Archive for the ‘UNFCCC’ Category

Paris ratification maths

The joint announcement by the US and China that they would ratify the Paris Agreement and the more recent announcement by Brazil has raised the prospect that the agreement could enter into force sooner rather than later. Could it even happen prior to COP22 in Morocco or at least by the end of 2016? Certainly the G20 gave entry into force a boost when they included this in their Communique earlier this month.

We reiterate our commitment to sustainable development and strong and effective support and actions to address climate change. We commit to complete our respective domestic procedures in order to join the Paris Agreement as soon as our national procedures allow. We welcome those G20 members who joined the Agreement and efforts to enable the Paris Agreement to enter into force by the end of 2016 and look forward to its timely implementation with all its aspects.

Paragraph 1 of Article 21 of the Agreement specifies the requirements for entry into force as follows;

This Agreement shall enter into force on the thirtieth day after the date on which at least 55 Parties to the Convention accounting in total for at least an estimated 55 percent of the total global greenhouse gas emissions have deposited their instruments of ratification, acceptance, approval or accession.

The UNFCCC is running a tracker page and the exact status by country can be found on the UN Treaties site.

entry-into-force

The combined emissions of China and the United States account for most of the 39% shown in the tracker picture above (mid-September). But of course they are only two parties, whereas 27 have ratified so far. Many of these are small island states, such as Barbados and the Cook Islands, some of which may be challenged in the near term by rising sea levels. So what might be a potential pathway to 55 / 55?

In terms of the number of parties, the Alliance of Small Island States (AOSIS) which consists of 44 members can get us most of the way there. With AOSIS and the 12 other non-AOSIS parties that had ratified by mid-September, the 55 Party threshold is surpassed. So it would appear that entry into force on this basis is achievable as other countries will doubtless come forward as well.

But 55% of global emissions may be a bit more difficult. The 40 AOSIS countries are all low emissions, so even their combined impact will be below 1% of global emissions. Starting with the USA, China and Brazil, the bar moves above 40% and with AOSIS, Norway, Peru and others who had ratified by mid-September it will approach 42%.

The 55 country and 55% line could easily be crossed with ratification by the other major emitter, the EU, but the parliamentary process in Brussels would  normally push this into 2017. However, the political push behind the Paris Agreement can hardly be described as normal. At an EU leader summit last week, there was a strong indication given that EU ratification could happen in as little as three weeks.

If the EU fast track doesn’t happen, 13% of global emissions have to come from somewhere else. Some combinations of major emitters that could deliver this are as follows;

  1. Australia, Japan, South Korea, South Africa, Thailand, Vietnam and Venezuela gets to about 10%.
  2. Russia and India are at least 5% each.
  3. Canada, Australia, Japan, Ukraine, Mexico, Saudi Arabia, Kazakhstan also combine to about 10%
  4. Taiwan, Turkey, Algeria, Argentina, Egypt, Pakistan, Nigeria, Malaysia, Kuwait, Iran and Indonesia combines to about 10%.

Russia and India are clearly important, as was Russia with the Kyoto Protocol. But their early ratification isn’t essential. The other lists above clearly show that there are sufficient 0.6-3% countries to get this over the line. The first list, combined with Iran and Indonesia is but one example.

Given progress to date, a concerted push by AOSIS and perhaps the likes of the Umbrella Group (a UNFCCC collection of countries including USA, Australia, Japan and Canada amongst others), entry into force of the Paris Agreement is quite feasible in the nearer term. With the EU on board it is almost certain.

Revisiting global emissions accounting

As COP 22 approaches and negotiators face the task of implementing the Paris Agreement, they will be required to interpret, expand on and operationalize the various Articles of the Paris text. One such piece is Article 6, which offers a framework that can support the establishment of a global carbon market. But the rules of that market may be very different to ones that have preceded it.

The design of the Kyoto Protocol resulted in a particular emissions accounting architecture that is a mixture of allowance allocation against a cap, combined with a provision for project based credits originating outside the cap (supplied by developing countries in the case of the Kyoto Protocol, i.e. non-Annex 1). These credits effectively raise the cap when they are imported into a covered system such as the EU ETS.  Within the Kyoto Protocol, allowance allocation was handled through the Assigned Amount Unit against targets agreed by developed countries (Annex 1) and the most widespread crediting or offset system is the Clean Development Mechanism (CDM) which operates on a project by project basis in developing countries. This basic design has been translated into many jurisdictions, including locations such as California which is not covered by the Kyoto Protocol.

A feature of these systems is that the accounting normally handles the entities within the cap and the project outside the cap, but no attempt is made to account for the total greenhouse gas impact on the atmosphere or against a global goal to reduce overall greenhouse gas emissions. There is an implicit assumption that the sum of the various parts adds up such that the overall outcome is better than not having conducted the exercise at all. This happens because only a small percentage of the global economy sits under a cap, so there is no mechanism available to account for the total impact.  This is one reason why some Parties challenged the appropriateness of the Kyoto Protocol itself.

