Is it time to open up the EU ETS again?

January 20, 2022

As the new year gets going, the EU is facing much higher energy prices than it has had to contend with in the recent past, topped off with an escalating carbon price driven both by the energy price and the ambitious decarbonisation plans of the EU Commission. Starting in late 2020 at a price of around €20, the purchase of an EU allowance (EUA) in the EU Emissions Trading System (ETS) now costs between €80 and €90 per tonne of CO2.

The current allowance price in the EU ETS provides a significant incentive to reduce emissions, including investment in substantial mitigation technologies such as carbon capture and storage (CCS). As such, this is a welcome and critically important change from over a decade of prices below  €20 and a low of €3 where the system did little to encourage the energy transition. For much of the 2010s the ETS was awash in allowances, with the surplus brought about by the financial crisis and subsequent EU recession, the influx of units from the Clean Development Mechanism (CDM) of the Kyoto Protocol and the overlaying of other policies in the ETS sector, a practice that erodes the need for a specific carbon price and will undermine its impact.

We are now in a world where the EU ETS is driving substantial mitigation action, which is exactly what it is supposed to do. The question that arises is what comes next? One way of answering that question is to look at a scenario analysis of the EU net-zero emissions goal, such as in the Shell EU Sketch released by the Shell Scenario team a bit over a year ago.

A deeper look at the Shell EU Sketch highlights the ambition of the Fit for 55 (FF55) goal. Even in the scenario, the reduction planned under FF55 for the EU ETS sector isn’t fully met in 2030, but instead requires another five years of effort. In addition the energy transformation in the EU is not yet fully matching that of the Sketch. Take for example the build rate of CCS facilities in the Sketch versus the real world. At the rate of change in the Sketch, some 40 major (~ 1 mtpa each) CCS facilities need to be operating by 2030 and over 100 by 2035. The EU has finally started developing CCS clusters, but not yet fast enough to meet these goals. This implies that during the 2020s the EU ETS could see further price escalation if project activity does not fully match the reduction goals of the system.

The Fit for 55 package of measures and targets is extraordinary ambitious, contributing to the global reductions required to avoid passing 1.5°C of warming and setting up the EU for a landing at net-zero emissions in 2050. It does need a meaningful carbon price to usher in the transition, but in the Shell EU Sketch it rises to around €60 by 2030 and €200 by 2050 (but on a much smaller level of emissions than today). The current price of an EU allowance should usher in real change for industry and industrial processes, which is needed, but a continuing steep up-trend may also be a sign of a system that is becoming overly constrained by the rate of reduction required compared to the rate at which projects can be implemented.

When the EU ETS first started the Kyoto Protocol was coming into force and we all imagined a world of interconnected cap-and-trade systems, ambitious clean energy projects in developing countries and a resultant liquid global carbon market. With substantial demand coming from the Kyoto signatory countries with targets and good supply from clean energy projects, the resultant carbon market would be of sufficient size to deliver cost savings to all participants. Importantly, major price spikes could be managed. Almost none of this happened.

In the process, the EU ETS was designed with external hooks to make use of the mechanisms of the Kyoto Protocol (CDM and Joint Implementation or JI) and to connect with other systems. With the prospect of an Australian ETS about a decade ago the EU began early negotiations with the Australian Government to link the systems, but a change of government in Australia put an end to the Australian efforts. With the US leaving Kyoto and other countries making little use of the mechanisms, the EU ETS was left as the only real buyer of emission reduction units (CER) from the CDM. So it was flooded with them, contributing to the 2008 price collapse. The EU rightly closed the doors and it wasn’t until 2020 when they were partly reopened with a link to the Switzerland ETS.

