Beyond 2024: Envisioning the Next Era of Global Carbon Trading

In this elaborate interview, Yuvaraj DINESH Babu Nithyanandam, Executive Director, Climate Data Action Trust (CAD Trust), dissects the pivotal themes of accountability, responsibility, and transparency, in the world of carbon markets. As we navigate the complex interplay between voluntary and compliance markets, our expert sheds light on the evolving role of global regulations, like the EU’s Carbon Border Adjustment Mechanism, and their impact on both developed and developing nations. This conversation offers a rare glimpse into the intricacies of environmental policy, the challenges of harmonizing international efforts, and the critical steps needed to ensure a sustainable future.

CW: Despite 28 COPs and numerous initiatives there is a perception that the demand side regulations are missing whereas the supply side regulations are getting stronger. How would you put this in perspective?

Yuvaraj DINESH Babu Nithyanandam

DINESH: I won’t say that it is a perception but the facts are based on what you see on the various carbon trading mechanisms. Surely, there seems to be more efforts on the supply side implying more curbs on the developing nations as compared to what developed nations are supposed to do. However, we need to view this with a historical lens.

Globally, as per 2023 World Bank’s carbon pricing dashboard, there are 73 carbon pricing initiatives implemented, 39 National Jurisdictions are covered by the initiatives selected and 33 Subnational Jurisdictions covered by the initiatives selected. In 2023, these initiatives would cover 11.66 GtCO2e, representing 23% of global GHG emissions.

EU as a bloc is the world’s third largest emitter but EU ETS is the single largest emissions trading scheme in the world. So, we see a large representation of the demand side following a disciplined path.

However, this discipline and distinction came over several years of efforts and learnings with grandfathering of allowances, frauds, fraudulent reports and integrity issues which resulted in the discontinuation of use of carbon credits under EU ETS .

Today, EU ETS prices are the best indication of carbon prices and the scheme is an outstanding example of how developed nations should move forward. Naturally, we expected the rest of the world especially the developed nations to follow the same path because they had enough data, experience, and best practices to adopt it.

So, while developed nations have made lots of efforts to bring some or similar discipline like the EU ETS, there is definitely much more that could have been done.

Of course, one cannot take away the fact that all developed nations today have a mechanism in place. Take for example Australia, which has a very tight domestic scheme that doesn’t allow any external carbon credits. I won’t say it’s a success or a failure, but there is a solution in place given the political transformations that happened.

In Canada a lot of provinces are strengthening their positions. Alberta and Quebec have been there for many years. Similarly, California and other states in US follow regional greenhouse gas initiatives. So, the developed nations or the demand side we do have such frameworks in place.

But this perception of the supply side being put under the focus for quality and integrity is what I call a philosophical bent of the developed nations not allowing the developing ones to choose the same path as they chose three or four decades or even five decades ago.

Today, many developing countries are being pushed to have either a carbon tax, or emissions trading scheme, or domestic emission intensity scheme to tackle climate urgency. China and India both are following in that direction.

China has a very controlled internal system while India has different forms of emissions reduction programs.

So all put together, my short answer would be that it’s a very balanced action that we have seen so far, but it is not the kind of collective national effort that you could compare between, what is happening, between developed and developing countries.

CW: EU has rolled out CBAM. Do you think exporters to EU been given enough time to align with it? Also, what are your views on CBAM?

DINESH: CBAM has been in the works for some time. Of course, when it comes to the timeline, we can debate whether it was enough or not. Would the exporting countries be prepared if it were rolled out after three or more years? The answer to that question, I believe, would be very subjective.

Personally, I think, CBAM gives a push to the developing countries to set their house in order for emissions reporting. For a long time many countries refrained from calculating and reporting accurate emissions either to hide inefficiencies and data or simply lacked the political motivation. CBAM gives them an opportunity to roll-out an emissions calculation and reporting program by setting-up the right infrastructure, providing technical expertise and even financial assistance to MSMEs.

