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Carbon Markets
Post- Cancun
Possibilities and Expectations

by Anupam Das-Purkayastha
23rd December 2010

Introduction:
With anthropogenic climate change being a cause of global concern,
the Kyoto Protocol under UNFCCC has been the domineering global
framework under which climate change mitigation and adaptation
efforts were designed. The legally binding commitment to reduce
Greenhouse Gas (GHG) emissions by developed (Annex-1) countries,
the voluntary mitigation actions in developing (non-Annex1) countries
and the ability of Annex-1 countries to source emission reductions from
voluntary actions in non-Annex1 countries have been the core of the
framework. The legally binding commitment of Annex-1 countries to
reduce GHG emissions expires in 2012. The future of emission
reductions and hence, mitigation/adaptation efforts under a UN
regulated regime is in question. Against this backdrop, the Conference
of Parties (COP) met in Cancun, Mexico from 29th November, 2010 to
10th December, 2010, to deliberate and discuss on the future of the
UNFCCC’s climate regime. A set of agreements called Cancun
Agreements have been adopted thereafter by the COP.
The authors present in this document, in a Question and Answer
format, their opinion on the developments at Cancun and the possible
future to which the UN regulated regime is headed.
It has been widely reported that there has been an agreement
arrived at, in Cancun. What does that agreement pertain to?
The agreement arrived at Cancun, which is generally highlighted,
pertains to the agreement related to long term co-operative action plan
under the convention. Long term Co-operative Action track was opened
in Bali parallel to Kyoto post 2012 discussions; further mainstreamed in
Copenhagen; and given better shape by introducing common but
differentiated responsibilities and reasonably strong monitoring and
reporting mechanisms at Cancun. Cancun agreement as listed by
UNFCCC contains the decisions and outcome of 20 odd aspects
related to climate change mitigation and adaptation.
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Does the agreement on long term co-operative action on climate
change indicate that there is a prima-facie commitment on taking
up binding emission reduction targets?
The long term co-operative action plan is the outcome of the work of
the ad-hoc group working on long term co-operative action. This
work is neither complete nor the outcome arrived at, is officially meant
to pre-judge prospects on the discussion/negotiation on commitment of
reductions beyond 2012. The fate of commitments to reduce emission
after 2012 by Annex-1 countries is being worked upon, in a separate
track, under another working group – the Ad-hoc working group on
further commitments for Annex-1 parties under the Kyoto Protocol.
Discussions on post 2012 commitments under Kyoto will continue at
Durban, next year. However, we expect that Long-term Co-operative
Action Plan will constitute the main structure of future International
Agreement for Climate Mitigation and Adaptation
The climate change talks have been essentially held hostage to the
developed –developing world divide. Has that gap between the
developed and developing world narrowed down or widened at
Cancun?
The bone of contention has been the issue of legally binding
commitment of Annex 1 countries to reduce emission beyond 2012,
when the current legally binding commitment expires. There has been
no progress on this at Cancun, while the long term co-operative action
plan agreed at Cancun achieved the following, vis-à-vis Annex I and
Non Annex I countries:
• Emphasized common but differentiated responsibilities
• All countries will take GHG emission reduction targets subject to very
similar Monitoring, Reporting and Verification systems
• Annex I countries will take leadership in taking mitigation actions and
making the funds and technologies available to Non Annex I countries
to take mitigation actions
• Non Annex I countries will undertake supported and non supported
Nationally Appropriate Mitigation Actions.
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With 2012 just a year away, is there likely to be an agreement on
binding commitment to reduce emission after 2012?
The world has time until the end of 2011 when the countries next meet
in Durban to figure out a way to deal with climate change. Intense
deliberation, discussion, negotiation between now and the Durban meet
holds the key to what the world finally agrees on.
However, in our view some major progress has been made following
the last hours at Copenhagen when the Copenhagen Accord was
cobbled. Cancun has been able to build further on Copenhagen
Accord. While the Copenhagen Accord could manage only a “note”
from the UNFCCC members (signaling lack of unanimity of all members
needed for adoption and agreement), the Cancun Agreement was
adopted at COP16 in Cancun.
So all the countries of the world (all the member states represented in
UNFCCC) is on board after Cancun with regards to long term actions
needed in dealing with the climate change.
Has Cancun managed to achieve any fundamental change in the
way the world looks at its approach on combating climate change?
