Journey from Kyoto Protocol to Paris Agreement

The Journey

The United Nations Framework Convention on Climate Change (UNFCCC) signed in 1992 (but entered into force w.e.f. 21st March 1994) ratified by 197 countries, including the United States happened to be a landmark accord and the first global treaty to explicitly address the issue of anthropogenic climate change. It established an annual forum, known as the Conference of the Parties abbreviated as COP for convening international discussions aimed at stabilizing the concentration of greenhouse gases (GHGs) in the atmosphere.

The UNFCCC subsequently paved way for the Kyoto Protocol that was adopted in 1997 during COP 3 held in Japan, but could come into force only as late as 2005. It happened to be the first legally binding climate treaty. The Kyoto Protocol operationalized the United Nations Framework Convention on Climate Change by committing industrialized countries and economies in transition to limit and reduce greenhouse gases (GHG) emissions in accordance with agreed individual targets. It required the developed nations (or the Annex-I countries) to reduce emissions by an average of 5 percent below 1990 levels, and established a system to monitor countries’ progress.

One important element of the Kyoto Protocol was the establishment of Flexible Market Mechanisms, which are based on the trade of emissions permits. Under the Protocol, countries were legally bound to meet their targets primarily through national measures. However, the Protocol also offered them an additional means to meet their targets by way of three market-based mechanisms namely International Emissions Trading, Clean Development Mechanism (CDM) and Joint Implementation (JI).

The CDM allowed emission-reduction projects in developing countries to earn certified emission reduction (CER) credits, each equivalent to one tonne of CO2. These CERs can be traded and sold, and used by industrialized countries to a meet a part of their emission reduction targets under the Kyoto Protocol. The mechanism stimulated sustainable development and emission reductions, while giving industrialized countries some flexibility in how they met their emission reduction limitation targets.

More than just cutting emissions, the Clean Development Mechanism paved way for emissions trading. According to Article 17 of the Kyoto Protocol, emissions trading allowed countries that had emission units to spare i.e. emissions permitted to them but not ``used`` - to sell this excess capacity to countries that had already exceeded their permissible emission quotas. Each unit being equivalent to one metric tonne of CO2 emitted into the atmosphere.

Parties with binding commitments under the Kyoto Protocol (i.e. Annex I countries) accepted the targets for limiting or reducing emissions. These targets were expressed as levels of allowed emissions, or assigned amounts, at over the 2008-2012 i.e. the first commitment period of the Kyoto Protocol. Since carbon dioxide is the principal greenhouse gas, people speak simply of trading in carbon. Carbon is now tracked and traded like any other commodity. This is the genesis of the ``carbon market.`` Emissions trading schemes were established as climate policy instruments at the national and regional levels. Under such schemes, governments set emissions obligations to be reached by the participating entities.

Clearly Kyoto Protocol was a definitive step in the right direction but was not sufficient as it put the onus of anthropogenic climate change only on developed countries. The major weakness of the Kyoto Protocol was that developing countries did not commit themselves to climate targets. The economies of countries such as China, India and Indonesia grew rapidly in the following years — and so did their greenhouse gas emissions. Today, more than half of the world's emissions come from developing and emerging economies. Therefore, the need for holding developing countries to account was strongly felt.

Birth of The Paris Agreement

Further, even beyond 2020, which marked the end of the second commitment period of the Kyoto Protocol, climate change would still need to be addressed. This is why, the UNFCCC’s 21st Conference of the Parties (COP), held in Paris in 2015, adopted the Paris Agreement. The Paris Agreement adopted in 2015 rightfully offered a chance for the developing countries to take part in the fight against global warming, hand in hand with the developed countries. The agreement required all the major GHG emitting countries to reduce their emissions and gradually strengthen their commitments.

While the Kyoto Protocol allowed for emission offsets in developing countries, whereas Paris Agreement creates an opportunity to extend the reach and deepen the integration of carbon markets.

World leaders from 195 nations approved the Paris Agreement, which included commitments from every country. All this aimed to combat climate change. As on date, every nation on the planet, (197 in number) is a part of the Paris Agreement.

The Kyoto Protocol had established targets for the signatory countries to adhere to, and they came with penalties in the event of noncompliance. In comparison, countries in the Paris Agreement have the liberty to set up their NDCs (Nationally Determined Contributions). Also, it’s a non-binding agreement where signatories don’t incur any penalties if they fail to achieve their targets. The Paris Agreement, however, requires monitoring and reporting, as well as a reassessment of a country’s emission reduction targets over time. This helps to attain the Agreement’s broader, long-term goals.

