In the wake of global transition for climate neutrality, particularly in the countries that consume more resources and emit more, it is likely that the large emitting companies would face more stringent emission standards and/or limit for emissions, which would necessitate them to pursue greater efforts in cutting down greenhouse gas (GHG) emissions.
However, many of these companies have already embraced different measures, inter alia, energy efficiency and renewable energies, to contain their GHG emissions at a level where further emission reductions might appear to be economically inefficient.
This would trigger the rising demand for carbon offset credits to be generated by other companies/projects, both locally and internationally, against the payments to be made by the large companies mandated to reduce emission.
The essence of carbon trading is to make the parties involved in the process better off. The literature of environmental economics also suggests trading carbon in a market is one of the theoretically efficient instruments of GHG mitigation.
Under certain conditions, carbon trading performs better than carbon tax. The carbon market, if the quality is ensured, could play an important role in ramping up climate actions.
The market could provide the emitting companies with the flexibility to decide on when and where to cut GHG emissions down and of course, at a lower cost.
Another significance of the carbon market lies in incentivising technological innovations to take place in the projects located somewhere else than the premises of the companies that have the obligation for mitigation.
Additionally, the opportunity to reduce emission for a company at a lower cost via the carbon market would prompt it to take early action. And in light of the urgency to stabilise global temperature, the carbon market, undeniably, could stimulate early action.
However, any laxity in quality assurance in the carbon market might lead to the release of more GHG emissions instead, jeopardising our goals of the Paris Agreement.
As different large polluting companies, for instance, in rich countries, may embark on purchasing carbon credits, i.e., the certificates for emission reductions, from other local or international projects to fulfil the net-zero goal, alarm raises for all practical purposes and particularly due to the experience of the Clean Development Mechanism (CDM), which was introduced to enable companies from developed countries to claim carbon credits through supporting projects in developing and least developed countries.
While CDM has, to some extent, been successful in clean technology transfer to the developing and least developed countries, there remains criticism over actual emission reduction on the ground.
Arguably, some projects released additional GHGs to create high emission baselines and thereafter, GHG mitigations were calculated from high baselines.
Environmental economists and climate change experts, therefore, claim that some projects might have led to more emissions than reducing the same.
Establishing an emission baseline is a key challenge, attributable to its inherently uncertain nature and as it requires developing scenarios based on assumptions.
Moreover, the prospect of making quick money encouraged entities to produce cheap carbon credits from projects with little or no additionality to sell to the polluting companies and thus contributing very little or nothing to our climate goals.
From a market perspective, the result was obvious - with a high supply of carbon credits, including those of poor quality, the carbon market collapsed during 2011-12 as price per ton of CO2eq (carbon dioxide equivalent) was hovering around $1 to $2 against that of $20 in 2008.
Now that the large emitters are vowing to pursue net zero-emission, in one of the likely scenarios, some of these emitters might buoy on cheap carbon offsetting projects that have little or no credibility.
The adverse selection of projects, having motif for mitigation at a very low cost, would perhaps be a serious drag on achieving the eventual net-zero goal of 2050. This might also lock us in the business-as-usual situation.
Another possibility and the seemingly bad news would be the surge of carbon credits – generated, for example, 10 years back – to meet the fresh demand from the large emitters.
A deeper inspection reveals that these millions of unsold carbon credits, if qualify for trading, would not remove any additional emission from the atmosphere right now.
Different reports, furthermore, suggest that the availability of all untraded carbon credits in the offset market would make over-supply of such credits, leading to the market slump again.
In the best interest of the global community and as we cannot negotiate our future, the carbon market should only allow selling credits from the projects that have duly considered all environmental integrity, both in project design, implementation and monitoring.
While methodologies for emission accounting have evolved and are more stringent now than what they were a decade back, the older credits that perhaps have been generated under relaxed requirements are still qualified to be sold in the market today.
One of the ways, therefore, could be retiring the credits that were generated many years back.
Against the challenges that the carbon market would encounter, an independent international body might help regulate the market and ensure the entry of only quality carbon credits.
As these carbon offset projects are only tenable when they would help clean the atmosphere and the countries part of the Paris Agreement have a keen interest in stabilising global emission, it needs no telling of the importance of an independent international governance body to oversee carbon offset projects.
Finally, the goal of net-zero emissions of the companies is great and for some companies, it would be easier, for instance, to switch to renewable energies and pursue resource efficiency to meet the goal.
Nevertheless, many companies would face a really hard time to find solutions.
They would, perhaps, require making a combination of choices and undertake measures in several phases to be carbon neutral rather than looking for the solution at one attempt.
They might also need to purchase carbon credits from the projects undertaking GHG mitigation elsewhere.
And considering the need of the companies and the fact that we cannot compromise with environmental integrity, the baseline development shall follow the methodologies appropriately, host country approval shall be based on proper evaluation and among other things, the third-party auditing/verification shall be more stringent.
Last but not the least, projects with high-quality carbon credits should have the opportunity to negotiate for better prices and this would provide the market signal to develop high-quality emission reduction projects.
The author is a Humboldt scholar and an environmental economist
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.