A further issue related to the current structure is the macro accounting of the external credit. Projects vary in type, ranging from clearly measurable emission reductions (e.g. capturing land-fill methane) to notional reductions (e.g. a wind turbine is built, but the alternative might have been more coal). Particularly in the case of the latter example which is an energy mix question, there is normally no resolution between the local project and the overall energy mix direction of the host country. A key question is typically left unanswered; if the import of credits into a cap-and-trade system raises the cap, has there been an equivalent, albeit probably notional, decline elsewhere.

But as the Paris Agreement starts to take hold, this will likely change. The Durban Platform, established at COP17 to create a global climate agreement applicable to all to replace the Kyotol Protocol, was designed to address these issues.

The Paris Agreement is built on the concept of Nationally Determined Contributions (NDC). These are set at national level and offer a direction of travel for a given economy in terms of its energy mix and/or greenhouse gas emissions. Although the first set of NDCs offered in the run-up to COP21 were varied in nature and in some cases only covered specific activities within the economy, over time they will likely converge in style and, for the Paris Agreement to deliver, must expand to cover all anthropogenic greenhouse gas sources.

The NDCs also lead us down another path – that of quantification. The first assessment of NDCs conducted by the UNFCCC in October 2015 and then refreshed in May 2016 required the quantification of all NDCs in terms of annual emissions and cumulative emissions through to 2030. This was necessary to establish an equivalent level of warming of the climate system, which is driven largely by the cumulative emissions of carbon dioxide over time. Without such an assessment, the UN cannot advise the Parties on progress towards the aim of the Paris Agreement.

The UNFCCC didn’t have a full emissions inventory on which to base this calculation, so they established one from the best data available. But Article 13 of the Paris Agreement introduces a transparency framework and calls on Parties to regularly provide;

  • A national inventory report of anthropogenic emissions by sources and removals by sinks of greenhouse gases, prepared using good practice methodologies accepted by the Intergovernmental Panel on Climate Change and agreed upon by the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement;       
  • Information necessary to track progress made in implementing and achieving its nationally determined contribution under Article 4.

The foundation for transparency is measurement and reporting, which further implies that emissions quantification is a foundation element of the Paris Agreement. Although nationally determined and always voluntary, the Agreement effectively establishes a cap, albeit notional in many cases, on national emissions in every country. The caps are also effectively declining over time, even for countries with emissions still rising as development drives industrialization.

Article 6 introduces the prospect of carbon unit trading through its internationally transferred mitigation outcomes (ITMO) and emissions mitigation mechanism (EMM). Text in paragraphs 6.2 and 6.5 is included to avoid any possibility of double counting;

. . . internationally transferred mitigation outcomes towards nationally determined contributions. . . . . shall apply robust accounting to ensure, inter alia, the avoidance of double counting,

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.

These provisions, in combination with the progressive shift towards quantification of all emission sinks and sources, means that full national accounting for offset crediting must take place for both the recipient and the source of the units. For the recipient, there will be no change in their procedures in that the introduction and counting of outside units is already built in to the inventory processes underpinning the trading systems. But the source country will be required to make an equivalent reduction (also referred to as a “corresponding adjustment”) from their stated NDC, therefore tightening their contribution. This was a feature of the Joint Implementation (JI) mechanism under the Kyoto Protocol, but was not the required practice in the CDM.

The example shown in the box below illustrates this through a hypothetical case for a nature based transfer (NBT) from Kenya to Canada, utilizing the EMM as a means to acquire the necessary funding. The impact on the Kenya NDC implies a shift from a stated reduction of 30% from Business as Usual (BAU) in 2030, to some 37% below BAU. This ensures there is no double counting of the transferred amount and maintains the full integrity of the overall NDC approach such that the implied global cumulative emissions goal of the NDCs is maintained. However, Kenya will need to find further reductions in its economy as a result. One implication of this is that the price of carbon units may rise due to the additional demand that an overall emissions cap, even a notional one, places on the global economy.

Article 6 of the Paris Agreement offers great potential for carbon market development and emissions trading, therefore driving a lowest cost mitigation outcome and directing funding and financing to low emission technologies. But over time, it should also introduce an accounting rigor that has only featured in some quarters to date. This may well change the supply demand balance, leading to a more robust and enduring carbon market.

