November 23, 2020
China is all set to launch its carbon emissions trading scheme next month. If successful, it is set to be the largest such system in the world. Carbon trading schemes have been on several countries’ agendas, but their execution has been limited due to fiduciary, technical and implementation challenges. Pakistan has abundant potential carbon mitigation and adaptation options and could benefit greatly from collaboration with China’s emission trading scheme.
What is a carbon market?
A carbon market is one where you can buy and sell carbon credits, which have been validated by an independent expert source. Policy makers are once again advocating carbon markets to efficiently address global climate change and decrease carbon emissions. Within a carbon trading framework, entities generate credits representing emissions cuts and sell them to other nations or companies seeking to offset their own pollution. In theory, carbon markets help steer investment toward projects that deliver emissions cuts most efficiently. In practice, it is an efficient tool to transfer capital from developed to developing economies.
The EU ETS (European Union Emissions Trading System) is the most famous carbon trading system. Established in 2005, the price of carbon emissions in the EU ETS has been volatile, making it difficult to base firm projections on a price for carbon emissions. However, it now accounts for over USD 175 billion a year, a sizeable increase since it was established when 362 million tons of CO2 were traded on the market for a sum of USD 8.85 billion.
An opportunity for Pakistan
Pakistan’s history with carbon markets has been uneven. In 2005, Pakistan ratified the Kyoto Protocol under which “certified emissions reductions” generated by Clean Development Mechanism (CDM) project activities in developing countries could be used by developed countries credits to meet their emissions targets. In 2010, the Pakistan government allocated funds for carbon trading in its annual budget. However, by 2012, Pakistan’s share of CDM projects was less than 1% while China and India accounted for 60 percent and 30 percent of global CDM projects respectively. In the budget for fiscal year 2015-16, the Pakistani finance ministry allocated PKR 34 million (approximately USD 340,000) for carbon neutral projects to help the industrial sectors sell and buy carbon credits in a local market. In the same year, the government wrapped up the CDM cell in the Climate Change Division due to its poor performance.
The Pakistan Climate Change Act, 2017 provides the legal and institutional framework for climate policy in Pakistan. The Act envisioned delegating responsibility to the Ministry of Climate Change (MoCC) for designing and establishing a national registry and database on GHG emissions. It seemed to work on paper but not in reality. In 2018, the National Committee on the Establishment of Carbon Markets (NCEC) was formed to assess the country’s potential for implementing domestic and participating in international carbon markets. The MoCC published a draft report on the introduction of carbon pricing instruments in Pakistan. The report recommends implementing a domestic emissions trading scheme (ETS) in Pakistan that would initially cover large emitters from the power and industry sectors accounting for 168 Mt of CO2 equivalent emissions.
Collaboration with China
Pakistan has a ripe opportunity to link up with China’s programme by developing carbon offsets locally and selling these to China. In its 14th five-year plan, China prioritised carbon trading, including online trading, and Pakistan can benefit from that in the following ways:
· Legal and regulatory framework: An ETS requires a robust legal and regulatory framework outlining the activities that need to take place while specifying the scope, rules and applicability of the program, including monitoring, reporting and verification (MRV) protocols. Adopting the rules of its larger neighbour would be an easy first step.
· Nationally Determined Contributions: Carbon markets would allow Pakistan to meet its Nationally Determined Contributions (NDCs) targets of reducing emissions by up to 20% below Business as Usual (BAU) by 2030. By making its own market compatible with that of China, Pakistan would greatly benefit through a positive ripple effect, as Chinese markets start to develop.
· Commodity trading: Pakistan could explore how the outcomes of projects like the PTI government’s flagship Ten Billion Tree Tsunami could be developed into a commodity that can be sold in international carbon markets. Sustainable forestry management projects in Indonesia, have already secured carbon credits with a monetary value that benefit their developers. By applying lessons learned from Indonesia’s experience with sustainable forestry management, Pakistan can replicate these strategies.
· Increased revenue: Chinese companies might be able to offset their emissions by purchasing credits from Pakistan, if such credits are developed in accordance with Chinese rules. They would benefit by cheaper credits than their own market while Pakistan would benefit from the revenue generated.
· Co-benefits: An ETS is likely to create positive outcomes for public health, energy security, job creation and land-use change; in particular, the long-term health benefits stemming from a reduction in local air pollution through climate mitigation policies. By enriching projects through carbon credits, more such initiatives could be developed to benefit the local economy. Pakistan can also develop some new high-skilled jobs for the assessment of carbon credits and climate change.
The way forward for Pakistan
Pakistan would also benefit from tapping into alternative carbon markets, such as voluntary emissions trading schemes, which would enable Pakistan to unlock private finance via carbon credits.
Unlike developed countries which have already used up much of their carbon budget due to excessive industrialisation, Pakistan is blessed with an abundance of natural resources and has room to reduce more regarding forest protection and renewable energy. The next Conference of the Parties, scheduled for November 2021, is expected to formalise international trade in carbon credits under the Paris Agreement and carbon pricing will be a key driver of efficiency in global emissions reductions.
Yawar Herekar currently works with the Global Green Growth Institute (GGGI) as a GCF accreditation and ESS policy expert for the Ministry of Economy in Fiji.
Maha Qasim in an environment and climate finance consultant based in Islamabad.
Cedric Rimaud is a corporate bonds and green finance specialist based out of Singapore.