In our view Cancun agreement has laid the foundation of a new
configuration for the framework which could play out in the next year or
so, in finally giving the world an acceptable agreed solution to deal with
climate change. The Cancun Agreements can lead to mitigation actions
by all countries with leadership being taken by Annex I countries in
actions and making resources available to Non Annex I countries in
mitigation actions. The agreement mobilizes resources for adaptation.
The Long term Co-operative Action plan has all the elements of an
International Climate Mitigation and Adaptation framework. It can also
make Kyoto redundant by making provisions for binding commitments
by Annex I countries and International offset transfers (flexible
mechanisms) within the Long Term Co-operative Action Plan (LCA).
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Foundation for action to mitigate and adapt to climate change has been
laid in the LCA of Cancun Agreements. If we trust the parties for the
spirit expressed, in the letters of Cancun Agreements, then this marks
strongest international reaffirmation of spirit of the Framework
Convention since 1992.
What is the likely role of CDM in the new framework?
In our view the groundwork that has been done in Cancun is a
preparation for a framework in which the role of CDM as a project
based offset generating mechanism in a nation that does not have a
GHG emission limit/target is diminished or marginalized .
In the event that CDM is no longer operative, it is generally
perceived, that the interests of non-Annex 1 countries will be hurt.
So isn’t it correct that a new climate change regime in which CDM
is not operative is not in the interest of Non Annex I countries?
The new climate change regime which we see as emerging, from the
developments in Copenhagen and Cancun, is a dispensation in which
Annex I country’s interests will be adequately safeguarded even
without a mechanism same as CDM.
However, it will be important to ensure that the project owners continue
to have faith in the UN system of climate change regulation. For that,
the project developers of CDM projects should rest assured that all the
mechanisms of Kyoto will be operative till 2012 i.e., CDM projects will
be registered, registered CDM projects will be able to generate CERs
and Annex I countries will be able to use CERs to meet their
commitments. It is very likely that the projects that are registered and
generating GHG ERs /CERs will be able to use such GHG ERs/CERs
for meeting commitments of the Host Country or Annex I country under
a new mechanism.
So what is the likely shape of things to come in the UNFCCC
administered climate change regime – and how is a developing
country’s interest safeguarded in the new scenario?
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The work of the ad-hoc group on Long term co-operative action has all
the ingredients ready to replace CDM. One of the outcomes envisaged
in the Copenhagen accord was the articulation of (1) the respective
economy wide emission reduction targets from each Annex1 country
and (2) the Nationally Appropriate Mitigation Actions (NAMAS) which
are to be implemented by non Annex 1 countries. Thus in effect both
Annex 1 and non Annex1 countries were to communicate their
respective emission reduction targets – which were done.
NAMAS would prove to be the pivot on which the relation between
developing and the developed world as regards climate change
mitigation get hinged. NAMAS in its various dispensations will replace
CDM in future. The long term co-operative action plan within which
NAMAS is scoped contains all the principles that determine the rule of
engagement between developing and developed world. These
principles are the same which gave us a working mechanism called
CDM. With NAMAS the working mechanism would be different but the
founding principles remain the same. As long as the principles remain
the same, the new mechanism which emerges based on NAMAS will
meet the fundamental requirements of developing countries.
What are these principles?
The principles that are laid out for the engagement of the developed
and developing world in their mitigation efforts are as follows:
The developed countries have been historically responsible for
greenhouse gas emission and are therefore the major contributors to
anthropogenic climate change. So, developed world needs to take lead
in mitigating the impact of climate change.
• Participation of developing countries in the mitigation action is on the
basis of equity and in accordance with their common but differentiated
responsibilities and respective capabilities.
• For the developing world, social and economic development and
poverty eradication are overriding priorities – hence emissions will grow
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in the short term.
• Actions by developing countries to cause deviation from business-as-
usual emission will happen when enabled and supported by
technology, finance, capacity building.
All of these are in the long term co-operative action plan agreement of
Cancun.
With NAMAS how could the developing world’s mitigation actions
look?
Each developing country will formulate national GHG mitigation action
plans; some would be funded with the domestic resources and others
may require international support. In our view, the ones that seek
international support could be required to demonstrate, that to the
extent the actions are internationally supported, they are additional to
the targets accepted by the country. Then a developed country’s
support of NAMAS in a developing country will be counted towards the
developed countries mitigation actions..