Paris Agreement’s ambitious goal is to cap the rise of global temperature at 1.5°C in the 21st century. However, based on the commitments made by individual nations, studies show that these targets won’t be enough to accomplish the 1.5°C cap. In fact, the cumulative targets will only achieve to cap the rise in global temperatures, somewhere between 2.7°C and 3.7°C.

Thus Climate Action is only going to intensify here onwards.

In the wake of clauses 4.4 and 4.7 of the Paris Agreement, Developed country Parties will continue taking the lead by undertaking economy-wide absolute emission reduction targets while Developing country Parties will continue enhancing their mitigation efforts, and will be encouraged to move over time towards economy-wide emission reduction or limitation targets in the light of different national circumstances. Further mitigation co-benefits resulting from Parties' adaptation actions and/or economic diversification plans can contribute to mitigation outcomes under Article 4 explicitly establishes beyond reasonable doubt the permanence and relevance of carbon trading in the overall global strategic framework on Climate Change Mitigation.

In fact the very raison d'être of Article 6 of the Paris Agreement completely bolsters the efficacy of emissions trading mechanisms in the global cooperation towards Climate Change Mitigation. Article 6 is undoubtedly the sweet spot of the Paris Agreement which reaffirms the validity of purpose of carbon trading.

COP 26 - Turning Point

At the heart of COP26 that was held in Glasgow in November 2021 was the urgent need to reduce greenhouse gas emissions, 80 per cent of which come from energy generation and use. A power-packed Conference of Parties dedicated to a future of clean energy saw multiple announcements of new initiatives, funds and pledges to reduce and end coal use, the dirtiest of the fossil fuels.

After much deliberation, rules for a global carbon market were established at the Glasgow COP26 climate change conference in November 2021, enacting a globally unified approach first laid out at the 2015 Paris Climate Agreement. The agreed-upon framework, known as Article 6, will comprise a centralized system and a separate bilateral system. The centralized system is for the public and private sectors, while the bilateral system is designed for countries to trade carbon offset credits, helping them meet their emission targets.

Under the new agreement, those who create carbon credits will deposit 5% of proceeds generated into a fund to help developing countries tackle climate change. Also, 2% of credits will be cancelled to ensure an overall reduction in emissions. The new rules allow participants to use previous credits created between 2013 and 2020, prompting fears that they could potentially saturate the market and put downward pressure on prices.

This will create financial incentives for countries and companies to create emission-reducing technology and initiatives, such as mechanical carbon capture systems and forest planting—all of which will help reduce carbon levels in the atmosphere.
The Paris Agreement/ or the Paris Accord is an effective step towards democratizing the Carbon Markets rather than these markets being restricted under monopoly, duopoly or oligopoly for that matter. Since Article 6 of the Paris Agreement sets the stage for a much more evolved Carbon Market with several more mechanisms that are likely to come up in the foreseeable future. The mechanisms that are expected to evolve are more likely to give emphasis on various aspects of the Sustainable Development Goals thus fostering the Sustainability Agenda simultaneously. The world is aware that significant advances achieved towards the accomplishment of SDGs have been undone ever since Covid-19 ravaged the world in 2020. Covid-19 has pushed the entire world behind on the timeline for achieving the 2030 agenda. Reinvigorated concerted efforts are required for making new headway in terms of social, political, economic and environmental development particularly for the most marginalized people in the world.

The Way Forward

New Carbon Mechanisms that will drive the Sustainability narrative will give the project owners an opportunity to pick choicest thematic interventions that supplement the environmental wellbeing with overarching social well-being too. This is in fact the need of the hour particularly as the World re-emerges from the shadows of the Pandemic.

We strongly believe that when competition increases, quality is not compromised because clients have several options to make a selection from. In fact with more number of Carbon Mechanisms entering the marketplace, something that will stand to gain the most eventually will be, Sustainability!!! Monopoly and Oligopoly have never done much good for the market and society simultaneously. If one aspect takes the front seat the other is sure to lag behind.

Thus monopoly/ oligopoly in the Global Carbon Market must be systematically dismantled paving way for pluralism.

Newer Carbon Mechanisms are quite likely to plug the existing gaps by ensuring following inherent features in the way Carbon Credits are generated, monitored, reported and verified:

• Additionality;
• Baseline Scenario in Emission Reduction Methodology for the Carbon Offset;
• Permanence;
• Robust Monitoring, Reporting and Verification (MRV) protocols;
• Alleviation of double counting;
• Alleviation of Negative Impacts in terms of Social and Environmental Harm;
• Contribution to SDG Achievement;
• Improved Governance and Transparency.