Carbon markets to take centre stage at Cop 25

Author Kate Abnett, Senior Reporter

UN climate negotiations in Madrid, Spain, next month will see countries renew their efforts to finish Article 6 of the Paris climate agreement, the section that could “make or break” the ambition of the accord and launch a global emissions trading system.

Envoys from the nearly 200 countries signed up to the 2015 Paris agreement will meet in Madrid from 2-13 December for the annual UN climate summit (Cop 25). 

The chief hope for the talks is that countries agree rules on Article 6, the only part of the treaty not finished at last year’s UN summit. Article 6 will enable countries to trade emissions reductions with one another, laying the foundations for a global carbon market.

If implemented effectively, Article 6 could slash countries' costs for reducing emissions, freeing up cash that could support an additional 5bn t/yr in emissions reductions in 2030 – more than the total annual greenhouse gas output of the EU.

“How these rules are decided is really going to make or break the ambition of the Paris agreement,” World Resources Institute senior associate Kelly Levin said.

Agreement has so far eluded negotiators. Article 6 was punted to Cop 25 after negotiations ended in gridlock in the final hours of last year’s summit. 

Observers are hopeful that Cop 25 will produce rules for Article 6. This would pave the way for countries and investors to start developing projects that could generate tradeable emissions reductions.

“I think what will come out of Cop 25 will be a good basis to work with,” International Emissions Trading Association (IETA) international policy director Stefano De Clara told Argus. The summit’s outcome should mean investors and countries know “most of the rules of the game” on Article 6, he said.

But parties will need to be willing to compromise. The UN Convention on Climate Change (UNFCCC) takes decisions by consensus, meaning all 197 countries must approve — or not formally object to — the Article 6 rules.

Even if envoys strike a deal on Article 6 next month, the finer technical details will be figured out in a work programme after the summit, a process that observers say will take roughly two years.

“There is the risk that sustentative stuff or political decisions are postponed [to the work programme] because you cannot get there in the time you have at Cop,” De Clara said.

Dragging the Article 6 talks into next year would prevent the Paris agreement from being fully implemented in 2020. It would also distract from the big task that countries face next year — updating their national emissions reduction pledges.

As part of the Paris agreement, each country set itself a national target to cut emissions (NDC). But the combined efforts of current NDCs fall far short of the agreement’s goal to curb global warming to 2°C above pre-industrial levels this century, and to pursue efforts to cap warming at 1.5°C.

“We know that the current NDCs are not good enough. In 2020 parties need to focus on coming forward with enhanced ambition for Cop 26 in Glasgow,” former UN climate negotiator Kelley Kizzier said, referring to next year’s UN climate summit, which the UK will host in November.

Envoys head to Madrid armed with a draft Article 6 text, which they agreed at last year’s UN summit and refined during a round of talks in Bonn, Germany, in June. This document — which contains hundreds of square brackets, each set indicating an issue that has not been resolved — will be the basis for Cop 25 negotiations.

Here are the key issues to watch out for in the Article 6 talks.

Double counting

This topic caused the gridlock in last year’s Article 6 talks.

Negotiators need to agree a system for countries to conduct international trades of emissions reductions, and account for these trades in their national climate goals. “Double counting” is one of the most contentious issues in these talks.

Double counting occurs when a single emissions reduction is used for compliance with multiple climate targets. 

If the Article 6 rules allow double counting, “it would make it seem like we are getting twice as many emissions reductions as actually happen”, non-governmental organisation Environmental Defense Fund (EDF) has warned. EDF estimates that up to a third of total global emissions — equivalent to the combined CO2 output of the US and China — are at risk of double counting.

Brazil is leading the push for Article 6 rules that allow double counting. The country has generated millions of certified emissions reduction (CER) credits from projects such as landfill gas, hydro and biomass energy. It wants to use these credits to meet its own climate targets, and to make money by selling them to other countries.

But the EU and other countries reject this. They want Article 6 rules that apply a “corresponding adjustment”, where if a country sells an emissions reduction worth 1t of CO2 to another country, the seller must add an extra 1t of CO2 to its own national emissions tally.

Non-NDC sectors

There is also the question of how to account for emissions reductions in sectors not included in a country’s NDC. Most, but not all, countries have set economy-wide emissions reduction goals under the Paris agreement.

At issue is whether a country could achieve an emissions reduction in a sector not covered by its NDC, and then transfer that emissions reduction to its NDC, or another country’ NDC, and count it towards the target. Without watertight accounting rules, double counting could become an issue here too.

CDM transition

At stake here is whether countries will be allowed to use CER credits generated by projects set up under the Kyoto protocol's clean development mechanism (CDM) to meet their Paris agreement targets.

The battle lines are similar to those on double counting. Brazil and India want all CDM credits, plus the CDM projects that produced these credits, to be transferred to the Paris agreement. These countries have produced millions of CERs, and they stand to profit from selling them to other countries.

A full transition of CDM credits is firmly opposed by the EU. They fear that countries would buy cheap CERs to meet their Paris agreement targets, instead of investing in new projects to cut emissions.

Market observers have warned that if all CDM credits get used in the Paris agreement, it would water down the treaty’s ability to curb climate change. 

One solution would be to set a restriction on the "vintage" of CER credits that countries can use to comply with the Paris agreement, by banning credits that represent emissions reductions achieved before, say, 2020. Brazil rejects this idea.

A compromise at Cop 25 could see countries agree to phase in a “vintage” over a number of years – for example, by allowing countries to use credits of any age to meet their climate goals in 2020, but then tightening the rules on “vintages” each year until only post-2020 credits can be used. 

Is the private sector involved?

Article 6 holds the key to involving the private sector in efforts to meet global climate goals.

The latest texts contain an option for emissions reductions generated under the Paris agreement to be used for “purposes other than” meeting NDCs.

When countries start trading emissions reductions, this could allow a company to buy reductions and count them towards a voluntary climate goal. It could also enable airlines to buy countries’ emissions reductions and use them to comply with the UN’s global scheme for offsetting aviation emissions (Corsia), which launches in 2021. 

The private sector will also play an important role in Article 6 as a key source of funding for emissions reduction activities.

But until the Article 6 rules are in place and it is clear that there will be a market for emissions reductions, investors will remain cautious.

“At this moment and until there is a clearer case for investment, the private sector is watching from the fence,” Sandra Greiner, lead consultant at consultancy Climate Focus and an adviser to the African group in the UN climate talks, told Argus.

So far, around $345mn has been committed to pilot activities that could participate in Article 6 — this is likely to be significantly less than would have been expected if the Article 6 rules had been finished last year. The majority of this investment is from public sector programmes.

But governments — which are expected to be big buyers of emissions reductions under Article 6 — are also wary. 

Governments are “hesitant” to commit to start Article 6 pilots in the land use sector without clear guidance on the Article 6 rules, according to Edit Kiss, development director at Mirova Natural Capital, part of asset management fund Mirova, which aims to have €1bn ($1.11bn) worth of investments in nature-related projects by 2022.

“Some of the governments we talk to say, ‘We are waiting for the Article 6 rules,’” she said.

Kate Abnett is senior reporter for European Emissions Markets, a daily service providing detailed market analysis, prices and news for the greenhouse gas markets. Learn more.

 

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