Carbon markets: Looming climate showdown?

Smoke billows from the chimneys of Belchatow Power Station, Europe’s biggest coal-fired power plant, in this May 7, 2009 file photo. — Reuters pic
Smoke billows from the chimneys of Belchatow Power Station, Europe’s biggest coal-fired power plant, in this May 7, 2009 file photo. — Reuters pic

PARIS, Nov 28 — The “rulebook” needed for the Paris Agreement climate treaty to become operational at the end of 2020 is mostly complete except for one major sticking point -– the way in which carbon markets will function.

What may seem like a technicality could in fact prove key to the world’s plans to reduce emissions and stave off dangerous temperature rise.

How much does carbon cost?

The Paris deal commits nations to cap that rise to “well below” two degrees Celsius (3.6 degrees Fahrenheit). The world’s leading climate scientists say that for a safer limit of 1.5C (2.7F), carbon emissions must halve by 2030.

They are in fact rising around 1.5 per cent annually.

One common option for encouraging countries, industry and consumers to lower their carbon footprint is taxing or placing quotas on emissions.

Such schemes are growing worldwide — the World Bank estimates around 20 per cent of emissions are currently covered by some form of monitoring system.

But the price of CO2 emissions varies globally, and generally is too low to make a difference.

According to the think tank I4CE, as much as three quarters of emissions covered by tax or quota schemes are valued under US$10 per tonne.

Economists calculate that price needs to be closer to US$100 per tonne to reach the Paris temperature targets.

Do they work?

Since emissions accumulate globally, it doesn’t matter to Earth where carbon is emitted. The argument for carbon trading is therefore that the best way to tackle emissions is to reduce them where it is easiest — that is to say, cheapest.

The Clean Development Mechanism (CDM) introduced in 2006 allowed high-polluting nations to offset emissions by paying for reduction schemes in developing countries.

Whereas the CDM, under the Kyoto Protocol, requires only rich nations to mitigate emissions, the Paris accord enjoins all countries to work on reductions.

Enter Article 6 of the Paris Agreement, which provides for two types of carbon market.

The first is a system of bilateral cap-and-trade exchanges between two nations. The second builds on the CDM but removes the distinction between developed and developing nations.

The stakes are enormous.

Clear and transparent carbon markets would allow the world to better gauge the effect of climate action.

There’s also a significant economic incentive: the International Emissions Trading Association, which acts on behalf of industry, estimates that if Article 6 is successfully implemented the cost of emissions reductions could halve globally by 2030.

“We really need to get the rules right,” said Alden Meyer, of the Union of Concerned scientists.

“If you do, the reduction in the cost of cutting emissions could help raise ambition by making it cheaper.

“But if you get the rules wrong, you could be letting billions of tonnes of hot air into the system.”

Sticking points

While everyone agrees on the need for Article 6 to work, several nations are split on how it should do so.

First there is the risk of “double counting” emissions reductions: if a tonne of carbon saved is counted as part of the selling nation’s mitigation efforts, the buying nation cannot also count it towards its own action.

There’s also the issue of how emissions from aviations might be included — currently, the industry is not covered by the Paris deal.

And several countries — notably Brazil but also India and China — want to be allowed to carry over carbon credits issued under Kyoto as valid in the new system.

Finally, poorer nations already dealing with the costs of climate inaction are pleading for a larger share of carbon market revenue — five per cent is one number on the table — to help them repair and recover. — AFP

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