Kenya and Canada

Debating the global temperature goal

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Within the Decision Text supporting the Paris Agreement, paragraph II.21 calls on the IPCC as follows;

21. Invites the Intergovernmental Panel on Climate Change to provide a special report in 2018 on the impacts of global warming of 1.5 °C above pre-industrial levels and related global greenhouse gas emission pathways;

This has prompted a number of academic institutions and climate scientists to start publishing on the issue of a 1.5°C goal, with much more likely to come in the months ahead. One such paper (Huntingford, C. and Mercado, L. M. High chance that current atmospheric greenhouse concentrations commit to warmings greater than 1.5 °C over land. Sci. Rep. 6, 30294; doi: 10.1038/srep30294 (2016).) was reported on recently by the BBC, under the heading Debate needed on 1.5C temperature target.

In fact the paper was about where we are today in terms of temperature and reaches a similar conclusion to the one that I reported on recently after attending an MIT Joint Program forum. At that meeting, the response to my question about current levels of warming was as follows;

. . . . current warming is around 1.1°C since pre-industrial times, but that there is more to the story than this. The climate system is not at equilibrium, with the oceans still lagging in terms of heat uptake. Therefore, if the current level of carbon dioxide in the atmosphere was maintained at some 400 ppm, the surface temperature would rise by another few tenths of a degree before the system reached an equilibrium plateau.

Similarly, the paper reported on by the BBC, argues much the same line;

There is strong evidence that even for current levels of atmospheric GHGs, there is a very high probability that the planet is committed to a mean warming over land greater than 1.5 °C relative to pre-industrial times. Such warming could be greater than 2.0 °C, and in particular for large continental regions away from coastlines.

While a debate about the global goal wasn’t a feature of the paper itself, the BBC interviewed the authors and reported that while they believed it to be a good idea to have an “aspirational” 1.5°C goal in the Paris agreement, that nevertheless if the world is to take 1.5°C seriously, then a serious discussion needs to be held about the implications of that goal. The author of the paper is quoted as saying “I think there needs to be a very thoughtful debate about what’s to be gained at these different temperature levels, if approaching the lower levels meant severely damaging the economy,”.

Such a discussion has been largely absent, replaced with a somewhat myopic focus on 2°C and now “well below 2°C, with a view to 1.5°C”. I discussed this at some length in my first book, drawing on the work of the MIT Joint Program in their 2009 report Analysis of Climate Policy Targets under Uncertainty. In that report the authors demonstrated that even a modest attempt to mitigate emissions could profoundly affect the risk profile for equilibrium surface temperature. This is illustrated below with five mitigation scenarios, from a ‘do nothing’ approach (Level 5) to a very stringent climate regime (Level 1).

Shifting the Risk Profile

An important feature of the results is that the reduction in the tails of the temperature change distributions is greater than the shift in the temperature goal (represented by the median of the distribution). For example, the Level 4 stabilization scenario reduces the median temperature change by the last decade of this century by 1.7 ºC (from 5.1 to 3.4 ºC), but reduces the upper 95% bound by 3.2 ºC (from 8.2 to 5.0 ºC). In addition to being a larger magnitude reduction, there are reasons to believe that the relationship between temperature increase and damages is non-linear, creating increasing marginal damages with increasing temperature (e.g., Schneider et al., 2007). These results illustrate that even relatively loose constraints on emissions reduce greatly the chance of an extreme temperature increase, which is associated with the greatest damage.

But the other focus of the Paris Agreement stands apart from such debate. As previously discussed in several postings, Article 4 calls for a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century, i.e. a state of net-zero emissions. In fact such an outcome is eventually required irrespective of the temperature outcome; without it warming continues.

Net-zero emissions arguably brings a more practical focus to the task of emissions mitigation. It defines an end-point and allows a discussion on the pathway there, the types of technologies required and the shape of the energy economy once achieved. All of this features in the new supplement to the Shell New Lens Scenarios, A Better Life with a Healthy Planet: Pathways to Net-Zero Emissions.

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Scenarios are part of an ongoing process used in Shell for more than 40 years to challenge executives’ perspectives on the future business environment. They are based on plausible assumptions and quantification, and are designed to stretch management thinking and even to consider events that may only be remotely possible.

Pathways from the Paris Agreement

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Laws and Sausages

As COP21 concluded I was reminded of a quote by Otto von Bismarck, ‘Laws are like sausages, it is better not to see them being made.’ Yet, over the course of the preceding decade I had done just that. I could now reflect upon the complex and torturous course of modern diplomacy that had worked to deliver a deal and which hopefully represents renewed global leadership on climate change.

Some 150 heads of Government and heads of state had turned up in Paris to kick off proceedings and although most departed immediately afterwards to leave the job with their negotiating teams, the telephones ran hot between capital cities across the world over the ensuing two weeks. Indeed, it was even rumoured that the newly forged friendship between the USA and Cuba meant that the two countries cooperated to put pressure on Nicaragua when it appeared that its negotiator was going to hold up proceedings with some fiery rhetoric in the final stages of the main plenary meeting.

