PM IAS OCT 21 EDITORIAL

1. The carbon markets conundrum at COP26

Context: Article 6 of the Paris Agreement introduces provisions for using international carbon markets to facilitate fulfilment of Nationally Determined Contributions (NDCs) by countries.

• Despite several rounds of high-level meetings, carbon market discussions remains one of the most technical and highly contentious unresolved issues of the Paris agreement working program(PAWP).

Mechanisms under existing Carbon markets:

• Carbon pricing is an instrument that captures the external costs of greenhouse gas (GHG) emissions. This is levied on the Carbon emitters and is used as a relief against the loss occurred due to Climate Change. It is based on Polluter Pays principle.
• Clean Development Mechanism issues Certified carbon emission reductions (CERs)/Carbon credits acc. To the rules of Kyoto Protocol. Its market collapsed in 2012.
  • It aims to influence future carbon market mechanisms so that low income countries, and especially least developed ones, receive a greater and fairer share of carbon finance.
  • For Example: Delhi Metro became first Metro rail system in the world 2011 to get Carbon credit. It has earned ₹19.5 Cr between 2012-2018 by selling these carbon credits.
• Carbon markets under the Paris Agreement (Article 6) for “voluntary cooperation” towards climate goals:
  • Market Mechanism 1 (Article 6.2) – It allows countries to sell any extra emission reductions {called as Internationally Transferred Mitigation Outcomes (ITMO)} they have achieved compared to their NDCs.
    • This is a voluntary direct bilateral cooperation, while ensuring environmental integrity and transparency (the reporting requirements under Paris regime. Which means No COP Supervision is required
  • Market Mechanism 2 (Article 6.4) – It would create a new international carbon market for the trading of emissions reductions created anywhere in the world by the public or private sector.
    • This new market referred to as the “Sustainable Development Mechanism” (SDM) seeks to replace Kyoto Protocol’s “Clean Development Mechanism” (CDM).
    • Unlike Market Mechanism 1, It will be supervised by COP and allow Private player participation.
    • Overall Mitigation in Global Emissions (OMGE), which is a new voluntary element of the Paris Agreement, is a key requirement of the SDM.

Importance for Carbon market for India:

• Developing countries, particularly India, China and Brazil, gained significantly from the carbon market under the Clean Development Mechanism (CDM) of the Kyoto Protocol.
• India registered 1,703 projects under the CDM which is the second highest in the world. Total carbon credits issued for these projects are around 255 million which corresponds to an overall anticipated inflow of approximately U.S.$2.55 billion in the country at a conservative price of U.S.$10 per CER.
• Therefore, logically, India has a lot to gain from a thriving carbon market. However, with the ratification of the Paris Agreement, the rules of the game have changed.

Challenges:

• A new Dilemma: Under the Kyoto Protocol, developing countries had no targets to achieve, they only sold the carbon credits. But now, under Paris Agreement, even developing countries are required to have mitigation targets. We are faced with a dilemma of either selling our carbon credits like before or use these credits to achieve our own mitigation targets. 
• While over 50% of the countries have communicated their intention of using market mechanisms to achieve NDC targets, India is not one of them as it aims to rely on domestic mitigation efforts to meet its NDC goals.

Issues under COP-26: The three critical issues that would be hotly debated in Article 6 negotiating rooms are CDM Transition, Accounting rules and Share of Proceeds to the Adaptation Fund.

1. CDM transition: The CDM projects(under Kyoto Protocol) have gone through due diligence and credits have been issued under UNFCCC oversight. Therefore, the Article 6 mechanism(under Paris agreement) should honour the previous decisions and allow for a smooth transition of these projects and credits to ensure not only the viability of these projects but also inspire trust among the private investors in the UNFCCC decision-making process.

• Problem: Some countries have cast doubts on the environmental integrity of these credits and while there is greater acceptance for transition of projects/activities, the same is not the case for transition of credits.  If the decision regarding transition of CDM is not favourable, it could lead to a loss of billions of dollars worth of potential revenue to India alone.
• A possible Solution: the new supervisory body to be formed under the Paris Agreement can re-examine the validity and rigour of such credits.

