COP23: global carbon markets are critical

The Paris Agreement, the central tenet of the world’s bid to halt catastrophic climate change, the document nearly every global economy (with the notable exception of Donald Trump’s US) has committed to implement, the template for a market-based, coordinated effort, is only 16 pages long.

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.

You can read more of bluenotes' COP23 coverage here with a piece by Sharanjit Paddam, Principal, Deloitte Actuaries & Consultants.

In a world of highly sophisticated global financial markets, perhaps this is surprising. However, it must be recognised carbon markets are still evolving, the NDCs impose a necessary regulatory umbrella and, notwithstanding climate change being borderless, a highly effective ETS may generate a competitive advantage for one country over another.

Moreover, COP23 starkly contrasted the different approaches of China and the US. China announced plans to imminently launch its ETS at Bonn, which clearly in time will be the largest and most impactful ETS and can be expected to significantly influence many other ETSs.

In contrast, the key official US forum at COP23 was a panel pushing the role of fossil fuels in future energy generation - while California’s Governor Jerry Brown was marketing the “American Pledge” with the hashtag #wearestillin (Paris).

Much to do

Putting these differences asside, over the next 12 months in the lead up to COP24, country negotiators have much to do to agree key issues such as carbon accounting and transparency of carbon trades.

The global momentum developed from Paris in 2015 may evapourate unless the timeline to finalise and implement a rule book for Paris by the end 2018 is met.

All this reinforces the challenge ahead of Australia where the words “carbon price” seemingly are not part of our vocabulary.

We need to remain actively engaged in this debate and in the development of global carbon markets.

Australia has a lot to offer the development of the carbon markets and much to miss out on if not actively involved.  

Paul Orton attended COP23 as a member of the Carbon Market Institute delegation

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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