In the previous eighteen months, staff in French embassies all over the world had worked tirelessly to support the process, but in the end it was the negotiators themselves working through the night in the final days who delivered the deal. All manner of behind the scenes trade-offs were made to resolve profound disagreements on a dozen or so key issues including the temperature goal itself, the eventual need for net zero emissions of greenhouse gases and the level of financial assistance for developing countries. There were also hundreds of smaller issues and points of principle that got dealt with during the final days, ranging from continued specific recognition of developing countries in certain instances to the role of a non-market mechanism to support mitigation.

In the days before the start of the COP the text had extended to nearly one hundred pages, with multiple variations of almost every clause and hundreds of square bracketed words and phrases, indicating disagreement amongst the Parties. But unlike 2009’s COP15 that took place in Copenhagen where almost everything that could go wrong, ultimately did, the French Foreign Ministry had left nothing to chance and were to be congratulated on an extraordinary outcome. . . . . .

The rest of this story and a deeper analysis of the Paris Agreement can be found in my new e-book, Pathways from the Paris Agreement. It is available on Amazon for their Kindle (and Kindle app for iPad and Android) or as a print-on-demand publication and coming soon on a number of other e-book platforms.

Pathways from the Paris Agreement (small)

All proceeds from this book will be donated to the Center for Climate and Energy Solutions (C2ES) and the 2041 Foundation, two NGOs that I have worked with directly over many years.

 

 

A new reality to come to terms with

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The first UNFCCC talks since the adoption of the Paris Agreement are now underway and the various delegations are getting down to the tough task of implementation. I was in Bonn on the opening day of the two week meeting, representing the International Emissions Trading Association (IETA) in a side event hosted by the Clean Development Mechanism (CDM) Executive Board (EB). The aim of the event was to draw on the learning from a decade of CDM operation and apply this experience to Article 6 of the Paris Agreement. This is the Article that provides a potential new foundation for carbon market development. I was there to present the IETA Article 6 Vision paper which I posted a story on recently.

The side event was packed out and many were standing in the corridor leading to the room; there is clearly considerable interest in this topic. Over the years the CDM has been a successful mechanism, resulting in nearly 8000 projects and some 1.7 billion Certified Emission Reduction (CER) units issued. Even at a €5-10 per CER (as it was in the earlier days of the EU ETS), this still represents a carbon price based financial injection of up to €10 billion into developing economies. The CDM spawned a small industry of project developers, assessors, MRV professionals and climate finance experts and clearly demonstrated that even a gentle application of the market can have a significant impact. Little wonder that there is such interest in the mitigation mechanism embedded in Article 6 and its potential to drive change.

However, the CDM (or a version of it) is unlikely to be repeated or replicated under Article 6, at least not under the terms that existed within the Kyoto Protocol. It was clear from the discussion during the side event that this new reality is going to take a while to hit home and settle in. The CDM became an important source of climate finance for developing countries, where the only real obligation on the part of the host country for a given project was to provide the necessary governance structure to ensure eventual issuance of the CERs. But that is no longer the case given the provisions of the Paris Agreement and Article 6 are now effectively the same for all countries.

Over time, Nationally Determined Contributions (NDC) will expand to cover all greenhouse gas in all economies. Every NDC, either specifically or notionally (for assessment and stocktake purposes) is linked to a quantitative carbon budget and there is an expectation from the Paris Agreement that these budgets will be delivered. While the Paris Agreement doesn’t say this in such stark terms, it is nevertheless implied. The whole approach that the UNFCCC used to assess the NDCs in their latest synthesis report, released on May 2nd, underpins this. Their aggregate analysis is summarized in carbon budget terms as follows;

The implementation of the communicated INDCs is estimated to result in aggregate global emission levels of 55.0 (51.4 to 57.3) Gt CO2 eq in 2025 and 56.2 (52.0 to 59.3) Gt CO2 eq in 2030. The global levels of emissions in 2025 and 2030 were calculated by adding the estimated aggregate emission levels resulting from the implementation of the communicated INDCs, that is 46.5 (44.3 to 48.9) Gt CO2 eq in 2025 and 48.0 (45.1 to 51.4) Gt CO2 eq in 2030, to the levels of emissions not covered by the INDCs. Global cumulative CO2 emissions after 2011 are expected to reach 533.1 (509.6 to 557.2) Gt CO2 in 2025 and 738.8 (703.6 to 770.9) Gt CO2 in 2030.

As I noted in my last post and drawing on Article 6.5 in the Paris Agreement, this means that the transfer of credits from a project across a national border (in the style of the CDM) will impact the national inventory reports of both parties. These transfers will then have to be executed in the style of Joint Implementation (JI) of the Kyoto Protocol, which effectively required an adjustment to the project host country’s national goal if the crediting unit was to be used by another Party to meet their goal.

