Carbon market initiatives for forests in India

Forest carbon markets offer an alternative means of financing climate change mitigation, relying on forests as carbon removal sites. These markets generate credits through activities like avoiding deforestation, afforestation, improved forest management, and reforestation. Projects must adhere to specific standards, ensuring registered credits meet criteria for permanence and prevent leakage. Forest carbon markets transform carbon into a tradable commodity, with a concentration of projects in carbon-dense tropical forests globally, particularly in the global south.

India, the world's tenth-largest forested country, has committed to substantial climate action, aiming to create an additional carbon sink through afforestation and tree cover. Recent legislative developments empower the Indian government to implement a domestic carbon credit trading scheme. Challenges and opportunities arise as India explores a market-based mechanism, considering its vast forested areas and existing commitments.

Despite ambitious goals, translating commitments into equitable on-the-ground action poses challenges. A recent paper ‘Forest carbon market-based mechanisms in India: Learnings from global design principles and domestic barriers to implementation’ looks at the issue in detail. The paper's central question revolves around the design principles that could make a forestry sector market-based mechanism successful in India.

Drawing on a literature review, the paper identifies four relevant design principles, grounded in global sustainability narratives and tailored to the Indian context. However, the path to a successful market-based mechanism in India faces challenges rooted in past forestry sector reforms, and the paper concludes by addressing three fundamental challenges and proposing solutions based on the identified design principles.

Methodology

The research methodology comprises two key components. Firstly, an extensive review of academic and policy literature was conducted to identify prevalent design principles in global carbon markets. This involved classifying these principles into broader sets based on relevance and frequency. The literature search covered various databases, including Academia, CAB Abstracts, DOAJ, Google Scholar, ISI Web of Science, JSTOR, PubMed, and Semantic Scholars. The fixed term 'carbon market' was combined with variable terms like 'design principles' and 'global design principles.' Complementary terms like 'effective,' 'equitable,' 'forest,' and others were also used to ensure comprehensive coverage.

The search resulted in 78 publications across databases and 28 additional articles from Google searches. After a rigorous screening process, 47 publications were eligible, from which 30 design principles were shortlisted. These principles, applicable across sectors and geographies, were categorized into ten broader classes.

The second part of the methodology involved an inductive approach to identify four design principles from the ten classes. Governance regimes, efficient management of emissions, credit units, and "caps," enabling a collaborative venture, and spatial and temporal commitments were chosen based on their frequency of occurrence. The final distribution of these principles across sectors and geographic regions, particularly focusing on forestry in India, was analysed.

The selected design principles included governance, efficient management, sustainability, collaborative ventures, quality of units, temporal parameters, supervision, resonance to agreements, spatial parameters, and reconnaissance and piloting. The detailed distribution of these principles across sectors and regions was tabulated, forming the basis for further analysis and discussion in the subsequent sections of the study.

Results

The study shortlisted four design principles as likely tools to design and implement a market-based mechanism in a way that caters to the socio-ecological circumstances and land management regimes commonly found in India.

Comprehensive, fair, and transparent governance regimes while developing the forest carbon markets may likely enable long-term positive outcomes, as stressed by design principle 1. The market’s effectiveness would be likely determined by its stringency in terms of a robust and consistent regulatory framework (design principle 2) that emphasises a long-term outlook on forest monitoring and is not bogged down by short-term goals.

The forest carbon markets machinery needs to safeguard the interests of the most vulnerable actors (in this case, local forest-dependent communities who live in and have traditionally been stewards of Indian forests) and offer flexibility to comprise community-sensitive and contextual factors during implementation. Design principles 3 and 4 stress this critical aspect of collaboration and locally-relevant spatio-temporal flexibilities respectively.

Design principle 1: Comprehensive governance regimes

Effective governance is crucial for the integrity of forest carbon markets. A robust governance regime should encompass accountability, equity, monitoring, transparency, and trustworthiness. Previous evidence suggests that forest carbon markets may not contribute significantly to on-ground carbon removals and may pose conflicts with existing socio-political institutions, potentially allowing some market actors to use it as a 'license to pollute now and clean up later.' To address these concerns, a governance model for forest carbon markets should prioritise clarity in applied terms and definitions, along with transparency in market functioning.

The first component involves defining terms, such as 'forest carbon credit,' to establish uniformity and curb greenwashing. A governance regime should only consider verified forest carbon credits generated in compliance with regulations, addressing risks of non-permanence, and involving local beneficiaries through free, prior, and informed consent. The second component emphasizes transparency in market functioning, ensuring claims of carbon removals align with on-ground implementation and monitoring. Forest carbon credits should complement, not replace, verifiable emissions reductions in related sectors.

For India's market-based mechanisms, a National Steering Committee (NSC) can play a vital role in ensuring clarity in definitions, classifications, and overall transparency. Additionally, incorporating biodiversity values and ecosystem service provisioning is essential to democratically benefit local communities. The focus of projects should extend beyond carbon sequestration to include tangible non-carbon benefits, fostering a more comprehensive and sustainable governance regime.