2. Accounting rules: Article 6.4 mechanism allow for public/private sector participation.

• Problem: It does not automatically imply that emission reductions transferred from a host country be adjusted against its NDC targets. These reductions represent additional efforts of the private sector or public entities to mitigate greenhouse gas emissions, and in fact it must be appreciated that they raise global climate ambition.
  • Solution: Not all mitigation actions fall within the purview of its NDC. Therefore, India can significantly gain from the market mechanism under Article 6.4 by selling emission reductions that lie outside its NDC.
• Problem of double counting: The view of developed countries, that this will deter raising ambition levels.
  • A flawed view:This view is flawed as such efforts will in fact be additional to what have been committed in the NDC. Robust accounting will ensure that there will be no double-counting of emission reductions.
• Share of Proceeds (SOP) to the Adaptation Fund: For developing countries, adaptation is a necessity. However, it remains severely underfunded compared to financing for mitigation activities.
• While developing countries emphasise that the SOP must be uniformly applied to Articles 6.2 and 6.4 to fund adaptation, developed countries want to restrict its application to Article 6.4.
  • This would disincentivise the Article 6.4 mechanism and limit voluntary cooperation to the cooperative approaches under Article 6.2 favoured by developed countries.

Way forward for developing countries:

• Targeting foreign investment: The new market mechanism should encourage private sector participation and attract foreign investments to support low carbon development.
• India can profit out of other countries’ inability to achieve their NDCs: It is the developed countries that would rely more on market mechanisms for achieving their climate targets as they would be comparatively low-cost options.

Conclusion: The success of COP26 at Glasgow hinges, to a great extent, on the conclusion of carbon markets discussions.

2.Is the coal crisis over? The supply of coal in India is well below the demand

GS 3: Environment, GS 2: IR

Context: Coal crisis in India hampering the Energy Supply.

The Crisis: The supply of coal in India is well below the demand. Whereas the demand is nearly a billion million tonnes (MT), the supply is well below 800 MT within the country.

Reasons:

• Production Problem: The acute shortage can be on the account of production, when the stocks are sufficient at the pit head but requisite supply is not made to the power plants.
  • Ironically, India sits on 300 billion MT of coal and, as mentioned earlier, our annual requirement is around a billion MT per annum. 
• An increased demand: an increase in the demand for power on account of the post-pandemic economic recovery, an increase in international prices of coal, unseasonal rainfall and a mismanagement of the supply chain within the country. Apparently, some of it has been managed and we are no longer discussing the crisis.
• Failure of supply chain management: The stagnation in the production of coal by Coal India Limited (CIL). The production has stood at 600 MT for the past three years. Had the production grown at the rate at which it was increasing (8-9%) during 2014-16, the current production of CIL itself would have been more than 750 MT. Also in the non-CIL domain, A number of mines were allocated to entities other than CIL. But the Non-CIL coal production fell from 128 MT in 2019-20 to 120 MT in 2020-21.
• Delayed payments to Coal India: CIL, which had reserves of around ₹35,000 crore in 2015, now appears to be strapped for funds, especially cash flows as power generating companies (GENCOs) owe more than ₹20,000 crore to CIL. Funds will have to be arranged for the expansion of existing mines as well as the opening of new ones.

Way forward

• Improving Governance: CIL has a fabulous team. It needs to be supported and not “monitored”. The Union Government has an important role to play. CIL should focus on mining.
• Interaction with the states to boost production: Government officers should interact with the States, but before that, this ongoing “war” between the Union Government and the States will have to stop. Ironically, all the coal resides in States that are ruled by non-National Democratic Alliance (NDA) parties.
• Smoothening the environmental clearance process:  The Union Government will also have to take up clearance-related issues with the Ministry of Environment, Forest and Climate Change.
• Funding the CIL: the Union Government should stop squeezing more funds out of CIL as it has done during the past few years by way of dividends to balance its own Budget, when this money should have been used for opening new mines and expanding existing ones.
• Clearing the dues to CIT: providing cash to CIL against the dues owed by GENCOs.
• Augmentation of Non-CIL production.
• Re-energizing inter-ministerial talks: There was an inter-ministerial Coal Project Monitoring Group (CPMG), which was set up in 2015 to fast-track clearances, that became dormant. This will need to be revived.
• Improving cash-flows in whole of supply chain: GENCOs have a receivable of more ₹2,00,000 crore from distribution companies(DISCOMS). They, in turn, owe more than ₹20,000 crore to CIL. There is, hence, a serious cash crunch though most of these entities show profit in their balance sheets.

Conclusion: The coal crisis may be temporarily over, but if the fundamentals of the crisis are not taken care of, it is likely to recur. What also needs to be looked at is the financial crisis that is brewing in the power sector.