I raised this issue as part of my presentation and the message was then amplified by a couple of people in the audience during the Q&A. But the response from some in the room was close to one of denial of this new reality, even though the Paris Agreement makes the need for such adjustment clear. The discussion almost drifted back into the old reality of developing countries not having goals and targets, but fortunately we didn’t land there. We didn’t resolve the issue either, which means that there are probably some tough discussions ahead as the negotiators get down to business.

A week later in Bonn and after many hours of discussions on Article 6 by the Parties, there has been some progress. At a side event on the second Monday also on Article 6 and also standing room only, I heard one central African delegate note that we had certainly left the world of the CDM and that perhaps we were somewhere between the constructions offered by CDM and JI of the Kyoto Protocol, albeit this would have to be interpreted to match the new bottom up global architecture of the Paris Agreement. I also heard another national delegate argue strongly that the new mechanism was not a sustainable development mechanism and should not be referenced as such, even if sustainable development was an important outcome of the implementation of the mechanism. Several panellists talked about quantification of NDCs as an important precursor to the avoidance of double counting.

The various concerns and issues that have been raised in these early discussion are very valid and the answers aren’t immediately obvious. Many developing countries have placed the need for finance as a condition on at least some portion of their mitigation contribution and in the past the CDM offered such finance. But if the reality of a new mechanism is a tighter national goal as a consequence of using it, there may be some push back. In the IETA paper one possible solution to this was proposed, namely the direct purchase of project units from the host country of the mitigation activity by multi-lateral funds. But this is unlikely to reach the necessary scale of mitigation envisaged by the NDCs, so other approaches will have to be developed. Interesting times ahead!

Update: The co-chairs in the UNFCCC discussions on Article 6 have released informal notes on ITMOs (here) and the proposed mechanism (here). These are a summary of points made in the initial discussions in Bonn.

Within the Paris Agreement sits Article 6, a carefully crafted set of provisions to foster, in the parlance of the UNFCCC and the Parties to the Agreement, cooperative approaches. This includes a provision for cross border transfer of mitigation outcomes and a mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development. But for those outside the negotiating process (and hopefully those inside as well), this Article is seen as the foundation for carbon market development. There was a great deal of advocacy effort behind the Article, particularly from the International Emissions Trading Association (IETA) who argued strongly that such a construction within the Paris Agreement was essential to see accelerated adoption of government implemented carbon pricing; widely recognised as a critical policy instrument for managing carbon dioxide emissions.

The wording of Article 6 needs some deciphering and for those now assembling in Bonn to begin the process of implementation of the Paris Agreement, some steer from the private sector will hopefully be helpful. After all, if the provisions do enable the development and expansion of carbon markets then it will almost certainly be the private sector that is most deeply involved. To that end, IETA have now published a first thought piece on Article 6, setting out a vision for its implementation.

IETA Article 6 Brochure

The IETA vision for Article 6 is built on the need for governments to implement carbon pricing, ideally through market based approaches such as cap-and-trade or baseline-and-credit. This starts with the internationally transferred mitigation outcomes (ITMO), described in 6.2 and 6.3. These transfers are effectively carbon market trades between governments or private entities operating through emission trading systems. One example is the link between California and Quebec, which effectively ties parts of the Nationally Determined Contributions (NDCs) of Canada and the United States together. Similarly the link between Norway and the EU ETS is doing the same for their respective NDCs. IETA argues that for clean and simple accounting and the avoidance of double counting, that the concept of exchange of carbon units, either notional or real, should be an underpinning feature of any ITMO. That means the basis for cooperative approaches is, for the most part, a market based one. For governments to access the economic benefits and cost effectiveness of a cooperative approach, they will need to implement carbon unit based emissions management systems within their economies.

IETA also recognises that not all governments may be ready or able to implement trading based systems, so its vision draws on another aspect of Article 6 to enable this. Paragraphs 6.4 (a) – (d) describe an emissions mitigation mechanism (which IETA have given the designation EMM). While some commentators are already arguing that this is a future version of the Clean Development Mechanism of the Kyoto Protocol (i.e. CDM 2.0), IETA makes the case for a much broader interpretation and use of this mechanism. Such implementation could see the EMM offering both universal carbon allowance and crediting units for those countries that choose to use them, facilitating trade between NDCs (i.e. ITMO), providing registry accounting and offering the prospect of carbon pricing in many economies.

The EMM could also be designed to establish sector baselines and issue sovereign credits for performance in excess of those baselines, which might then be purchased by external climate funds to channel investment. In this way it would function more like the CDM. But as IETA notes in its thought piece, the world in which crediting from one country acting as a direct offset in another is coming to an end. Under the CDM this was possible because the project host country had no quantified emissions management goal. As such, national accounting effectively took place on one side only, although the project itself had to have a credible baseline against which it operated. But as NDCs progressively expand to cover all national emissions (if they don’t then the Paris Agreement can’t claim to manage global emissions), paragraph 6.5 prevents such one sided accounting;

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.

