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COP-WATCH: Can the carbon markets be made to work?

  • Written by  Marco Magrini
  • Published in Climate
COP-WATCH: Can the carbon markets be made to work?
09 Nov
2021
Marco Magrini explores the complex issue of carbon markets – will they work? Or will they be exploited?

As COP26 enters its final and decisive week, all the thorny issues are still on the negotiating table. The thorniest of them all concerns the future of carbon markets, encrypted in the rather foggy Article 6 of the Paris Agreement. Its text is so vaguely worded that an extensive rulebook needs to be approved. Unfortunately, in the six years since Paris, no COP has ever managed it. 

The issue is complicated, yet it must be understood in order to gauge the final outcome of the Scottish climate conference. And, maybe, to grasp how distant and divided the world is. So, bear with me.

Article 6 prescribes three separate mechanisms for ’voluntary cooperation’ towards emissions reductions: the first two based on a ’market approach’ and the third not.

  • Article 6.2 proposes a mechanism that would allow countries that have exceeded their Paris climate goals to sell any surplus (be it in emissions reductions, renewable energy or forest expansion) to countries that have fallen short against their own targets. The entities being traded are referred to as ‘Internationally transferred mitigation outcomes’ - ITMOs.
     
  • Article 6.4 aims at creating an international market for carbon emissions, to be governed by a UN agency, that would allow public and private entities across the world to trade emissions reductions and credits. A new Sustainable Development Mechanism (SDM) would replace the Clean Development Mechanism (CDM), which operated under the Kyoto Protocol, allowing countries to fund emissions-reducing projects in other countries and claim the saved emissions as theirs.
     
  • Article 6.8, devoted to ’non-market approaches,’ is even less clear. If approved and regulated though, it may have a huge impact on the decarbonising process, as it includes development aid to poorer countries, without any advantage in terms of tradable carbon credits.

Article 6 fits on an A4 piece of paper, but the current negotiating texts for the rulebook are 34 pages long. These texts are embroiled in a web of diverging positions, conflicting interests and shrewd horsetrading from the world’s countries.

There are at least four main points of contention. The first one concerns ‘double-counting’. Stringent accounting needs to make sure that any ITMO traded is not counted by both the country that buys the credit and the country that sells it. It sounds like a non-issue. However, the differences in countries’ approaches to emissions reduction make it hard to agree on the treatment of transfers. 

Secondly, developing countries insist they want a percentage of the proceeds from trading all types of carbon credits. The EU, a spearhead in carbon trading, does not favour a levy on carbon credits, but would agree on offset trading. 

The third conundrum is whether old credits from the CDM can be counted toward the new Paris system. There are countries that did well under the Kyoto provisions and still have credits, such as Brazil and Russia. Now, they want to be able to sell them under the new system. Other parties maintain that this would lower trading prices, thus undermining the entire system.

Finally, countries such as Canada and New Zealand want Article 6 to address human rights issues. There have been cases of abuse in some CDM operations and many countries are anxious to avoid it in the nascent market. The trouble is that countries including China and Iran are vigorously opposed to any mention of human rights.

Disagreements do not end here. There are contrasting arguments even on the very idea of the ‘market-based approach’  – something that has characterised these negotiations since COP3 in Kyoto. There are countries, like Bolivia, that are against markets altogether, saying they only create ‘carbon billionaires'.

Some activists agree. When, last week, former Bank of England Governor Mark Carney announced that more than 450 financial institutions with $130 trillion in managed assets had committed to net-zero targets, Greta Thunberg tweeted: ‘The fossil fuel industry & banks are among the biggest climate villains.’ Carbon offsets are ‘a free pass to keep polluting.’

COP26 has entered its crucial stage. Energy and Environment ministers have arrived. An army of negotiators has started to scramble for compromises, mostly behind closed doors. Given their many divisions, it won’t be an easy task.

The most important thing is to stay faithful to the goal of staying within the famed threshold of a 1.5°C temperature increase. Offsetting and trading are ­part of the climate-fixing toolbox, and key to international cooperation. A recent report by the International Emissions Trading Association and the University of Maryland estimates that, if an agreement on carbon markets is reached, it could unleash up to $1 trillion of new capital investment toward poorer countries, helping cut emissions and promoting technological innovation.

But no one should forget that, unlike rules and regulations, the laws of physics and chemistry cannot be cheated.

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Geo November 2021 cover v3 copyCOP26 is set to be the most important climate conference since the Paris Agreement was signed in 2015. With live reporting from Glasgow every day of the conference and plenty of extra analysis, get all the COP content you need from Geographical.

 

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