COP23: global carbon markets are critical

It’s shorter than some product disclosure statements I come across at ANZ for seemingly straightforward financial solutions.

" Existing NDCs to reduce carbon emissions are not sufficient to keep global warming below 2 degrees."

Yet, leaving Trump aside, while it is agreed it must work, there is no agreement on how to implement it - or whether it will work.

With two years passed since Paris but one year before the rules must be in place, I travelled to the latest confab on the process in Bonn, Germany aware there was very mixed expectations.

One view was there is plenty of time to work this out. The other was there is much to do given the inherent complexity of the details. Bonn needed to make genuine progress.

Set objective

The set objective of the annual meeting of countries under the UN Framework for Climate Change Convention (UNFCCC) or Conference of the Parties (COP) – the official title – was “advancing the details of the Paris Agreement”. 

The next COP, COP24, to be held in Poland in December 2018 needs to finalise the rule book to implement and deliver the country carbon emission reduction commitments (termed National Determined Contributions or NDCs) under the Paris Agreement.

First the good news: much progress was made. Briefings during the second week of COP23 from Australian and New Zealand negotiators were positive, particularly with respect to trading of carbon offsets or credits.

This is key: global carbon markets are critical. 

It is generally recognised existing NDCs to reduce carbon emissions are not sufficient to keep global warming below 2 degrees. More needs to be done.

But even to make the starting line and deliver the existing NDCs will require countries to be able to trade carbon bilaterally or preferably under a multilateral model – that is there needs to be global carbon trading.

The capacity to generate carbon credits differs between countries and is dependent on numerous factors. But as the impacts of climate change flow across sovereign borders, the generation of carbon credits should also be borderless. 

If credits can be generated at lowest cost, this will encourage and support the delivery of country NDCs and so benefit all.

The Paris Agreement presently foreshadows carbon trading under two paths.

First under Article 6.2 on a bilateral cooperative basis between countries guided by UNFCCC rules, and secondly under Article 6.4, through a multilateral model, the Sustainable Development Mechanism, explicitly governed by a recognised third party, such as the UNFCCC. 

So to the less good news out of Bonn: there is ongoing differing views between key blocs of countries as to the preference for Article 6.2 or 6.4, and how to progress discussions on details such as carbon accounting (to minimise double counting), transparency and the need to raise the ambitions committed to in Paris.

Longer term

A longer-term ambition is to ultimately link country specific emission trading systems (ETSs) to enhance market liquidity and maximise the availability and efficiency of carbon trading.

During a side event at COP23 organised by Korea, countries which already have ETSs in place (eg New Zealand) or under development (eg Singapore), commented that notwithstanding market experience, they were arguably up to 10 years away from committing to linked or integrated markets.