This means that the transfer of credits from a project across a national border (in the style of the CDM) will impact the national inventory reports of both parties. IETA argues that these transfers will then have to be executed in the style of Joint Implementation (JI) of the Kyoto Protocol, which effectively required an adjustment to the project host country’s national goal if the crediting unit was to be used by another Party to meet their goal.

The Paris Agreement introduces a very different world of international emissions trading to the one that exists today and has operated in recent years. The IETA paper concludes with a visualisation of how this might end up.

Article 6 Evolution

Some post-Paris diplomacy

President Obama and Canadian Prime Minister Justin Trudeau met last week for their first formal bilateral meeting since the latter was elected. With the success of the Paris Agreement behind them, the two leaders made their first steps together towards implementation with the announcement of a number of actions. A greater focus on methane emissions figured high on the list of things to do, but perhaps even more important than this was the recognition that co-opoerative action is required to implement the provisions within the Paris Agreement that are aimed at carbon market development. The joint statement released during the meeting made a very specific reference to this work;

Recognizing the role that carbon markets can play in helping countries achieve their climate targets while also driving low-carbon innovation, both countries commit to work together to support robust implementation of the carbon markets-related provisions of the Paris Agreement. The federal governments, together and in close communication with states, provinces and territories, will explore options for ensuring the environmental integrity of transferred units, in particular to inform strong INDC accounting and efforts to avoid “double-counting” of emission reductions.

The reference here is to Article 6 of the Paris Agreement, which allows for “internationally transferable mitigation outcomes” (ITMO) between Nationally Determined Contributions. Article 6 also establishes an emissions mitigation mechanism (EMM) which could well support the ITMO by becoming, amongst other things, a standardised carbon unit for transfer purposes. These are the sorts of areas where considerable thought will be required over the coming months.

The statement represents a big step forward for the United States and for the further development of carbon markets. The USA was amongst the very first countries to release its INDC, within which can be found the statement;

Use of markets:
At this time, the United States does not intend to utilize international market mechanisms to implement its 2025 target.

This was not a big surprise at the time. It was still early days for the resurgent political interest in the importance of government implementation of carbon pricing and therefore the supporting role that international carbon markets can play in helping optimise its use. But a great deal has happened in a year (the USA released its INDC on March 25th 2015), topped off with Article 6 in the Paris Agreement. This time last year that looked like an almost impossible dream, although several of us in the carbon pricing community dared to talk about it.

But perhaps it is the developments in North America itself that have raised the profile of cross-border carbon unit trade with the respective national governments. Although the California-Québec linked cap-and-trade system got going in 2014, it wasn’t until 2015 that Ontario showed a sudden interest in joining the system. At the April 2015 Québec Summit on Climate Change, Ontario announced its intention to set up a cap-and-trade system and join the Québec-California carbon market. The following September, Quebec and Ontario signed a cooperation agreement aimed at facilitating Ontario’s upcoming membership in the Québec- California carbon market. To add to this, during COP21 Manitoba announced that it would implement, for its large emitters, a cap-and-trade system compatible with the Quebec-California carbon market. Québec and Ontario then committed in Paris to collaborate with Manitoba in the development of its system bysigning a memorandum of understanding tothat effect.

Others US states and Canadian provinces may join, with Mexico also looking on in interest. This could in turn lead to a significant North American club of carbon markets; perhaps one even starting to match the scale and breadth of the 30 member EU ETS. Clubs of carbon markets are seen by many observers as the quickest and most effective route to widespread adoption of carbon pricing. The Environmental Defence Fund based out of New York has written extensively on the subject with their most recent paper being released in August last year.

With parts of the USA members of a multi-national club of carbon markets, the Federeal government is then effectively bound to build their use into their NDC thinking. There may be a significant flow of units across national borders, which will make it necessary to account for them through Article 6 and the various transparency provisions of the Paris Agreement.

But most importantly there is the economic benefit of doing this; a larger more diverse market will almost certainly see a lower cost of carbon across the participating jurisdictions than would otherwise have been the case. This could translate into a lower societal cost for reaching a given decarbonization goal or open up the possibility of greater mitigation ambition.

A focus on the Philippines

Last week I was in Manila participating in the opening panel session of the Shell sponsored energy event, Powering Progress Together. The panel included IPCC WG1 Co-chair, Dr. Edvin Aldrian from Indonesia; Philippine Department of Energy Secretary, Hon. Zenaida Y. Monsada; and Tony La Vina, a former Undersecretary of the Department of Environment and Natural Resources, but currently Dean of the Ateneo School of Government. With the focus of our panel being the energy transition and climate challenge it didn’t take long to get to the situation faced by the Philippines and the Intended Nationally Determined Contribution (INDC) it submitted to the UNFCCC in the run-up to COP21.