Design principle 2: Strengthen oversight in forest carbon accounting

This design principle focuses on establishing robust carbon accounting and pricing mechanisms within forest carbon markets. The absence of such mechanisms is recognised as a barrier to upscaling forest carbon markets globally. The principle emphasises the need to avoid double counting, control leakage issues, address bad faith actors, and implement caps on trading emissions.

The importance of avoiding double counting is underscored by the Global Green Growth Institute and the Indian Ministry of Power, as inaccuracies in calculations can hinder the attainment of Nationally Determined Contributions (NDCs). Leakage issues, highlighted by Niesten et al., can lead to significant environmental damage, making it crucial to stress additionality and prevent fraudulent practices.

Actors operating in bad faith can negatively impact market design, as reported by Redshaw, causing a decline in carbon trading standards and public confidence. To counter this, a strong regulatory framework is recommended to scrutinize transactions and ensure credits fulfil necessary criteria before entering the market.

The design principle also suggests implementing localised caps on emissions trading to achieve market objectives, as proposed by the Organisation for Economic Co-operation and Development (OECD). This involves emitters complying with minimum carbon reduction targets and trading emissions nationally and internationally. However, international trade of carbon credits would require additional regulatory policies beyond the scope of the paper. Overall, the four components of this design principle address leakage concerns, improper accounting practices, bad faith actors, and the need for localised caps to enhance the efficiency and integrity of Forest carbon markets.

Design principle 3: Lower transaction costs and modify terms of engagement with local communities

This design principle emphasises the need to establish healthy partnerships involving various stakeholders for effective and equitable forest carbon markets. Recognising the historical role of local stewardship in Indian forest conservation, collaboration with NGOs and communities is crucial for forest carbon market success. Local communities are acknowledged as effective forest stewards, yet their limited awareness of contributions and rights impedes their participation.

High upfront and transaction costs pose a significant barrier for small-scale forest carbon projects. Transaction costs, including search, negotiation, approval, monitoring, enforcement, and insurance costs, can deter project establishment. Lowering these costs may require subsidies, possibly achieved by pricing forest carbon credits higher than the current average of USD 30–50/tCO2.

In India, community-owned forests under market-based mechanisms face financial and informational transaction costs. Addressing these costs is vital for achieving equitable and inclusive forest carbon markets. Treating local communities as active partners involves valuing their cultural practices, respecting traditional knowledge, and implementing innovative compliance and monitoring mechanisms.

Local institutional members can be trained for project monitoring, reducing approval costs. Routine decentralised monitoring and regulatory incentives can enhance market inclusivity. Negotiation costs can be minimised through legally-binding contracts facilitated by community-based organisations. While transaction costs typically decrease with larger project sizes, India's diverse forest ownership necessitates upfront financing to incentivise local community participation in carbon trading projects.

Design principle 4: Encourage locally relevant flexibilities in temporal and spatial commitments

This design principle underscores the importance of setting specific criteria for spatial extent, temporal commitments, and nature of land use in forest carbon markets, particularly relevant in the Indian context. The literature highlights these factors as key barriers, emphasising the need for flexibility to encourage local community participation.

Concerns about lengthy commitment periods and restrictive commitments in forest carbon projects can deter actors. Spatial thresholds and land use restrictions further limit participation. Flexibility within the market structure is crucial for generating high-quality forest carbon credits, accommodating India's diverse ecosystems, land use practices, and land tenure systems.

India's forests are extensively used by local communities and exist within a mosaic of agricultural and other land uses. Forest carbon markets must consider this contextual nature of forest land use, adjusting for diverse land use systems like agroforestry. To address the time lag in carbon sequestration, flexible reward mechanisms, such as preferential sourcing of credits from community-managed forests, can incentivise early action. Commitments to forward finance and credit purchases, coupled with government interventions, can strengthen policy certainties and safeguards, fostering trust and aligning all actors with shared long-term objectives.

What are the challenges that forest carbon markets may encounter in India?

Forest carbon markets are envisioned to incentivise forest protection and expansion for effective climate action. However, their success, especially in tropical regions like India, faces challenges. Three primary issues in the Indian context include land property rights, implementation capacity, and fundamental flaws in carbon markets.

Firstly, conflicts arise over land ownership between state forest departments and local communities due to ambiguous land rights. The Forest Rights Act aims to address this, but its success is mixed, leading to disputes and challenges in benefit-sharing mechanisms.

Implementation capacities pose a hurdle, given limited government capacity and historical land conflicts. Effective market-based mechanisms that benefit all stakeholders face challenges in a context where state forest departments hold unequal power compared to local communities.

Fundamental issues in forest carbon markets include the questionable benefits for local communities, increased carbon emissions, and the lack of context-specific knowledge on carbon sequestration potentials in diverse Indian forests. The existing knowledge gap, combined with challenges in monitoring and verification, raises uncertainties about the effectiveness of market approaches, especially on publicly-owned land.

Addressing these challenges requires a nuanced approach, emphasising clarity in land rights, empowering local communities, and addressing the fundamental issues within carbon markets to ensure equitable and effective outcomes in India's forest carbon markets.

The full paper can be accessed here