More importantly, CBAM will force exporters to evaluate technologies and processes that help reduce emissions. Hitherto, only the large conglomerates in exporting economies had access to funds and technology to match the emissions standards of the EU. Now, I believe, there will be a constructive dialogue among the various industries and its companies covered under the CBAM with their respective governments to explore efficient and cost-effective ways to reduce emissions. For example, the steel industry in India along with the government will look at the best path to move forward and transform the entire steel production with the goal of producing green steel. In order to decarbonize, industries in each of the developing countries need mid-term and long-term guidance to develop economically feasible, sustainable and competitive solutions.

In the short-term, carbon offsets could play a role. I don’t know whether the exporters that fall under the CBAM ambit will explore carbon offsets for compliance which would help these mid-sized companies to continue their export business. Of course, these will come at a considerable cost given that EU will be stringent when it comes to carbon credits. They have had a very bad experience with importing of carbon credits into their EU ETS system. So, they will put strict guidelines on exporters self-declaring emissions.

Exports will be hit hard especially from India and China. We cannot change that overnight. There was, I would say, enough time to put some measures in place which didn’t happen. And there could still be some negotiations left on the table for extending the timeline. But given the fact that CBAM applies to core emissions sectors – the hard to abate ones, therefore developing countries would want to negotiate. But I don’t think EU is ready for that given the way they have rolled out CBAM. Because EU has own targets and mind you we also criticize them for not reducing fast enough. So this is one of their measures to reduce their own emissions. Therefore, it’s time for all the countries to step up, get innovative and resolve this complex situation of emissions reduction with the help of offsets that are high-integrity and used in a transparent way.

CW: Will CAD Trust also get into some sort of global emissions data?

DINESH: No, we don’t have any plans on bringing together the greenhouse gas inventory across the countries. The whole idea of the Climate Action Data Trust was to address the lacuna of transparency and disaggregation of data in the carbon markets. However, UNDP has developed digital technologies for greenhouse gas inventory besides national carbon registry. The World Bank has also developed open source Core Carbon Registry and is assisting for its deployment for its partner countries. UNDP and The World Bank have been exploring various digital tools that can help the world move forward fast and accurately on climate action.

CW: What are the trigger points for the growth of Voluntary Carbon Market and what would the key developments to watch in the next two years?

DINESH: The voluntary carbon market is currently a topic of debate due to concerns about its transparency and accountability. Despite these challenges, the contributions of organizations like Verra and Gold Standard over the past 15 to 20 years have been vital in maintaining the momentum of the carbon market. They have developed a range of methodologies since the collapse of the CDM market, leading to substantial investments – up to $36 billion – in the voluntary market.

While the size and impact of these efforts may seem modest compared to the larger compliance market, their significance shouldn’t be underestimated. Similar to issues faced in markets like the EU ETS, such as inaccuracies in emission reporting and instances of fraud, the voluntary market has also had to navigate and rectify these challenges.

Presently, the synergy between the compliance and voluntary markets is stronger than ever. This is partly due to the initiatives of countries like Singapore, which may inspire neighbouring ASEAN countries and others worldwide to recognize and support the voluntary market. These countries are working on developing criteria and solutions to address the market’s challenges, though these measures are still evolving.

The voluntary market has established around forty different standards, primarily focused on verified emission reductions. This approach demonstrates a commitment to methodological discipline, validation, and verification, aligning the voluntary market more closely with the standards of the compliance market.

The integration of these two markets is increasingly evident, particularly with the implementation of UN mechanisms like Article 6.4. This trend suggests a future where there is greater alignment in pricing and market values between verified emission reductions and compliance reductions.

However, the voluntary market still needs unified standards and quality control. The increased attention from major regulators like the U.S. and EU indicates the growing importance of this sector on a global scale.

There’s also a wave of innovation, especially in developing countries, under mechanisms like Article 6.2 of the Paris Agreement. This innovation is opening up new avenues for carbon credit mechanisms. For example, India’s PAT scheme and its proposed domestic carbon credit mechanism illustrate different approaches to carbon credits, including Article 6 viz., ITMOs (Internationally Transferred Mitigation Outcomes) and credits under the SDM (Sustainable Development Mechanism). Each type represents a unique approach to handling carbon credits, offering various options for managing emissions.

