INTRODUCTION TO CARBON MARKET

AND CARBON TRADING

17 Jan 2024

ACCLIMATE CAPACITY BUILDING WORKSHOP, BIRD CAMPUS, LUCKNOW

Agenda
 What is a carbon market?
 Why is it important?
 Existing Structure
 Type of Carbon Markets
 From Kyoto to the Paris
 A few things about Article 6
 India’s participation in Article 6
 India’s Domestic Carbon Market
 Green Credit Scheme
What are Carbon
Markets?

 Carbon Markets are trading platforms in which carbon

credits are sold and bought.
 Also considered a tool to put price on carbon!
 1 Carbon Credit = 1 tonne of CO2 or the equivalent
amount of a different greenhouse gas reduced.
 Countries or companies can use carbon markets to
compensate for their GHG emissions by purchasing
carbon credits from entities that remove or reduce
GHG emissions.
 What’s the argument behind creating carbon markets?
• Best way to reduce GHG emissions where it is
easiest, i.e., least costly!
Why are Carbon Markets Important?
An elderly resident reacts as a wildfire rages behind her in the village of A tourist pier in Suesca, Colombia, gets little use, thanks to the extremely low Residents walk through the flood-damaged city center of Bad Neuenahr-
Gouves, on the island of Evia, Greece. Aug. 8, 2021. Photographed by water level, on March 12, 2021. Photographed by Diego Cuevas Ahrweiler, Germany. July 2021. Photographed by Daniel Etter
Konstantinos Tsakalidis

Residents inspect the damage at a village affected by flooding on Adonara Residents use a raft to move along a waterlogged street in a residential area Himachal Pradesh and other neighbouring states in North India
Island, East Flores, Indonesia. April 5, 2021. Photographed by Rofinus after a heavy monsoon rainfall in Hyderabad City, Pakistan on Aug. 19, 2022. witnessed 20 major landslides and 17 flash floods, India on Jul 11, 2023
Monteiro Credit: Akram Shahid/AFP via Getty Images Credit: See here
Carbon Markets can bring in Carbon Finance
• A recent analysis by IETA suggests that 80% of countries that have submitted their NDCs have signaled an intention to use Carbon Markets to meet their NDC targets.
• 24% of the countries are already engaging in pilots and/or bilateral agreements.
 Significance of Carbon Market
 The World Bank estimates that trading in carbon credits could reduce the cost of implementing
NDCs by more than half — by as much as $250 billion by 2030.
 The value of the global carbon market soared 13.5% in 2022 to a record high of 865 billion euros.
 The EU ETS is the largest carbon market based on value and accounted for roughly 87% of global
market size in 2022.

900
800
700
600
500
400
300
200
100
0
2018 2019 2020 2021 2022

Market size in Billion Euros

Source: Global Carbon Market Size [see here]

Broad Structure of the Carbon Market that exists

Carbon Market

Compliance Voluntary
Carbon Market Carbon Market

Emission Compliance Offset Program

Trading/ Cap & Offset (Baseline &
Trade Programme Crediting)

EU ETS and over California

Government
25 national and CDM (under Compliance Voluntary Offset
regulated (very
subnational Kyoto) Offset Programmes
few)
programmes Programme

China NCTs, VCS (Verra), Gold

Australia CCU Standard
 Type of Carbon Market | Emission Trading Scheme
• Based on the cap-and-trade mechanism.
• In an ETS, companies trade emission permits (often called Allowances), which allow them to emit 1tCO 2e.
• When a company releases 1tCO2e, it must give one permit back to the government (surrender an allowance to
the regulator).
Excess GHG Sale of GHG Emission Reduction Units
Emissions

Allocated GHG Emission Units

Reduced GHG
Emissions

Finance

Image Credit: Inspired from TNC A6 Explainer Emitter A Emitter B

Type of Carbon Market | Baseline-and-Credit [Offset]
 Allow supply of carbon credits from
Host Country
emission reduction activities Project Design
Approval
(projects).
 Standards define eligibility and quality
criteria for projects. Third-Party
Registration
 Demand can come from: Validation
• Government and/or entities with legal
obligation to offset their GHG
emissions. [Compliance] Monitoring & Third-Party
• Private companies that wishes to Reporting Verification
offset their GHG emissions by
purchasing carbon credits. [Voluntary]
 Compliance – UNFCCC CDM, A6.4 Commercialization Issuance
 Voluntary – Verra, GS
Sectoral Scopes [Non-Exhaustive]
 Energy industries  Construction
 Energy distribution  Transport
 Energy demand  Waste handling and disposal
 Manufacturing industries  Afforestation and reforestation
 Chemical industry  Agriculture

