Watch: Rohini Pande Delivers the 3rd Annual Ashok Kotwal Memorial Lecture

This summary first appeared in Ideas for India on January 27, 2025

Rohini Pande began her lecture with an overview of the targets set in the 2015 Paris Agreement, which called for countries to move towards net zero carbon emissions by 2050 to meet the ambitious target of limiting global warming to under 2°C. She also raised the question of who should be responsible for meeting these targets, as lower-income countries are focused on economic growth,and would be less likely to set strict net zero targets. To ensure climate justice, richer countries would need to be net negative in order to meet a global net zero target. However, the reality is that current global targets are far from being met, and we are well above the trajectory for the warming limit of 2°C. When it comes to domestic policies, carbon taxes only cover about 6% of global emissions; and although carbon compliance markets cover 19% of emissions, there is a limit to how much these policies can be scaled. 

Pande moved on to highlight the need to focus on avoided emissions as a mechanism for reducing overall emissions. As tropical deforestation contributes significantly to emissions, she considered how existing forests – particularly those located in LICs – could be protected through payouts for maintaining forest cover. As LICs are the cheapest places to reduce emissions, she argued that global climate finance should prioritize these regions. This cost has to consider the fact that LICs would need to find a different path of industrialization – after all, no country achieved economic growth without substantial energy use, and as countries get richer, they also deforest more rapidly. 

The lecture then turned to possible mechanisms for reducing emissions in LICs. The first is the carbon border adjustment mechanism, which is designed to tax emissions embodied in imports from countries with lower or no domestic carbon pricing. However, Pande noted that this is not very equitable as the burden falls on the exporting country. Another approach involves financing carbon-reduction projects through carbon offset trading. The three key pathways for these projects – avoided emissions, reducing emissions, and removing and storing CO2 – are not just equitable, but there are also efficiency arguments to support them. 

Pande then introduced some basic terminology to contextualize the discussion: she explained the difference between carbon offset credits, which are traded in the voluntary carbon markets (VCMs), and carbon permit credits which are traded in regulated compliance markets. She emphasized why understanding these markets matters for India, which has adopted a compliance market mechanism under COP29 – noting a tension between the country’s nationally determined contributions (NDC) and what firms might do. A lot of the thinking around forests is in terms of meeting NDCs and not how land use projects are going to enter carbon credit trading.   

Moving on, the lecture touched upon the current status of VCMs. Today, VCMs cover just 0.2% of global emissions, Nevertheless, these markets present an opportunity for equitable international climate financing, with Pande stating that economists are well-suited to think about the issues associated with it. She outlined the four major players in VCMs: buyers, who are typically energy-intensive companies; suppliers, such as project developers; brokers, who facilitate the purchase of carbon allowances from project developers; and registries, which track and verify carbon offsets. India’s participation in VCMs is mostly in the form of renewable energy projects and not land use projects. The country accounts for a large proportion of projects that are registered for consideration, has over 500 project developers, and has ‘retired’ the maximum number of credits.  

Until 2021, VCMs experienced a significant boom, with substantial demand from fossil fuel and automobile companies. However, post 2021, there was a crash in the market, for two reasons: one, stagnation in demand due to concern about the quality of projects being sold in the market, and two, release of research results suggesting that many of the projects were not “additional”. Pande went on to explain that additionality is a critical feature of this market, which is to say that had you not paid money for this project, these emission reductions would not have occurred. If non-additional projects are used by companies to further increase their emissions, then the market has justified an overall increase in global emissions rather than reducing it. A key issue is that project developers who would not have cut down the forest anyway are the ones for whom it is cheapest to enter the market – they can take the money without having to change their actions. Further, verifiers who are supposed to screen out non-additional projects have incentives to pass them as they are paid based on whether a project gets verified. 

So, is there a future for VCMs? Pande contended that despite non-additionality being a hard problem to solve, there is a lot of interest from “good buyers”. These are especially large tech companies such as Google, Meta, and so on, that are using large amounts of energy in their data centres and face a lot of pressure from stakeholders. There is also focus on the Integrity Council for the Voluntary Carbon Market (ICVCM). However, such a body can only lay down principles. There is a need for research on standards and counterfactuals that make sense. 

Pande outlined three institutional challenges that need to be addressed. The first is an equity issue. Given an overall scarcity of the remaining emissions space in the world, climate justice warrants that lower-income countries get a larger share of the space. The current VCM cannot achieve this as it involves only off-the-counter trade between two parties. Second, there is a need for better quality carbon credits, which raises questions around what rules should guide measurement of additional carbon cuts by projects. The third aspect is the verification of carbon sales and having effective monitoring mechanisms in place. 

According to Pande, to achieve net zero goals in an equitable manner, we ultimately need to move towards a novel compliance market with voluntary participation from companies in the Global North and project developers in the Global South. The former would be responsible for hitting overall targets using a combination of reduction of their own emissions and those via developers. The kind of questions that economists and others should be thinking about are the right proportion of companies versus developers, and how to allocate permits to ensure climate justice. Finally, Pande reiterated the importance of including land use projects in such a market, with technologies such as satellite imagery and remote sensing helping address the additionality issue. 

The lecture was followed by a Q&A with the audience.