Unsupported NAMAS will in such a scenario contribute towards a
developing country’s emission reduction target, while supported
NAMAS will amount to a flexible mechanism available to partly meet
developed country’s emission reduction target.
Developed countries can plan their NAMAS schemes for international
support in 3 categories:
1. NAMAS schemes which require international support for their
complete enablement
2. NAMAS schemes which require international support for
broadening the scheme
3. NAMAS schemes which require international support for deepening
of the scheme
Of course, whether the mitigation arising out of internationally
supported NAMAS can be counted towards target of a developed
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country or this mitigation can constitute an internationally tradable
offset, is still to be discussed, debated and accepted. It could also
happen that LCA will require Annex I countries to take leadership role
setting climate mitigation target and in addition to that target support
NAMAS. In such a situation, Kyoto mechanism may continue to operate
in addition to LCA with all its flexibility mechanisms. In that case too,
the “additionality” determination will be simpler for CDM projects, and
becomes similar to JI projects. Much of the mitigation action,
formulation/approval of mitigation programmes and projects shift to Non
Annex I country DNAs or other appropriate country agency. This is a
welcome step and is a suitable setting for significant jump in mitigation
action. But much larger and far reaching capacity building effort would
be required in non-Annex I countries other than BASIC countries.
How will the project level interaction happen?
Each NAMAS scheme will have in it - action to be taken at unit level
(say industrial unit level) to reduce emission. To be effective in
achieving emission reduction, national governments would formulate
the schemes in such a way that once the scheme is rolled out by a
national government it will generally become binding on the unit
covered by it to work towards the scheme’s objective by formulating
appropriate project actions.
In our opinion, a good number of Annex I countries may choose market
mechanism to achieve the mitigation targets through non supported
NAMAS. Non-supported NAMAS schemes would support trading of the
GHG ER asset between deficient and surplus units within the scheme
participants as a means of cost-effectively achieving the scheme’s
climate change related target.
Annex 1 countries can declare their support for NAMAS already
formulated or Annex1 countries can in advance proclaim support for
certain types of actions if implemented by non-Annex1 countries as
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NAMAS.
The emission reductions from supported NAMAS will, in all probability
will be permitted to serve as offsets for use by Annex1 country.
Supported NAMAS becoming the CDM/JI of the new framework, with
more action and decisions in Annex I countries, is a distinct possibility.
What is going to be the role of markets in the new formulation?
The role of markets in mitigation efforts for the period beyond 2012 will
continue to remain uncertain at least until the 17th session of COP in
Durban.
The Cancun agreement has concluded with a decision to consider the
establishment of one or more market mechanisms to enhance cost-
effectiveness and promote mitigation actions. Also there are indications
to suggest that market mechanism will not be the only means of support
of NAMAS.
In our opinion, many non-Annex I and Annex I countries will deploy
market mechanisms to meet their targets under Cancun Agreements. In
addition, the Annex I countries, may be able use mitigation achieved
through the NAMAS that is supported by them. The ER commodity
generated from such supported NAMAS would be similar to CERs or
ERUs. The need for deeper and wider action to meet the mitigation
targets will make active participation of private players and markets
inevitable and this dynamics will lead to active role of the market.
Recall, nothing in the Kyoto text indicated that CDM projects can be
unilateral and CERs could be traded the way we have seen during the
last decade.
Hence, the market for UNFCCC emission reductions post-2012 will be
large, widespread, and less fragmented and different from the one we
have today. We envisage there will be a number of domestic markets,
with a portion of the domestically traded carbon credits having
international linkage.
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How is REDD going to be financed?
To drive Reduction in Emission from deforestation and degradation the
Cancun meet requested the Ad-hoc working group on long term co-
operative action to explore financing options for full implementation of
REDD and urged developed countries to support through multi-lateral
and bilateral channels the development of national strategies action
plans, policy and measures. So until Durban at least, all financing
activities for REDD will be through multilateral and bilateral channels.
VCS credits can be another channel for financing.
The developed countries committed in Copenhagen to provide
USD30 billion of finance for mitigation and adaptation. What is the
status on this post-Cancun?
The commitment at Copenhagen was to provide USD30 billion dollars
towards mitigation, adaptation and forestry during the period 2010 to
2012. The developed countries also agreed there to mobilize by 2020,
USD100 billion per year to address the needs of developing countries.