Industry will be feeling the competitive pressure and rising fuel bills for citizens opens the door to voter anger when it comes to elections if the EU ETS price continues to rise without adequate relief valve mechanisms. The Market Stability Reserve (MSR) would offer some reprieve as it starts releasing banked allowances, but a longer term solution could also be found through Article 6 of the Paris Agreement. The EU ETS could open itself to projects executed under the 6.4 mechanism and transferred into the EU ETS via 6.2, along with the necessary corresponding adjustments to the counterparty country nationally determined contribution (NDC). I discussed the corresponding adjustment mechanism in my last post of 2021. The transfer provision under 6.2 also provides an opportunity to link with other trading systems, such as the recently created UK ETS.

Making use of Article 6 will be a very different experience to that with the CDM. This is a mechanism that operates between two nationally determined contributions (NDC), each with its own plan to reduce emissions, but each plan must be converted to a carbon budget for the period of the NDC in order to use Article 6. The rules for doing this were thrashed out in Glasgow and can be found in III.B of the decision. When the transfer between NDCs is executed, a corresponding adjustment must be made to the respective carbon budgets. This means that the selling country must make up the amount of the sale through additional actions within their NDC, which ensures that the overall reduction goals of the respective NDCs are maintained. Under the CDM, no such provision existed.

With robust Article 6 accounting standards, the EU can have confidence that environmental integrity is preserved and that real reductions are delivered through the ETS. This was always a concern with the CDM. However, there is a fine balance to be achieved when creating a relief valve in that a sharp fall in the carbon price is not helpful for investment. As such, the EU might initially look to trade with a very limited number of countries, such as those with similar ETS structures. The UK, New Zealand and South Korea could all fall into this category.

By opening up the ETS the EU will promote confidence in international carbon trading, which will become an increasingly important part of the mitigation toolkit as the world gets closer to net-zero emissions. This is because remaining emissions and the availability of sinks to balance won’t always be in the same jurisdiction. But most importantly, a larger trading system will lower overall costs for the same reduction goals or alternatively may promote greater ambition, which is certainly needed and was called for in the Glasgow Climate Pact. This will benefit everyone.

Blockchain, carbon emissions and NFTs

May 16, 2022

At a recent emissions trading workshop, there was a great deal of discussion about the new kid on the block, carbon trading and non-fungible tokens (NFT). I should say up front that this is not a particular area of expertise for me, so this post represents my observations on the subject, however blockchain is becoming a tool to support the energy transition.

According to Wikipedia, an NFT is a non-interchangeable unit of data stored on a blockchain, a form of digital ledger, that can be sold and traded. The NFT can be associated with a particular digital or physical asset including but not limited to, art, songs, and sport highlights and a license to use the asset for a specified purpose. In the case of the voluntary carbon market, the NFT represents a carbon removal or carbon reduction. So it might represent the storage of carbon in a tree, or in a geological formation. NFT ledgers claim to provide a public certificate of authenticity or proof of ownership and a license to use the asset for a specified purpose. That use could be as an offset against emissions generated by the holder of the NFT.

There is no doubt that carbon markets, be they regulatory or voluntary, require a mechanism of some description to track creation, ownership and surrender of emission reduction units, credits and trading system allowances. This normally emerges as a transaction log and in the case of regulatory systems such as the EU Emissions Trading System, is centrally managed by government and also contributes to the compliance process where units must be surrendered against some obligation. Within the Kyoto Protocol architecture which spanned multiple countries and regulatory systems, an international transaction log (ITL) was created by the UNFCCC and it was used to track all cross border transfers of units available within that system (AAU, CER, ERU, RMU) and therefore effectively link the national registries. On their website the UNFCCC states that the International Transaction Log (ITL) connects registries and secretariat systems that are involved in the emissions trading mechanism defined under the Kyoto Protocol and its Doha amendment. One of the key mandates of the ITL is to ensure an accurate accounting and verification of transactions proposed by registries in order to support the review and compliance process of the Kyoto Protocol.