 Additional: The project should not be legally required, common practice, or financially attractive in the absence
of credit revenues
 No overestimation: CO2 emissions reduction should match the number of offset credits issued for the project
and should take account of any unintended GHG emissions caused by the project.
 No Double counting: Each metric ton of CO2 can only be claimed once and must include proof of the credit
retirement upon project maturation. A credit becomes an offset at retirement.
 Permanence: The impact of the GHG emission reduction should not be at risk of reversal and should result in a
permanent drop in emissions.
 Provide additional social and environmental benefits: Projects must comply with all legal requirements of its
jurisdiction and should provide additional co-benefits in line with the UN's SDGs.
From Kyoto to Paris
COP3 Carbon Rush COP21
The Kyoto Protocol introduced Amid the global financial crisis, the The Paris Agreement agreed upon,
three flexible mechanisms for global carbon market soars 84% to contains Article 6, which covers
nations to engage in carbon $118bn, with EU allowance ‘voluntary cooperation’ to help
trading: JI, CDM, and Emission accounting for 80% and CDM countries meet their climate goals.
Trading. credits 13% of the value. This includes two market-based
approaches.

1995 2005 2012

1997 2008 2015

COP1 (Berlin) KP came into force Carbon Panic

Launches the pilot phase of KP came into force on 16.02.2005 CDM credits dropped to $3/tCO 2 in
“Activities Implemented Jointly” and CDM became operational for response to an oversupply of
(AIJ) allowing countries to the first commitment period (2008 credits, mainly due to (a) the EU
voluntarily implement reduction – 2012). The discussion on stopping the purchase and use of
and removal projects, but without reducing emissions from industrial gas credits and (b) Japan
accruing credits. deforestation (REDD) begins at stopped buying credits, in the
COP11. aftermath of the Fukushima
disaster.
Concepts & Terminology
 Internationally Transferred Mitigation Outcomes (ITMOs): Real, additional, and
verified reduction or removal of GHG emissions, measured in tCO2e. It is a specific
term used in the Paris Agreement for carbon credits.
 Authorisation: The official approval granted by a host country for the use of ITMOs
or the transfer of ITMOs to another country.
 Reporting: Parties participating in cooperative approaches are required to provide
three kinds of report/ information to UNFCCC:
• Initial Report: The party demonstrates that it fulfils the participation criteria, the details
of the cooperative approach and other basic information. This is submitted before any
transfers of ITMOs are authorized after countries sign agreements.
• Annual Information: Status of transfers and use of ITMOs.
• Regular Information: An annexure to the Biennial Transparency Report (BTR), contains
information regd. the status of implementation and NDC achievement.
Continued…
 Registries: These are repositories that are necessary for tracking and managing
ITMO-related activities.
 Registries would work like databases responsible for recording and managing various
activities related to ITMOs, including authorization, transfer, acquisition, cancellation,
and utilization.
 Within the current framework, the following registries are at play:
• National Registries: Each participating country shall have its dedicated registry equipped
with unique identifiers to record and manage ITMO activities.
• International Registry: When a country lacks a national registry, the secretariat shall
maintain an international registry within its Centralized Accounting and Reporting
Platform (CARP).
• Mechanism Registry: It would track the issuance of A6.4ERs.
Key Pillars of Article 6

6.2
Cooperative
Implementation Bilateral
Article 6 of the Paris Agreement recognizes 6.4 Cooperation
that some countries choose to pursue
voluntary cooperation in the implementation
of their NDCs to allow for higher ambition in
Market-based
their mitigation and adaptation actions and
6.8 Approach
to promote sustainable development and
environmental integrity.
Non-market
Approach
 Article 6.2

Article 6.2 Units (ITMOs)

Financial Support

Host Country/ Buyer Country/

Project Developer Entity

• Article 6.2 enables a host country, that is on track to exceed its NDC target, to trade units to obtain investments,
support for capacity building, and access to technologies not available through domestic resources.
• The buyer country purchases these units, known as ITMOs (Article 6.2 units), to address any gaps in meeting its
own climate goals.
• Cooperation b/w countries can take different shapes, e.g., project-based units, linking of ETS, etc.
• Countries can design policy mechanisms to operationalize trades of ITMOs.

Image Credit: Inspired from TNC A6 Explainer

 Article 6.4
Host Country generates units through a UNFCCC centralized
mechanism and transfers them to buyer countries

UNFCCC
Financial Support

Host Country/
Buyer Country/
Project Developer
Entity

• Article 6.4 credits trades are supervised by a United Nations (UN) body, called Article 6.4 Supervisory Body,
which is similar to how the UN’s CDM mechanism worked under KP.
• At COP27, a new type of unit was defined called ‘Mitigation Contribution’.
• MCs are unauthorized credits that can be used for other purposes, e.g., result-based finance, domestic carbon
markets and/or international voluntary carbon markets.

Image Credit: Inspired from TNC A6 Explainer

 Article 6.8
UNFCCC web platform could be voluntarily used
to facilitate matching projects with financial and
technical support available in several focus areas

UNFCCC
Host Country/ Support (Technological,
Capacity, Financial) Buyer Country/
Project Developer
Entity

• Countries can decide to support other countries without any expectation of trading carbon units.
• A6.8 established a framework for the creation of a UNFCCC centralized website where countries and other
stakeholders could submit mitigation projects that are being planned and outline where support is needed.
• This online platform could be voluntarily used to facilitate matching projects with the support needed and
available.

