Katowice Climate Deal Leaves Carbon Markets Intact But Incomplete

15 December 2018 | KATOWICE | Poland | Negotiators have signed off on an incomplete set of rules for implementing the Paris Climate Agreement, and one of the components they missed is the one providing guidance for creating international carbon markets to accelerate the reduction of emissions under Article 6 of the Paris Climate Agreement.

Technically, the lack of guidance will not halt the creation of international markets that countries are developing among themselves, and several participants said that so-called “carbon clubs“, which are clusters of countries developing regional platforms, will step up with guidance of their own, as is permitted under the Paris Agreement. Privately, however, market participants acknowledged that the lack of clear global guidance introduces an element of risk that could slow these regional efforts.

“The risk is high for us in moving forward without a rule book for the Paris Agreement,” said one source. “We’re building something that is unprecedented, and it’s hard to reach consensus among countries without a global reference.”

While the carbon clubs will move uncertainly forward without the rule book, the same cannot be said for the effort to build a single, global market operating under the United Nations Framework Convention on Climate Change (UNFCCC). That project, championed by Brazil, is essentially on ice until next year’s talks in Chile.

What is Article 6?

Although it doesn’t use the word “markets”, Article 6 of the Paris Agreement says countries can use internationally-transferred carbon offsets to promote activities that cut emissions deeper than they pledged in their climate action plans (NDCs, for “nationally-determined contributions”), and it lays out two paths for creating these offsets, or “ITMOs” (Internationally-Transferred Mitigation Outcomes).

The first path, articulated in Article 6.2, lets lets countries generate ITMOs and link markets internationally, using UN-sanctioned rules of carbon accounting. It has already led to a proliferation of cross-border carbon-trading initiatives around the world, and these will continue even without inclusion in the rule book, with countries free to develop their own guidance on issues that the rulebook doesn’t address.

The second path, explained in Article 6.4 and championed by Brazil, creates a centralized mechanism within the UNFCCC called the Sustainable Development Mechanism (SDM). This is the part that’s in limbo, and it’s there because Brazil also wanted to exempt developing countries from existing rules that prevent double-counting by requiring countries that sell offsets to then deduce the emission-reductions from their own carbon inventories.

Guidance for both paragraphs faced challenges during the Katowice talks.

Burdens and Loopholes

On the eve of the talks, several current and former negotiators – most prominent among them being the respected former US negotiator Sue Biniaz – warned that some countries were violating the spirit of the Paris Agreement by loading the rule book for implementing it with overly prescriptive proposals favored by a handful of countries.

“Article 6.2 is deliberately worded to recognize that countries may use transferred mitigation outcomes toward NDCs — whether or not the CMA (Conference of Parties to the Paris Agreement) provides guidance,” says Nathaniel Keohane, the Vice President in charge of Global Climate for the Environmental Defense Fund (EDF). “That’s the crucial meaning of the phrase ‘consistent with guidance,’ which is widely understood to mean that if guidance exists it must be followed — but action does not depend on guidance.”

In the months leading up to Katowice, however, negotiators from several countries layered in proposals that critics said exceeded the existing guidelines. Biniaz went so far as to characterize the rule book as a rewrite of the Agreement itself — an assessment that seemed to resonate with observers here.

“The draft text that negotiators came to Katowice with included roughly 700 options, representing multiple examples of overreach, included by multiple countries,” said one observer, speaking on condition of anonymity. “They should not have been there in the first place, and resolving took valuable time from priority topics, which cannot be understated.”

Guidance for Article 6.4, meanwhile, faced a different challenge, as Brazil pushed for language that would allow developing countries to count their emission reductions twice in the early years, provided they promise to make it up later.

In the end, the task of developing guidance for Article 6 was relegated to a subsidiary body charged with resolving scientific and technical challenges, meaning no official guidance will emerge until next year’s talks in Chile.