All in all, the carbon market, particularly the voluntary sector, is evolving amidst challenges and opportunities. The sector’s growth and better integration with compliance markets hinge on the development of clear, unified standards and global cooperation. The path forward for this market involves balancing innovation with standardization to ensure effective and credible carbon reduction efforts worldwide.

CW: With EU and other countries working on establishing their own acceptable offset standards and methodologies, what will be the impact on the existing 40 standards like Verra and Gold in this evolving landscape?

DINESH: Methodologies have historically been a public good, as seen with the Clean Development Mechanism (CDM). The UN’s approach to developing methodologies was such that they did not hold intellectual property (IP) rights, ensuring that these methodologies were in the public domain and accessible to all.

This precedent implies that even when a country or a bloc like the EU decides to develop its own set of methodologies for carbon offsets, these methodologies, once used for public projects, essentially become part of the public domain. This is akin to the way financial market regulations, such as those for green bonds or other financial instruments, are publicly accessible and not proprietary.

So, when countries focus on creating their methodologies, they have the option to either adopt or disregard existing standards like Verra or Gold. This decision rests with individual countries and cannot be externally enforced. For instance, a country might choose to develop its unique methodologies to encourage both domestic and international investments to reduce its greenhouse gas emissions.

Conversely, other countries or regions might opt for a more inclusive approach, like Singapore, recognizing and incorporating existing standards viz., Verra, Gold Standard, GCC, ACR etc., . This diversity of approaches leads to a market with varied perspectives.

However, the key takeaway is that methodologies, once in the public domain, are there for everyone to use and adapt. This scenario is unlikely to threaten the existence of established standards like Verra and Gold. Instead, it might actually lead to a more unified market, as these standards continue to adapt and evolve in response to new national or regional methodologies.

CW: Do you foresee an increasing participation of Governments in the carbon market similar to the Canadian government recently signing up a long term contract for carbon removal credits?

DINESH: Definitely, yes. The current progress in carbon markets and net zero efforts is significantly influenced by governmental participation. In the past, mechanisms like the Clean Development Mechanism (CDM) and Emission Trading System (ETS) dominated the narrative, overshadowing initiatives like Joint Implementation (JI), which fostered emission reduction collaboration between developed countries.

The evolution from these past experiences to current practices highlights a critical shift. For instance, the ongoing negotiations by countries like Thailand, Singapore, Japan, and India demonstrate a stronger negotiating position for developing nations, thanks to direct government involvement.

Compared to the earlier carbon trading markets, we see a stark contrast in the approach to transparency. Earlier, the market was largely opaque, driven by brokers and traders with minimal transparency. Today, transparency is indispensable for any transaction in the carbon market.

Government involvement brings several advantages to the carbon market. Firstly, it provides a long-term perspective, enabling private sectors to plan, finance, and implement technical solutions more effectively. Secondly, governments actively participate in transactions and dialogues guide the private sector on technology choices and investment strategies. This involvement ensures that innovation aligns with high standards of integrity, transparency, and accountability.

Moreover, the current negotiations between countries, including developed nations like Sweden and Switzerland focusing on advanced technologies like carbon capture and storage (CCS) and direct air capture (DAC) reflect a shared commitment to invest in emission reductions.

I believe, the role of governments in shaping the carbon market is invaluable. Their involvement ensures a focus on integrity and accountability, empowering nations and fostering innovation while maintaining the core principles of carbon market operations. This government role is indeed a boon for the carbon market, driving it towards more effective and transparent operations.

CW: The CAD Trust ensures transparency for carbon offset data, but a fully functional Voluntary Carbon Market (VCM) needs a variety of data points like fair pricing for different sets of credits and buyer information. What do you think will drive the acquisition of this data, and how soon do you anticipate a true integration between the Voluntary and the Compliance market?

