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COP fudges market mechanisms

UN climate talks shy away from key implementation issue

Delegates at the Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change in Katowice in December reached agreement on how to implement the 2015 Paris Agreement, the global climate treaty that will supersede the Kyoto Protocol from 2020.

But one of the key implementation issues — the market mechanisms that govern various regional and global emissions trading and credit schemes — went largely unresolved.

Negotiators from nearly 200 countries hammered out a set of rules that will govern global climate action until well into the century, with the ultimate aim of restricting temperature increases to less than 2°C above pre-industrial levels, with an aspiration to keeping the increase to 1.5°C.

The so-called Paris Rulebook lays out procedures and guidelines governing, among other elements, how countries should report on their climate plans, on their efforts to assist developing and vulnerable countries, on how to account for the flows of financial assistance, and how countries should calculate and present their emissions reductions over time.

Unlike the Kyoto Protocol, Paris is a "bottom-up" agreement. Instead of the UN setting targets, nations are encouraged to set their own emission reduction goals in accordance with their respective capabilities and ambition. These goals, known as nationally determined contributions (NDCs) may or may not cover a country's entire economy, but once they are voluntarily set, they are regarded as binding.

Monetising emissions

These NDCs, which are to be submitted before 2020, may also commit countries to participating in international emissions-trading mechanisms that are set out in Article 6 of the agreement. Putting a price on carbon means that cuts in emissions can be monetised, boosting returns on investments in clean energy and other abatement technology.

December's negotiating agenda included a workstream on rules governing international emissions trading, but these talks broke down in the final days as differences of opinion over jurisdiction and accounting proved impossible to bridge.

Carbon markets are where clean energy producers can participate most directly in climate-change action. The bulk of short- and medium-term emissions cuts are likely to be achieved by replacing coal-fired power with gas, which emits roughly half as much CO2 /MW of power generated.

There is a growing resistance to climate action on the part of some parties

According to the UN Environment Programme, around 125 such fuel-switching projects were registered under the Kyoto Protocol, and these are estimated to have reduced approximately 400mn t of CO2 emissions by 2020. And there is plenty of scope for more: total global emissions from coal alone are estimated at around 14bn t/yr, according to the Global Carbon Atlas project.

Article 6 of the Paris Agreement calls for two frameworks for emissions trading: Article 6.2 allows for trading between countries (known in UN parlance as "parties"), while Article 6.4 creates a "mechanism" that would generate emissions reductions through public and private investment, in much the same way as the Kyoto Protocol's clean development mechanism (CDM).

By the second week of the talks, Article 6.4 negotiators appeared to have agreed to transfer much of the CDM's intellectual property, such as methodologies to measure reductions, and established administrative systems, to the new "mechanism".

But problems arose when parties differed over eligibility of existing CDM projects in the new "mechanism". Some parties felt that only certain types of projects should be eligible, while others wanted a "blanket" approval. In addition, there were differences of opinion on whether there should be eligibility cut-off dates for either projects or credits from the CDM.

Differences over framework

In the Article 6.2 discussions over a framework for emissions trading between nations, a group led by Brazil insisted that any reductions generated outside the scope of a country's NDC and sold to third parties should still be counted by the project's host country as part of its carbon reductions.

The opposing group, led by Germany, insisted that any reductions must be accounted for fully, thus removing any possibility of double-counting. In short, accounting for emission reductions must employ double-entry bookkeeping to ensure that no reduction is counted twice.

In addition, there was considerable disagreement over proposals by developing nations that the market administrator should withhold a portion of any transfer of emission reductions to ensure a net reduction in global emissions, as well as to help fund the administration of the market.

14bn t/yr—global emissions from coal

While other agenda items progressed towards their conclusion, the talks on Article 6 issues remained deadlocked as the second week ended. Even an additional day of negotiations led by ministers could not overcome the differences.

Despite this last-minute hitch, the remainder of the Paris Rulebook was approved by the conference. This outstanding issue will be taken up this year by negotiators, with a view to reaching a final agreement at the next COP, scheduled for early 2021 in Chile.

It was not only Article 6 that caused problems at the talks. The conference was also tasked with receiving a report from the intergovernmental Panel on Climate Change that outlined the climate effects of keeping global temperature increases to 1.5°C above pre-industrial levels.

A proposal to "welcome" the report — which implies acceptance of its conclusions and a willingness to be guided by them — met with stiff resistance from a small group of countries: the US, Russia, Saudi Arabia and Kuwait. These parties instead proposed that the conference "take note" of the report, which implies no such positive endorsement.

Eventually the conference adopted conclusions expressing its "gratitude and appreciation" to the IPCC and "inviting Parties to make use" of the report. The unexpected intervention on a matter that was regarded as uncontroversial was seen as a symptom of wider political developments, including a growing resistance to climate action from some of the parties.

Accessing carbon markets

The outcome of the Katowice summit is that nations now have a system under which they can submit their climate plans, guidelines covering what information should be included, a schedule for reviewing and increasing global ambition, and a system to track and review climate finance to developing and vulnerable nations.

This "rulebook" opens the way for countries to improve, upgrade and confirm their NDCs in time for 2020. These commitments are the trigger for a wave of investment in low-carbon energy, but it will require a market mechanism to add the incentive for private capital to exploit the opportunities.

In their draft NDCs, most of which were published in the run-up to the Paris conference in 2015, more than 40pc of countries said they planned to access international carbon markets to help them achieve their targets. The vast majority of these are developing countries, for whom carbon markets represent an additional source of project finance.

The coming 12 months will see negotiators focus on the issue of market mechanisms, and this is likely to lead to a hardening of positions at first. But the incentive for countries to reach agreement is very powerful, since investment plans are unlikely to be developed until the entire landscape of the Paris Rulebook is clearly laid out.

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