The Philippines has seen energy sector emissions rise sharply in recent years (see chart) with coal use doubling between 2007 and 2014, while natural gas and oil demand remained almost static. Although oil use for transport increased, this was offset by a drop in oil based power generation.

Philippines Energy Emissions

Against this backdrop the Philippines submitted an INDC which calls for a 70% reduction in emissions for 2030 against a business as usual projection which sees increasing coal use in the power sector. The charts below were prepared by the Department of Energy. By 2030, full INDC implementation would see only a modest change in coal capacity from current levels, but a significant increase in natural gas and growth in wind and solar such that they become material in the overall power generation mix.

Philippines Electrcity Capacity

The government also has big plans for the transport sector, with major electrification of the popular Jeepney (small buses) and tricycle (motorcycle based carriers) fleet. These are everywhere in Manila.

But as the Secretary pointed out in the panel discussion, this shift is dependent on outside financial help. The reduction goal represents at least 1 billion tonnes of cumulative carbon dioxide over the period 2015 to 2030 and although an anticipated cost of implementation isn’t given, it may well run into tens of billions of dollars. However, the immediate benefits should be considerable, particularly for health and welfare in cities such as Manila itself as roadside air quality improves with an alternative bus fleet. The INDC specifically notes (one of several mentions);

The mitigation contribution is conditioned on the extent of financial resources, including technology development & transfer, and capacity building, that will be made available to the Philippines.

The Philippines have certainly felt the sharp end of the global climate in recent years, but particularly with Typhoon Haiyan, a Category 5 Super Typhoon, in November 2013. That event led to a member of the Philippine delegation pledging to fast for the duration of COP 19 in Warsaw. The INDC is an ambitious start on their mitigation journey, but also highlights the challenges faced by many countries at a similar stage in their development. As the Philippine economy develops it will need much more energy than currently supplied; the surge in coal use as a response is also seen in many other national energy plans. Limiting the early growth of coal in emerging economies is one of the big global issues that the Paris Agreement and related INDCs must address as they are implemented. The provisions within Article 6 of the Agreement can help; ideally by channelling a carbon price into those economies with the necessary climate finance to change the energy outlook.

Developing Article 6

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Article 6 of the Paris Agreement contains a number of bolt holes for the development of market and non-market mechanisms to drive future mitigation.

Within these, paragraph 6.2 pertains to any linkage that might exist between Nationally Determined Contributions (NDCs), such as could occur between cap and trade systems residing in different countries. For example, Canada and the United States have such a linkage between the California and Quebec systems, with other states and provinces likely to join. Presumably when Canada presents the result of its NDC efforts to the UNFCCC at various stock takes, the transfer that has occurred between these two systems will need to be accounted for, with this paragraph leading to a clear set of modalities for the necessary accounting of the transfer. The longer term hope is that this paragraph provides additional impetus to such activities, catalysing both the use of such trading systems and the creation of links between them. This is an important step towards the formation of a globally traded carbon market.

Paragraph 6.4 is also a formative proposition, potentially containing within it the means to drive new investment and markets. It states;

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.

Almost from the moment the gavel came down in Paris, commentators have been referring to this as the Sustainable Development Mechanism. This has become so embedded that when I returned to this part of the Agreement to write this post I was surprised that it isn’t actually called that. Rather, the mechanism is an EMM (Emissions Mitigation Mechanism) which supports sustainable development, not a sustainable development mechanism that happens to result in emissions reduction.

It is very early days, although Paragraph 6.7 gives the negotiators just this year to sort out the modalities and procedures of the mechanism. At a conference in London this month, a first discussion around Article 6 and particularly the mechanism within it took place. Although the meeting was more of a post-Paris stocktake, it offered an opportunity to get some thoughts and ideas onto the table.

One of the first of these was a presumption that the mechanism is simply the Clean Development Mechanism of the Paris Agreement, i.e. CDM 2.0. While it may eventually offer such a service, to limit it to this and no more may turn out to be very short sighted. In the first instance, the text above does not mention project activity or identify developing countries as the beneficiaries of the activities undertaken. This is in contrast to Article 12 of the Kyoto Protocol which clearly identified such a role for the CDM.

Rather, paragraph 6.4 is defined more broadly as a mechanism to contribute to the mitigation of greenhouse gases while fostering sustainable development. This means that it could have very wide scope and operate on many fronts or alternatively be specified quite narrowly but operate universally as a carbon trading unit. Other definitions or uses may also be considered.

Within a broad scope the mechanism could operate down to a single project, as was the case under the CDM, or become a crediting unit within a baseline system that operates across an entire NDC or within a sector covered by an NDC. Such a unit might be traded between systems, acting as the agent to link baseline-and-credit designs or even cap-and-trade designs. It could become a carbon reduction bought through a financing mechanism such as the Green Climate Fund, establishing that fund as a buyer of reductions as a means of driving mitigation activity. Other possibilities include linking it to technology demonstration or climate finance requirements.