Image Credit: Inspired from TNC A6 Explainer

 How would Carbon Market interact with NDC?

Emission Emission Reductions

Reductions becomes ITMOs

Transferred
ITMOs
NDC Target NDC Target
Host Country can Buyer Country counts
transfer credits to the purchased carbon
Buyer Country credits towards its
NDC

Support

Host Country Buyer Country

Image Credit: Inspired from TNC A6 Explainer

 India notified A6.2 Activities
• On 17 Feb 2023, India finalized the broad categories of activities that will be considered for trading carbon
credits under bilateral and/or cooperative approaches under the A6.2 mechanism.
• Activities for the initial three years (presumably after when A6.2 RMP are finalized).
• May be updated/revised by National Designated Authority for the Implementation of the Paris Agreement
(NDAIAPA).

GHG Mitigation Activities [non-exhaustive] Alternative Materials

• Renewable energy with storage (only stored component) • Green Ammonia
• Solar thermal power
• Off-shore wind
• Green Hydrogen Removal Activities
• Compressed biogas • Carbon Capture Utilization
• Emerging mobility solutions like fuel cells and Storage
• Best available technologies for process improvement in hard-to-abate
sectors
• Tidal energy
• OTEC

Source: MoEFCC, Press Information Bureau [see here]

 Snapshot of Early Movers in Article 6.2

Buyer Country Host Country

Switzerland Chile, Ghana, Dominica, Georgia, Malawi, Morocco, Peru, Senegal, Thailand, Ukraine, Uruguay, Vanuatu

Japan Mongolia, Bangladesh, Ethiopia, Kenya, Maldives, Viet Nam, Lao PDR, Indonesia, Costa Rica, Palau,
Cambodia, Mexico, Saudi Arabia, Chile, Myanmar, Thailand, Philippines, Senegal, Tunisia, Azerbaijan,
Moldova, Georgia, Sri Lanka, Uzbekistan, Papua New Guinea

South Korea Mongolia, Viet Nam, Gabon

Singapore Colombia, Ghana, Morocco, Peru, Papua New Guinea, Thailand, Viet Nam

Image Credit: Inspired from TNC A6 Explainer

Market-based Instruments in India
 Perform Achieve and Trade (PAT)
• Under the National Mission for Enhanced Energy Efficiency, BEE launched the PAT
scheme.
• Announced in 2008 and implemented in 2012.
• PAT is an entity-based model of setting targets for energy efficiency.
• In this scheme, the metric to calculate the baseline and target energy efficiency is
Specific Energy Consumption (SEC).
• SEC =
• SEC is expressed in million tonnes of oil equivalent (MTOE)
• For each sector, a detailed methodologies to calculate SEC have been provided in the PAT
policy document.
• PAT cycle comprises of three years. The 8th PAT Cycle Notification was released on Jun
2023.
• Trading happens in the platforms provided by Indian Energy Exchange (IEX) and Power
Exchange India Limited (PXIL).
Continued…
 Renewable Energy Certificate (REC) Scheme
• Renewable Purchase Obligations (RPOs) mandate a specific percentage of RE share of
power generation to be achieved by the Indian states.
• REC trading scheme is a nationwide market for trading RECs b/w Indian states to meet
their RPOs.
• Launched in 2010.
• REC is measured in Megawatt hours (MWh).
• CERC provides a dedicated institutional architecture to issue RECs to generation
companies, who can trade these RECs on approved platforms such as IEX and PXIL.
• The RPO scheme allows states that do not have significant renewable potential to still
have RE in their procurement portfolio by buying RECs from developers in states with
higher renewable energy potential.
Planned evolution of PAT to ETS

Phase 1 (Short-term) Phase 2 (Medium term) Phase 3 (Long-term)

Increase demand in the Voluntary Carbon Increase supply in the voluntary carbon Moving to an Emission Trading Scheme (ETS)
Market market
The system will eventually evolve into an ETS
This phase proposes to open the Indian In this phase, it is proposed that the voluntary system wherein an entity-specific GHG
voluntary markets to voluntary buyers in carbon market will open to sellers other than emissions intensity factor will be determined
addition to the existing DCs. In this, the the DCs. As part of the proposal, a thorough for the current situation. Then, expected
fungibility of ESCerts will be worked on and process will be enacted to issue carbon credits sectoral growth for the next years will be used
will be traded as carbon offsets. to the sellers, which can then be traded. to determine the BAU emissions for first
crediting period.
Green Credit Programme
 Launched at the national level to leverage a competitive market-based approach for
green credit to incentivize environmental actions of various stakeholders.
 Notification released on 12 Oct 2023.
 Environmental activities generating climate co-benefits, including emission reduction
and removals.
 Any person or entity can take action, such as:
• Water Management
• Tree Plantation
• Waste Management
• Air Pollution Reduction
• Sustainable Agriculture
• Mangrove conservation and restoration
Thank you!