“We should not let this slow us down — we don’t have time to waste,” said Dirk Forrister, President and CEO of the International Emissions Trading Association (IETA). “While we wait for the rules to firm up, committed countries and businesses should team up to start building cooperative markets — and the rule writers can catch up later.”

Article 6: Annotated

Here is the full text of Article 6, with brief summaries of each paragraph in simple English.

1. Parties recognize that some Parties choose to pursue voluntary cooperation in the implementation of their nationally determined contributions to allow for higher ambition in their mitigation and adaptation actions and to promote sustainable development and environmental integrity.

Countries can cooperate with each other to ramp up their climate change strategies (“allow for higher ambition in their mitigation and adaptation actions”) and promote sustainable development.

2. Parties shall, where engaging on a voluntary basis in cooperative approaches that involve the use of internationally transferred mitigation outcomes towards nationally determined contributions, promote sustainable development and ensure environmental integrity and transparency, including in governance, and shall apply robust accounting to ensure, inter alia, the avoidance of double counting, consistent with guidance adopted by the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement.

Countries can meet their emissions reductions targets (“nationally determined contributions”) by trading emissions reductions (“internationally transferred mitigation outcomes”) among each other, and they can create their own governance structures to manage the process, but they must make sure the trading promotes sustainable development, and they must follow accounting principles approved by the UNFCCC.

3. The use of internationally transferred mitigation outcomes to achieve nationally determined contributions under this Agreement shall be voluntary and authorized by participating Parties.

No countries are obligated to participate in the carbon markets.

4. A mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development is hereby established under the authority and guidance of the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement for use by Parties on a voluntary basis. It shall be supervised by a body designated by the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement, and shall aim:

1. To promote the mitigation of greenhouse gas emissions while fostering sustainable development;
2. To incentivize and facilitate participation in the mitigation of greenhouse gas emissions by public and private entities authorized by a Party;
3. To contribute to the reduction of emission levels in the host Party, which will benefit from mitigation activities resulting in emission reductions that can also be used by another Party to fulfil its nationally determined contribution; and
4. To deliver an overall mitigation in global emissions.

The UNFCCC will also create a centralized trading platform that countries can use to trade emissions reductions. Some are calling this the “Sustainable Development Mechanism”.

5. Emission reductions resulting from the mechanism referred to in paragraph 4 of this Article shall not be used to demonstrate achievement of the host Party’s nationally determined contribution if used by another Party to demonstrate achievement of its nationally determined contribution.

If one country transfers an emissions reduction to another country, then it can no longer deduct those emissions from its own carbon inventory. In other words: no double-counting.

6. The Conference of the Parties serving as the meeting of the Parties to the Paris Agreement shall ensure that a share of the proceeds from activities under the mechanism referred to in paragraph 4 of this Article is used to cover administrative expenses as well as to assist developing country Parties that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation.

Some of the money raised from the central platform will go to maintaining the mechanism, and some will go to least-developed countries.

7. The Conference of the Parties serving as the meeting of the Parties to the Paris Agreement shall adopt rules, modalities and procedures for the mechanism referred to in paragraph 4 of this Article at its first session.

High-level negotiators will provide more details on the Sustainable Development Mechanism.

8. Parties recognize the importance of integrated, holistic and balanced non-market approaches being available to Parties to assist in the implementation of their nationally determined contributions, in the context of sustainable development and poverty eradication, in a coordinated and effective manner, including through, inter alia, mitigation, adaptation, finance, technology transfer and capacity-building, as appropriate. These approaches shall aim to:

1. Promote mitigation and adaptation ambition;
2. Enhance public and private participation in the implementation of nationally determined contributions; and
3. Enable opportunities for coordination across instruments and relevant institutional arrangements.

Countries can also cooperate without using markets, and non-market approaches can be integrated with market-based approaches. Non-market approaches have been promoted by countries such as Bolivia and Venezuela and might include policies to promote renewable energy, as an example.

9. A framework for non-market approaches to sustainable development is hereby defined to promote the non-market approaches referred to in paragraph 8 of this Article.