The ambition embedded within the Paris Agreement is going to require change on a very large scale and at a very rapid pace; certainly much faster than could be envisaged through a project by project approach, as was the case with the CDM. While the CDM was very successful in what it did, the scale was hardly measurable against the size of the global energy system. This also argues against an early narrow use of Paragraph 6.4.

At this stage the possibilities are wide open and we need to keep them that way. In the months leading up to the Bonn intercessional meeting in late May, the opportunity exists to explore these options and think through the possible applications of a broadly defined mitigation mechanism. A rush to create CDM 2.0 would be a mistake, even if there is early recognition that the mechanism will need to fulfil this task as part of its overall definition.

It’s all about the transition

The ambition embodied within the Paris Agreement argues for the need to reach a state of net zero anthropogenic emissions around the middle of the century, although the text of the Agreement is less stringent and points to the second half of the century for a balance between sinks and sources. Either way, this presents a formidable challenge.

Looking at a modern developed economy today, it is possible to imagine a state of much lower emissions, or even net-zero. The technologies to have a zero emission power sector are readily available and have been for some time; look at the level that nuclear power reached in France as early as the 1980s. Today we also have carbon capture and storage and scalable renewable energy. Vehicle electrification is now coming of age and it is not difficult to imagine a future where this dominates, with heavy transport potentially using hydrogen. Homes can also be electrified and the service sector / secondary industry economy that drives the developed world today is primarily electricity based.

But the manufacture of goods still represents a large part of the global economy. Material goods represent one facet of our economy and certainly one that is critically important in the early stages of development of most economies. For example, between 2004 and 2014 some 350 million refrigerators were produced and went into use in China with a further 250 million exported. Production in 2000 was just 12 million units. China is now the world’s 6th largest exporter (2014 by value) of refrigerators, but this is just one sixth of US refrigerator exports.

The same is true when it comes to the refining and fabrication of the raw materials that developed and developing country secondary industry requires. These products all demand considerable use of fossil fuels for combustion based processes such as smelting, refining, base chemical manufacture and similar. Nevertheless, we could perhaps imagine a world based on 3D printing using various exotic materials (graphene, certain polymers etc.) as the raw material for manufacture. But even in this world considerable chemical plant capacity and therefore process heat would be required to manufacture the printer feedstock, but carbon capture and storage could handle emissions from these sources.

China grew rapidly on the back of large scale manufacturing and at the same time it built vast swathes of infrastructure; from cities such as Shanghai and Chongqing to the high speed rail networks that now connect them. Between 1995 and 2015 cumulative emissions from China amounted to some 130 billion tonnes of carbon dioxide, or 100 tonnes per person. For the most part, this wasn’t for personal domestic use (i.e. home electricity and heating), but to make products for consumers in China and for export which in turn finances domestic infrastructure for the future. The process is far from complete, but China is already starting to look to other economies to make its raw materials and supply finished products as it attempts to develop its service sector.

The situation for the least developed economies is not dissimilar to China 30 years ago. Some 3 billion or more people live in circumstances where little or only modest levels of infrastructure exists. While they may now have basic renewable energy for lighting and some other services, their standard of living remains far below other parts of the world. The development pathway in front of them may well be similar to the one that China embarked on in the 1980s. That pathway might even be funded by products made for the Chinese economy as its service sector grows and energy use reaches a plateau or even falls slightly.

The 100 tonnes per person of development emissions is perhaps the hardest to decarbonise. It is from steel mills, cement plants, chemical plants, manufacturing industry and heavy goods transport. These are the backbone industries and services for development, many of which have long gone from developed economies. They may also be quite expensive to decarbonise, which is problematic for economies in the earlier stages of rapid development. This development also leads to a degree of lock-in as once industries are created and jobs are in place there is a strong desire to keep them; the recent concern as the last major UK steel plant shed more jobs is an example. The same industries are also needed to continue making a wide range of products, from cars to iPhones, for consumers in the rest of the world.

One particular challenge for post-Paris implementation of the Agreement is this 100 tonnes per person of development emissions and the lock-in that follows. While the net-zero goal looks feasible and can be imagined as a longer term outcome, the interim emissions bulge as development continues and the supporting industries required for infrastructure are put in place may take us well beyond 2°C rather than the goal of well below. Further to this, the energy demand that will be created just to fuel the energy transition itself could be significant as hundreds of lithium mines open, solar PV factories expand and new vehicle technologies are offered to the public.

Article 6 within the Paris Agreement makes mention of a Sustainable Development Mechanism that results in emissions reductions. Such a mechanism could be an important part of the solution set for this problem. More on that to follow.