From UPSC perspective, the following things are important :
Prelims level : Nothing much
Mains level : Climate Finance
The next climate conference has the challenge of deciding how markets can be deployed in the service of climate.
CDM – Clean Development Mechanism
- CDM – is a market instrument that can help the industry as well as climate.
- India leads the initiative – Along with China and Brazil, India is a leader in CDM since its inception in 2007.
- India benefited from CDM – A number of small and medium projects in the field of energy efficiency and renewable energy were financed from CDM.
Challenges to the future of CDM
- New mechanisms – in 2021, new market mechanisms mandated under the Paris Agreement come into operation.
- Opposition by developed countries – Most developed countries is strongly opposed to permitting the carryover of CDM projects and their credits into the Paris Pact’s mechanisms.
- Credits under CDM – The credits lying unsold with the CDM projects could lose their economic worth.
- New validation procedures – CDM projects will have to go through the process of validation and registration again with the new mechanism. This will involve additional financial and administrative costs.
India – CDM
- CER – India has about 250 million Certified Emission Reduction (CER) units under CDM issued by the UNFCCC. The number of CDM projects registered in India is 1,376 and 89% of these projects are still active.
- Declining demand – The demand in the EU, which has been the largest market for CDM credits, has declined sharply over the last decade because of regulatory barriers.
- Value of CDM credits – The unrealised value of CDM credits could be in the range of almost $5 billion. India stands to lose substantially if existing CDM projects and credits are closed in 2020.
Arguments against CDM
- No environmental impact – It has failed to demonstrate environmental benefits in addition to the “business as usual” scenario.
- Difficult transition – Its transition to new mechanisms will have adverse impacts on carbon prices and investor sentiments in future markets.
- Double counting – double counting could compromise global ambition on reducing GHG emissions.
- Alternative technologies – CDM project proponents should be free to choose available cost-effective technologies as long as the objective of emission reductions is achieved.
- Technology is not a judge – “Additionality” in CDM projects should not be judged solely on the criterion of technology. They are also about investments and overcoming market barriers. All CDM projects have passed these tests.
- Transition is not so quick – The argument that a transition of CDM credits may flood the market and lead to deterioration in the carbon prices in future markets is also over-stretched. Validation and registration of projects under the new mechanism may take at least three years.
- Possible increase of credit demand – If all CDM units available globally till 2020 are traded immediately, they may be fully absorbed by 2024 — as demand for credits for meeting the Paris commitments increases.
- Increased demand from airlines – More than 60% of the credits may be used fully even before 2022 if we take into account the demand from airline operators to meet commitments under CORSIA.
- Environmental integrity is an objective of the market mechanisms under the Paris Agreement.
- Double counting – for project/program-based mechanisms, countries should make arrangements to prevent double-counting of emission reduction units in their national accounts.
- Nonuniform adjustment principle – the difference in levels of development of countries requires that the adjustment principle should not be applied uniformly to developed and developing countries.
- ICAO actions – ICAO is actively considering a plan to limit the use of CDM credits to those issued after 2015. This could be a challenge to the CDM in the future carbon market.
- For India – India should have a strategy that ensures that it does not get shut out of the CORSIA market even as ICAO enlarges the source of supplies from other countries.
- Changing the binaries – the relationship between the project/program-based emission reduction units and the national pool of emission reductions should be changed.
- Assessing carbon markets – there is a need for a firm basis to establish access to future carbon markets.
It is an emission reduction scheme for international civil aviation effective from 2021.