This commitment is on - as the long term co-operative action on climate
change has taken note of this and has asked that developed countries
report by May 2011, May 2012, May 2013 the resources provided until
then and how developing countries access those resources. So the
Cancun agreement has brought in an element of vital transparency
necessary to establish accountability towards commitments made for
the USD 30 billion. The commitment for generating by 2020,
USD100billion for financing mitigation actions in developing countries
has been reiterated in the Cancun agreement.
What will be the sources of this finance?
The finance is expected to come from private, public, bilateral and
multilateral sources.
The Copenhagen accord contemplated creating a Copenhagen
Climate Fund. Where does this stand vis-à-vis Cancun agreement?
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The establishment of Copenhagen Climate Fund was contemplated in
the Copenhagen Accord to function as an operating entity for financial
mechanisms under the U.N. convention on climate change for
mitigation, adaptation, technology creation/transfer and capacity
building. The Cancun Accord is silent on this.
However, in Cancun, a decision to establish a Green Climate Fund has
been taken. This fund will serve as an operating entity for the financial
mechanisms under the convention. The Green Climate Fund in a way is
the re-christened Copenhagen Climate Fund. The Cancun Agreement
in its LCA has set up the mechanisms for design and governance of the
fund. In that sense Cancun has served to progress a step further
towards the establishment of the fund. Following the set up of the fund
significant part of the multilateral financing could flow through this fund.
Has any major decision on Technology transfer been taken in
Cancun?
Yes, acceleration of technology transfer and impetus on technology
development have remained an area of concern in the climate change
regime. At Cancun the foundation has been laid to create an effective
mechanism for technology transfer. Copenhagen Accord mentioned
technology only in passing – alluding to a Technology Mechanism to be
set up to accelerate technology development and technology transfer in
the areas of adaptation and mitigation. At Cancun, significant progress
has been made on this front. The Cancun agreement has set an
ambitious target of making the Technology Mechanism operational in
2012. Towards that end it has established the structure of the
mechanism and delineated functions to be carried out leading to the
operation of the mechanism.
Given that the capacity to undertake mitigation and adaptation
measures needed to build up for the climate change combat
efforts is not the same in every developing country, what has
Cancun achieved on this front?
The Long term Co-operative Action agreement has emphasized the
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need for enhanced effort in capacity building as a requisite for
developing countries to effectively combat climate change. Decision to
- strengthen institutions, generation,/sharing/ management of
information and knowledge, communication/ education/ training/ public
awareness, stakeholder participation – have been taken at Cancun. At
Cancun, the ad-hoc working group on long term co-operative action on
climate change has been requested to consider ways to enhance
monitoring of capacity building and review effectiveness of capacity
building. It has been also requested to further elaborate the modalities
regarding institutional arrangements for capacity-building. The regional
imbalances in undertaking mitigation actions through Clean
Development Mechanisms that have been witnessed during the Kyoto
implementation may be avoided due to the envisaged capacity building.
What is the status on Carbon Capture and Storage (CCS)?
The meeting n Cancun has finally ruled that CCS in geological
formulations is eligible for CDM. The modalities and procedures for
inclusion of CCS project in CDM are yet to be elaborated. The
Subsidiary body on Scientific and Technical advice has been asked to
now lay out the modalities and procedures at its 35th session, thereby
putting at rest the uncertainty of CCS’s inclusion in CDM. This marks a
significant progress and the supply of offsets from CDM could increase
significantly. In situation wherein Kyoto may not continue such
mitigation actions may be a good part of supported NAMAS in countries
like China, India and South Africa.

General Carbon Advisory Services Pvt. Ltd. (GC) advises and provides consultancy services to clients worldwide on Greenhouse Gas (GHG)
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The views and opinions expressed herein are those of the authors and do not necessarily represent the views or opinion of General Carbon. This
document is not meant to guide investment or any other action including investment into projects or emission reduction offsets. Anybody relying
on information or projections provided in this document for decisions or actions will do so at his/her own risk and the authors and General Carbon
accept no liability arising from impact of such decisions or actions.

Author Anupam Das-Purkayastha (anupam.das@general-carbon.com), in consultation with Dr. P. Ram Babu (ram.babu@general-carbon.com)

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