India can’t afford another round of greenwashing

By Mihir Sharma

About two decades ago, the market for carbon “offsets” seemed to be thriving. Under the Clean Development Mechanism of the Kyoto Protocol, companies concerned about their emissions could earn credits for investing in projects that conserved energy or built renewable capacity elsewhere. These certificates could then be traded freely.

The market collapsed in the early 2010s, largely thanks to policy errors in Japan and the European Union. Even before that, however, many had come to believe it wasn’t worth saving. About 70 per cent of projects were located in India and China. Complaints had multiplied that too many of them were actually dodgy attempts at “greenwashing.”

The world is trying again. At the recently concluded COP29 climate conference, delegates established a new global mechanism for tradeable carbon credits. This time, whether or not it works will depend greatly on how transparent and credible India’s projects are.

Per capita, the world’s most populous country currently emits fewer than two tons of carbon a year, less than half the global average. If its growth follows the same pattern as China’s, which emits at twice the global average, the battle to save the climate will be lost. Any viable carbon credit market, therefore, must ensure investment flows into mitigation efforts on the subcontinent — almost regardless of what happens elsewhere.

For their part, Indian policymakers should recognize that tradeable carbon credits represent an opportunity that the country’s beleaguered construction and manufacturing sectors can’t afford to miss. A well-run system would ease the financial burden on companies trying to move up the value chain and reduce their cost of capital. It’s in their interests to get this right.

The 2016 Paris Agreement envisioned carbon credits being traded internationally in two different ways. Under Article 6.2, countries are meant to establish verifiable registries of offsets that are recognized by others based on specific multilateral or bilateral agreements. Credits under Article 6.4 are supposed to be overseen by an international “supervisory body” set up in 2021. Delegates at COP29 agreed to rules governing both kinds of credits, so the market can now begin operation in earnest.

Given past experience, there are worries that projects under Article 6.2 won’t receive adequate scrutiny. They are only supposed to count if they are “real, verified, and additional” — in other words, if the offsets actually exist, and if the emissions they mitigate would have otherwise entered the atmosphere.

The latter mandate will be hard to implement. Given the scale of the green targets that some countries — including India — have set for themselves, naysayers could claim that nothing financed by carbon credits over the next decade should count as “additional.” Indeed, activists attacked the first such project, the electrification of Bangkok’s public bus fleet through carbon credits traded with Switzerland, because the operator had already run a pilot project using electric buses.

Doubters should remember that all promises of climate action in the developing world are, in the end, subject to the availability of finance. India should stake out a clear definition of additionality that shows how new financing, in return for carbon credits, will create green assets that would otherwise not have existed.

The first point, on the other hand, is absolutely critical. Projects must do what they say they will do and be constructed on the timeline that matters for emissions reductions. Without trust and greater transparency, the finance required to create a functional carbon market won’t flow.

For their part, voluntary carbon markets have evolved towards greater oversight in recent years, driven by various private bodies that have created principles to govern trading.

Governments, particularly India’s, have to show similar energy. Officials have been working to sign Article 6.2 agreements with Tokyo and Seoul, both major trading partners. That’s good news for Japanese and South Korean companies that would like to expand operations without running afoul of their internal net-zero targets.

For such deals to work, however, and for them to inspire more, the government must create the capacity needed to properly oversee its registry of projects. What’s needed is a proper ecosystem of independent auditors — not just the usual suspects, who might have misaligned incentives.

A new, effective government agency should be stood up to quickly examine and authorize candidate projects. Whether the new carbon market works or not depends on how ready India is to get this right.