Insight Conversation: Chandra Shekhar Sinha, World Bank

Chandra Shekhar Sinha serves as the Global Lead for Carbon Markets and Finance in the Climate Change Group at the World Bank. He joined the institution in 1997 as part of the team that established carbon finance at the institution and has also worked on energy and climate change in Latin America, the Caribbean and South Asia regions.

He focuses on developing Paris-aligned carbon markets and enhancing climate finance operations, while also maximizing synergies of different climate change initiatives of the Climate Change Group at his institution.

In this interview, Sinha speaks with S&P Global Commodity Insights' Ruchira Singh and Anirudh Iyer about carbon market dynamics, demand generation, and Article 6 methodologies.

When can we expect the United Nations Framework Convention on Climate to release the Article 6 methodologies, and how will they impact the carbon market?

UNFCCC released standards for avoidance and removal. The methodologies would have to correspond to those standards. Our understanding is there are about half a dozen methodologies which are currently being considered proactively and should start coming out by June. Thereafter, the projects will begin to be registered.

When the Clean Development Mechanism was first launched, the World Bank, in trying to build the market foundation started submitting methodologies before any other party. In the early years, we were responsible for 80% of the methodologies submitted. So, we're starting the same process now. We are preparing methodologies to submit to the supervisory body for consideration. And these would be linked to areas where we think there's substantial development benefit that could accrue to our clients in developing countries.

One of the first ones we're looking at is called the Clean Energy Access standard. This is linked to a very large program in Eastern and Southern Africa, where there's a World Bank program called ACENT (Accelerating Sustainable and Clean Energy Access Transformation) for about $15 billion to provide clean energy access to 100 million people. These would be clean lighting, clean cooking, and access to productive uses in any place based on renewable energy.

We will similarly have other methodologies for energy storage, expanding grid and regenerative agriculture. There will be many other development organizations which can do that. There's a lag between the time you submit the methodology and when it gets approved, and a further time lag when the projects are designed using those methodologies.

The provision for CDM transition to Article 6.4 can jumpstart supply. And if you were to look at potential activities that can transition, those number of activities could be in hundreds. The problem is the demand and a careful consideration by host countries on projects and activities to authorize for transition. I think the right question is, how to build demand because the supply can be addressed through a combination of those new methodologies, CDM transition and Article 6.2 agreements between countries.

With Article 6.4 coming up, what will be the role of the international registries?

Article 6.4 will have a registry with provisions for corresponding adjustments through which it goes into Paris Agreement accounting. But it also has a provision for what is called Mitigation Contribution Units. So, it becomes an opportunity for VCM. Those who prefer the UNFCCC process over the independent standards, will go to the Article 6.4. get MCUs issued and can use it towards the corporate net-zero report.

The COP at Baku also agreed to a separate registry for Article 6.2 to meet the requirements of countries. Unless there is some clearly defined rationale and the size or complexity of the market requires it, countries should use existing institutions and registries.

In a case like India's, which is a very large market, it makes sense for regulators to have more direct supervision through the various audits and controls. In most developing countries, it is not the most urgent challenge to address. Governments often struggle with the capacity to develop and manage this process. The existing frameworks that exist should be used and held accountable for quality and integrity and there are very reliable solutions that are also available in the market.

Many countries in the Global South still do not have procedures of corresponding adjustments in place. And unless that happens, how do you see emissions trading under Article 6 to pick up? How can they give out LOAs without corresponding adjustments?

No, you cannot give a letter of authorization without commitment to a corresponding adjustment. What is important is that the government must have a procedure for providing the authorization.

The second element emerging economies like India, Indonesia or Vietnam are concerned with, is whether they will be able to meet their NDCs and therefore, they are reluctant to give corresponding adjustment without careful consideration.

What are your suggestions to address the lack of demand in the carbon markets?

What you are seeing happening in India is the way you need to address the demand challenge, which is the development of a compliance market in major emerging economies and creating the need for some of these carbon credits.

Everybody looks at Europe or the US for demand. That will be an important source of demand, and we need to do whatever we can to encourage that. But what you must recognize is, China emission trading system was an important source of demand for the CCER. With the recent restructuring of the CCER program it may find linkages to the international market and China may even consider importing eligible carbon credits though Chinese international investment the way South Korean program allow.

Brazil just announced the launch of its emission trading system where there is a crediting mechanism. South Africa allows offsets against its carbon tax obligation.

So, the major emerging economies will also have to guide the demand.

To address the scale of the climate challenge, it can no longer be about Europe. The companies there have flattened out their growth and are declining their emissions. And their taxpayers' clear mandate is for them to go to net zero as soon as possible with limited use of carbon credits for the time being. Things may change if the cost to get to net zero becomes prohibitively high.

In the meanwhile, developing countries need to find the most suitable way for themselves to meet their challenges through carbon pricing and carbon credits. What India has embarked on is clearly a move in the right strategic direction.

How will emerging markets guide demand when the systems they are putting into place is not expected to have very strict mandates?

Typically, environmental regulations start out lenient to allow participation and then become stricter over time. This gradual tightening helps build engagement and supports and maintains compliance. This was the case in Europe ETS in the first and second phases and regulators have now developed systems for ensuring manageable price volatility. When the ETS started in China, prices were $2/mt-$3/mt, but they have gradually increased to $10-12/mt. A similar trend has been seen in Korea.

Implementing a carbon price or cap starting at $75/mt, as recommended by the IMF, would likely cause an economic shock. This sudden change would provide limited time for industries to innovate, develop solutions, and ensure compliance. Moreover, such a measure will be politically and economically impractical.

Right now, at a low carbon price, the general feeling is, 'maybe there's an opportunity to grow... there's some business opportunity.' Then when it tightens, they learn, because the more efficient ones innovate and flourish and capture larger share of the market.

What do you think will be the impact of the US pulling out of the Paris Agreement?

There is obviously a big concern. On the carbon market side, the US government had not indicated any interest in using carbon markets for their Nationally Determined Contribution. Given the support of the US government, corporate engagement positively influenced climate change efforts by driving demand in the VCM.

We've seen shifts in many aspects of ESG, including climate change by the corporates because of the changing political climate.

I think there will be an impact on the VCM because most of the demand was from the US corporates. As for European corporates, the EU regulation made it very difficult for them to use the carbon markets in order to meet any of their climate change corporate goals.

The prospects of rapid growth of the VCM seem to be a challenge. At this point it seems like there are a core set of corporates that continue to pursue climate goals because their stakeholders and their users are still pretty concerned about climate change.