DINESH: The CAD Trust’s goal of ensuring transparency in carbon offset data is a crucial step towards a fully functional Voluntary Carbon Market (VCM). However, achieving a truly integrated market that encompasses both the VCM and the Compliance market will be driven by several factors.

Firstly, government interventions, as seen in the context of India’s approach to the Clean Development Mechanism (CDM) in the past, play a significant role in shaping market perceptions and influencing pricing structures. For example, India at one point made it very easy for wind power projects to get approvals thus sending clear market signal for wind power preference. This governmental influence, while subtle, can have profound implications on market prices.

Secondly, the approval and implementation of technology-based carbon credits, like those for hydrogen projects in India, will provide valuable insights into pricing mechanisms. Hydrogen is most touted in India right now, as compared to any other country in the world. Over the next six months you may see India approving one or two hydrogen projects under the 6.2 mechanism. Of course, the pricing won’t be published but one can get a sense of it by looking at the economics behind the decisions and the frameworks. More often than not, the decision-making process behind these approvals, although not always public, offer data points that can be used to gauge fair pricing and market trends.

Countries like Japan, which have formed numerous agreements under Article 6.2, are still navigating the complexities of pricing strategies in these markets. Of course, they have not disclosed data but eventually we will get a sense of where the pricing is basis implementation.

Moreover, the evolving role of intermediaries in the carbon market, who negotiate between buyers and sellers, will also contribute to better data. The shift towards more direct interactions between sellers and buyers on platforms, facilitated by initiatives like VCMI, ICVCM, and the CAD Trust, will help in standardizing demand, which in turn, influences pricing and provides more transparent data.

I believe that the path to acquiring the necessary data for a fully functional VCM and its integration with the Compliance market is influenced by government actions, market-driven pricing mechanisms, and the evolving roles of intermediaries. This process is ongoing, and while significant progress is being made, a complete and true integration of these markets might still be some years away. The journey towards this integration will be marked by increased transparency, fairer pricing practices, and more direct market interactions.

CW: What would be your 2024 message to all stakeholders in the Carbon Markets?

DINESH: The carbon market, although around for twenty years, is still developing, especially in terms of achieving the transparency and environmental integrity that stakeholders now expect. The concept of environmental integrity, for example, is still subjective and open to different interpretations. Efforts like those of the CAD Trust aim to harmonize and aggregate efforts to achieve this integrity, but it’s important to recognize these as ongoing efforts rather than immediate solutions.

The journey towards understanding and implementing these concepts is still in progress. For instance, the debate over whether a ton of carbon reduction is equivalently valuable in different contexts illustrates the market’s complexity. This comparison needs to account for economic and environmental differences between countries. A ton of carbon reduced in one country might come at a different cost compared to another, influenced by factors like technological capabilities and economic environments.

There’s also a need to understand the disparity in costs of emission reductions across different countries and technologies. This disparity should inform how we determine fair pricing in the carbon market. The concept of a ‘fair price’ is still nascent in carbon markets, and even if prices were widely available, they would likely be subject to criticism due to the market’s varying levels of development.

Transparency in carbon markets goes beyond merely making information public. It’s about demonstrating that the practices in place are fair and justified and understanding the reasoning behind pricing. True transparency should foster market growth, creativity, innovation, and scaled ambition.

The journey towards a transparent, fair, and equitable carbon market is complex and requires a nuanced understanding of various factors influencing market dynamics. Stakeholders need to engage in this process with an open mind and a willingness to embrace the evolving nature of the carbon markets.

Yuvaraj DINESH Babu Nithyanandam is currently the Executive Director of the Singapore-based Climate Data Action Trust (CAD Trust). CAD Trust is a global platform that links, aggregates, and harmonizes carbon credit data from project registries. The platform’s goal is to improve transparency and build confidence in carbon markets.

To know more about Dinesh’s rich experience in the Carbon Ecosystem, please visit him at https://www.linkedin.com/in/nithyanandam-yuvaraj-dinesh-babu-a1076b3/