November29 , 2021

Augmenting decarbonisation impetus beyond offsets

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MUMBAI, INDIA. Flurry of climate related pledges from the companies towards carbon neutrality and net-zero pathway demand credible emission reduction and removal strategies. Amid intensified global attention and drives to achieve a pathway to net-zero, there is a growing realization that much of corporate decarbonisation strategies focus on avoidance and reduction than removal projects. As per Net-Zero Asset Owner Alliance position paper, pathways to limit warming to 1.5°C demand massive scaling in annual negative emissions level from 0.5-1.2Gt pa of CO2 in 2025 to 6-10 Gt pa of CO2 by 2050. The present structural gaps – both in terms of low proportion of negative emission projects and quality of such project outcomes indicate that our efforts are far behind the targeted goals. Research from Coalition for Negative Emissions indicates that based on the current pipeline of projects, the level of negative emissions required by 2025 in the IPCC’s 1.5°C pathway will be missed by almost 80%.

In a race against time, are we really moving ahead?

Beneath the surface of corporate commitments, if we deconstruct their execution abilities through the lenses of realism, it points to two critical implementation related factors. Firstly, what are the feasible mechanisms to be adopted by the companies for timely realization of the committed emission reduction or removal goals – e.g., business practice changes, green technology alternatives, renewable energy, process innovation and efficiency improvements, conservation of natural resources and biodiversity amongst others? Secondly, are these internal mechanisms really sufficient to deliver the negative emission goals within the targeted timeline of the pathway? If not, what is the recourse available to bridge the shortfall in actual performance?

Reckoning the ground realities, it is becoming evident that despite the best intentions of the companies, the burden of legacy technologies and huge financial implications in transformation projects act as a major blockade to advance on the transition pathway. Also, the inherent nature of manufacturing processes in few industry sectors (Cement, Oil, Pulp and Paper, Airlines etc.) are highly carbon intensive and possibility of complete elimination or even significant reduction in emission level appears less achievable. Under the extremity of these scenarios, companies’ decarbonisation strategies remain highly dependent on the offsetting mechanism. It allows them to purchase carbon credits from external sources to offset remaining part of their emissions that cannot be eliminated after all internal reduction mechanisms have been exhausted. For carbon credit offsets used by a company, a basic qualifier of credibility of project outcome becomes quite significant. It sets the condition that removal of emission from the offsetting project is permanent, quantifiable, single counted and involves larger socially-beneficial impacts.

Raising the carbon stakes beyond offsetting

In essence, this sets the backdrop for the functioning of the voluntary carbon credit market ecosystem. Typically, carbon credits can be developed from 3 type of projects, namely:

  • Avoidance projects aiming to completely avoid GHG emittance
  • Reduction projects aiming to reduce level of emittance
  • Removal projects aiming to remove GHG directly from the atmosphere 

These projects may involve specifically focused climate related outcomes – e.g., avoidance of nature loss or biodiversity protection, nature-based sequestration or reforestation, avoidance or reduction of emissions (e.g. emittance of Methane from landfills) and technology-based removal of CO2 from the environment. As a part of verified project outcomes, a carbon credit certificate denoting a specified quantity of GHG is considered removed or to be kept out of the atmosphere. As an added advantage, these projects can have larger social and community related benefits e.g. health improvements, job creation and income improvement, biodiversity conservation, pollution reduction etc.

To provide strong impetus to global decarbonisation initiatives, there is a vital necessity for functioning of an integrated voluntary carbon market with robust and transparent moorings.

Such a market mechanism can effectively provide a cost-efficient tool to organizations – both net negative emission developers and net negative emissions consumers, to credibly balance and deliver their net-zero goals. With an open market driven price discovery mechanism, it establishes clear benchmarks for cost of carbon emissions for the companies lagging behind their commitment trajectory. At the same time, enabling liquidity and market value to fully transparent project outcomes, it sets increased incentives for those generating surplus, exceeding their pathway goals. Further, with an efficient functioning market, it supports attracting new investments to scale decarbonisation projects and increased financing channels for low-carbon related technological changes.

Re-designing of the Market Square 

A scenario analysis from McKinsey and the Taskforce on Scaling Voluntary Carbon Markets (TSVCM) considers that demand for carbon credits could increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050. Reckoning different price scenarios and their underlying drivers, the market size in 2030 is assessed between $5 billion and $30 billion at the lowest end of the spectrum, and over $50 billion at the highest end.

While the Kyoto Protocol’s second commitment period (2013-2020) expired in Dec 2020, several carbon trading platforms – both under mandatory and voluntary mechanisms, are functioning in different jurisdictions on a disjointed basis. To ensure transitioning of Clean Development Mechanism (CDM) and Joint Implementation (JI) under Kyoto Protocol to Sustainable Development Mechanism (SDM) under Paris Agreement, framing of appropriate methodologies, standards, governance norms as well as recertification approaches are critical requisites. Article 6.4 in particular considers to outline a mechanism to contribute to the mitigation of GHG emissions and support sustainable development by a designated authority under COP on a voluntary basis. It is expected that key principles for enabling market mechanisms – particularly market architecture, rules and procedures, supervisory structure, avoidance of double counting etc. are negotiated and resolved in impending COP 26. Significantly relevant to voluntary credits, outlining the core of structural guidelines will help to establish a clear roadmap for a transparent and reliable functioning market ecosystem across the carbon value chain.

Setting of core building blocks

Building on the best practices of existing carbon value chain players and leveraging body of knowledge from financial and commodities markets, core construct of voluntary carbon credit trading ecosystem would be resting on the following foundational enablers:

  • Legal basis: Harmonizing fragmented legal frameworks and jurisdiction specific definitions and rules to remove ambiguity in voluntary credit contracts, terms of use for trading platforms and operational requirements.
  • Market standards: Standardisation of divergent taxonomy and harmonisation of contracts and market practices to provide a foundational basis for a globally integrated and interoperable market with fungible carbon products. 
  • Consistent specifications: Detailed specifications reckoning key characteristics of the contract – i.e. type of corporate claims (net-zero, carbon neutral, carbon neutral on the path to net-zero), type of credit (removal, avoidance and reduction), method (technology based, nature-based), delivery type (spot, future), settlement type (cash, physical, both), allied benefits (community health, biodiversity protection, employment generation) etc. 
  • Credible market information: Reliable method to collect liquidity and pricing information across different market platforms and disseminate consolidated market data to enable informed price discovery by user communities. 
  • Governance mechanism: Governance and oversight to set principles and guidelines for participants’ eligibility, conduct, quality standards and risk management for functioning of high-integrity market ecosystem and its value chain partners –i.e., validation and verification bodies, standard setters, and registries amongst others. It will also require consolidation of body of work from existing organizations, like – International Carbon Reduction and Offset Alliance (ICROA), International Civil Aviation Organization Technical Advisory Board (ICAO TAB) overseeing CORSIA.
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