Role Of Carbon Markets Still Evolving In Run-Up To Peru Climate Talks

Steve Zwick

Less than three months ahead of the next round of international climate negotiations, it is still unclear what the potential role of the carbon markets is going to look like in a future agreement or even if carbon markets will be mentioned in the document. But if there is a role for markets, it will be built on the individual climate plans the countries bring to the table.

24 September, 2014 | Just what the carbon markets need: another acronym.

But John Kilani, Director of Sustainable Development Mechanisms for the United Nations Framework Convention on Climate Change (UNFCCC) Secretariat, insists that the acronym INDC (Intended Nationally Determined Contributions) is a good thing. The INDC concept has gained traction since the last round of UNFCCC negotiations in Warsaw in which countries agreed to initiate or intensify preparation of their INDCs, which will establish how individual countries plan to reduce their carbon emissions in the talks leading up to what stakeholders hope will be a new global agreement reached in Paris in 2015.

There will be a lot of talk about INDCs during the next round of UNFCCC negotiations in Lima, Peru in December, he predicted, as the UNFCCC participants consider the role of markets in addressing climate change. While the parties are not expected to put forth their visions for the INDCs until the first quarter of 2015, what the INDCs look like and their scope is going to define the shape and the role of the carbon markets in the future, Kilani told attendees at the International Emissions Trading Association’s (IETA) Carbon Forum North America in New York this week.

“I don’t want you to be disappointed that there is no text coming from Lima that says anything strong about the markets he said. “I don’t think we should expect that in Lima. But we should expect that in Paris because of the level of ambition that is communicated in the INDCs. How much of the INDCs is going to be quantifiable? That is what’s going to define the future landscape of carbon markets.

A new vision for linking

IETA has been developing a new plan to engage in the international climate talks that represents how a price on carbon could fit into a new international agreement because putting a price on carbon “has to happen to address rising carbon emissions, said David Hone, Climate Change Advisor for oil major Shell and former chair of IETA.

“Without it, the direction that investments go and how the investment outlook appears becomes very confused, he said. “Certainly without a price on carbon, we won’t get the clarity we need in terms of real mitigation.

The concept IETA has been working on, in collaboration with the Harvard Project on Climate Agreements, aims to show that in what will likely be an INDC world, these national contributions can potentially link, even if they are very different, Hone said. And it would not be just carbon markets linking together as the concept envisions INDCs built on carbon markets possibly linking to others without carbon markets, as long as there is some type of carbon unit transaction between these contributions, he said.

“That’s the sort of future we imagine, he said.

Speaking the same language

The next challenge for this effort is to think about the language that would need to appear in the Paris agreement to underpin this potential linkage of programs, Hone said.

“It’s unlikely that the Paris agreement is going to talk about global carbon markets, he said. “It’s unlikely that it’s going to have a formula for a global carbon market that we can all take forward and use. Rather it’s going to be text that describes the ideas and concept. The agreement itself may be quite short. It’s probably going to be more of an outline than substance because the next five years is really going to put the substance into this. It’s probably going to focus on the big picture items.

IETA and Harvard have drafted a few lines of text, taking inspiration from the simplicity of the language that underpinned development of the Clean Development Mechanism. The Paris agreement could include a statement that the parties may voluntarily transfer portions of their contributions to other parties and that these transferred units may be used by those on the receiving end to implement their INDCs.

“From a legal perspective, such a statement would be helpful in providing certainty both to governments and private-market participants that linkage is feasible within the UNFCCC framework, and it is likely a necessary condition for widespread linkage to occur, the Harvard Project stated in a document summarizing the approach. “Such a minimalist approach would allow diverse forms of linkage to arise among what will inevitably be heterogeneous nationally determined contributions thereby advancing both cost-effectiveness and environmental integrity.

IETA’s proposals are realistic, given what the international negotiators are trying to do in the run-up to Lima and Paris, said James Bacchus, Member of the High Level Advisory Panel to the President of COP20, Peru & Chair of the ICC Commission on Trade and Investment Policy.

“We’re looking at not a grand, comprehensive, universal agreement to be all and end all, but on another beginning on which we can build, he said. “It will focus mainly on procedures, not on substance.

A little pushback

China is a notable presence on the list of 74 countries, 23 subnational jurisdictions and more than 1,000 businesses and investors that signed the World Bank’s petition in support of carbon pricing. Noticeably absent, however, was the United States, which was not an accident, according to Paul Bodner, Director for Environment and Climate Change for the White House’s National Security Council.

“I don’t need to tell you that the President (Barack Obama) is very committed to market-based approaches, but we don’t have a consensus about that in Washington at the federal level, he said.

But he urged advocates of the carbon markets not to wait for a top-down approach to the establishment of market mechanisms.“Why are you waiting for permission from the UNFCCC system to create carbon markets? he asked. “Why are you waiting for permission to link those systems together? You don’t need permission.

Bodner, a former climate negotiator, highlighted IETA’s proposed language that the parties may voluntarily agree to link and the difficulty in getting the 193 countries in the UNFCCC to agree on anything. “The premise is wrong, he said. “If you say the agreement has to contain this text, you’re implying that if it doesn’t it’s not true. But the fact is it is true. Parties can do this today.

The challenges of linking

However, creating linkages outside of the UNFCCC process has its own challenges, even when the partnering jurisdictions are both strongly in favor of linkage. Quebec and California, for example, have been working on linking their cap-and-trade markets for six years, with the first official joint auction of carbon allowances for the two jurisdictions finally set for November. While the two jurisdictions did not need permission to link, their linkage does not have the regulatory weight it would have under the UNFCCC process because they are subnational jurisdictions that have limited authority to enter into a legally binding agreement.

“Even with two jurisdictions that have been trying to link, it’s not very easy, Kilani said. “To have an international framework that everyone commits to is very necessary. I understand where Paul’s coming from. It’s a difficult process, but don’t allow the difficulty to stop you from going for what is necessary. As difficult as the process may be, experience has shown with the exception of Copenhagen (UNFCCC negotiations) parties do eventually find common ground.

The European Union and Australia had plans to link their carbon pricing programs before the Australian government repealed the country’s carbon tax this year. But that linkage would have only been possible because of the underlying Assigned Amount Unit structure, said Andrei Marcu, Senior Fellow, Center for European Policy Studies. The AAU is a market mechanism within the Kyoto Protocol and functions like an allowance in a cap-and-trade system, providing the basis for trade and creating supply and demand through its allocation against national targets relative to actual emissions, an IETA paper noted. This was a fundamental feature in the EU-Australia plans to link. Without the AAU underpinning, there would have been absolutely no reason for the EU to accept those reductions, Marcu said, and a similar recognition of the ability to transfer units and understand exactly what is being accounted for will likely be necessary in the Paris agreement, he said.

The Obama administration remains bonded to the UNFCCC process, but the parties have had difficulty even agreeing on the Framework for Various Approaches the set of components and rules that would ensure that all approaches used for mitigation will meet certain standards, especially from an environmental integrity point of view Bodner observed.

“If you have a desire to create that link, whether you’re California trying to create a link to another country or Quebec, is there anything that makes it not possible for you to purchase those units and count them against your target today? Bodner asked. “There is nothing preventing you from doing that today.

The only feature the agreement needs to include is a way to track units across borders to ensure environmental integrity by guarding against double counting, Bodner said. “It is really important that a country does not present the same tonnes for compliance that another country is presenting, he said.“Just think carefully about what you really need and what you don’t need.