Article 6 – The Carbon Markets and the Issues

In 2015, 195 countries signed the global climate deal at the Paris climate conference (COP 21). The Paris Agreement aims to set an action plan pursuing efforts to limit the temperature increase to 1.5°C. All parties are required to submit the Nationally Determined Contributions (NDCs), which embodies national goals to reduce emissions. Last December in Madrid, Spain, countries came together to negotiate the Article 6 of the rulebook of the Paris Agreement, the implementation guideline entailing how governments can achieve their NDCs through voluntary international cooperation using the market mechanism. In particular, a well-designed carbon market would allow the business to pitch in climate mitigation and increase ambition through technology innovation and cost savings re-investment.

A carbon market is partly based on cap-and-trade programs. A jurisdiction puts a cap on allowable emissions on a scope of emission sources. Governments issue permits to pollute and allow trading between companies with different supply and demand for emission permits. The goal is to achieve cost-effective emissions reduction across the jurisdiction. As of 2019, there were 28 emissions trading systems (ETS) around the world at regional, national, and subnational levels (World Bank, 2019). New initiatives and regional ETS were starting to launch and corporate. For example, the European Union and Switzerland linked their ETSs and entered into force this January.  It is the first international linking emissions trading schemes that cover around 2.7 billion tonnes of CO2 equivalent.

Source: World Bank, Carbon Pricing Dashboard.

Parties see the benefits of participating in the global carbon market that boost economic development and achieve NDCs cost-effectively. However, there were discrepancies around the corresponding adjustment in Article 6.2 and baselines and additionality provisions in Article 6.4. In the climate negotiation, the stalemate on Article 6.2 was to develop robust accounting for carbon markets. Double counting of credits occurs when an emission reduction unit traded to another party, both seller and buyer claim on their emission cuts. Thus, only one unit of emission reduction is generated, but it is reported twice. It poses a threat to actual emissions reduction. It also makes mitigation progress less comparable and hard to track. To be specific, it is estimated 6.5% to 29.5% of global emissions are at the risk of being double-counted.

In COP 25, Brazil continued to against the rest of the countries on agreeing to the corresponding adjustment in Article 6.2. Without the adjustment, the loopholes allow countries to achieve their carbon reduction goals without real emission reduction efforts. Brazil claimed that developing countries should be granted a period allowing double counting and promise to make up the emission debt later in 2030. The country made a commitment to reduce 37% by 2025 compared to 2005 level, they, in fact, reached the target in 2012, a 41% reduction compared to 2005 levels. The pledge allows increasing carbon emission and the evidence lies in a rise of 9% emission in 2016. Needless to say, double counting would allow Brazil to emit more while keeping good emission reduction records.

Another issue was on baseline and additionality in Article 6.4. The concept stems from Clean Development Mechanism (CDM) under the Kyoto Protocol that specifies that certified emission reduction credits should only be given to the activities that would not happen under the counterfactual of the business-as-usual scenario.  In the current situation where many NDCs are not ambitious enough to be far below business-usual, using carbon credits could generate “hot air” because of cheap carbon credits that do not represent real emission reductions. Further, renewable energy prices have decreased significantly and can compete with the cost of fossil-fueled energy. Pursuing a transition to renewable energy may become the business-as-usual and not a credit-rewarding activity that should be counted into NDCs. Thus, the additionality test plays a crucial role in the global market to prevent the ambition of NDCs to be attenuated. However, parties failed to agree on the definition, methodologies, and procedures for additionality tests. More, there are also questions on the requirements and responsibilities of countries to conduct additionality assessments.

Though the issues of double counting and additionality remained unresolved in the rulebook, they do not prevent the development of regional trading schemes. We can learn from rules in regional systems and adjust to international implementable regulations. I believe little action is better than no action, and the severity of climate change cannot wait for the ongoing protraction of international agreements.

Yu-Ting Lo

yutlo@umich.edu


References:

“World Bank Group. 2019. State and Trends of Carbon Pricing 2019. Washington, DC: World Bank. © World Bank. https://openknowledge.worldbank.org/handle/10986/31755 License: CC BY 3.0 IGO.”

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s