Within the voluntary carbon markets there is no such global registry, but rather a series of registries that align with the particular voluntary market platform used to create the credit. These are summarised here. For example, the Verra Registry was launched in April 2020 and is the cornerstone for the implementation of Verra’s standards and programs. It facilitates the transparent listing of information on certified projects, issued and retired units, and enables the trading of units. It is the central repository for all information and documentation relating to Verra projects and credits. The Verra Registry also ensures the uniqueness of projects and credits in the system.

So along comes blockchain and NFTs, which by all accounts at the workshop, can certainly do the job of tracking carbon units and ensuring integrity – but the current systems also do this and have been doing it satisfactorily for some time. It feels like the new kids on the block are a solution looking for a problem, but at least as far as unit tracking goes, there isn’t a particular problem. That isn’t to say that the current system is perfect, it isn’t, or that NFTs won’t be an improvement on the current processes, in fact they may well be more suited to the task.

But the problem that does exist is perhaps one that blockchain and its associated tools could solve, yet it is highly complex. It’s the core of the climate issue – the carbon budget. The carbon budget for a certain rise in global average surface temperature is the limit on the cumulative carbon dioxide release, less removal of carbon dioxide from the atmosphere, prior to the point of net-zero emissions. In August last year the Intergovernmental Panel on Climate Change (IPCC) informed readers of its 6th Assessment Report that the carbon budget for 1.5°C of warming was now only 500 GT, based on cumulative emissions from 1.1.2020. Today, that will have reduced to about 400 GT. For 2°C of warming it is now about 1340 GT of carbon dioxide from now.

The risk associated with carbon markets based on a variety of different baselines, credit standards, allowance allocation mechanisms and even basic structure is that they don’t add up to anything close to the carbon budget available, so we collectively overspend the budget and therefore overshoot the temperature goal, even with supposed broad use of carbon units. In an extreme hypothetical scenario, we could end up with more voluntary market carbon credits than emissions, but with atmospheric CO2 still rising. That risk doesn’t change simply by applying NFTs to the credits that are created. The risk also exists with the current Nationally Determined Contribution (NDC) process of the Paris Agreement, where each country has effectively determined their own carbon budget, their own national baseline year and their own pathway forward. The sum of the NDC carbon budgets does not currently equate to the task at hand. The Global Stocktake process that is now underway will highlight the mismatch, but the Paris process has no tools at its disposal to solve the problem other than peer pressure and diplomacy.

An alternate way for the global voluntary carbon market to evolve would be to use the tools associated with blockchain to tokenise the carbon budget, rather than tokenise the current credit system. A single global ledger would also resolve the current problem of having fragmented carbon registries. The carbon budget tokens would then act like allowances in an emissions trading system, with a surrender process linked to emissions taking them out of the market permanently. The value of a unit in a market is a function of its availability (or scarcity) and we know that the carbon budget has a defined limit in this regard. That immediately delivers scarcity and this scarcity is then enforced using blockchain which ensures that each unit of the carbon budget can only be claimed once. While the carbon budget can be expanded via removals, considerable effort is required to do this, with an associated cost. Two possibilities (and doubtless there are many others) for NFTs and carbon budgets are as follows:

  1. Target the global carbon budget, effectively turning the budget into a global cap and trade system. But this is inherently difficult as there is no current mechanism to distribute the carbon budget between nations, companies or even people. However, fractionalized ownership of carbon credits could be an enabler for bringing more liquidity into the market. The further challenge with such an approach for the global carbon budget is the initial creation and distribution of the tokens. There will be a finite number, but no one party should benefit from the creation of the tokens; after all the carbon budget is a global commons problem. Further, there can’t be an agency such as the UN or UNFCCC selling the initial tokens as that would require a transfer of funds that many governments wouldn’t tolerate or is simply not feasible constitutionally. What if the global budget was tokenised by DAOs (Decentralized Autonomous Organization) on a piecemeal basis, with NFTs existing and available to use by those who chose? The DAOs might be companies, cities, states or even whole countries on a voluntary basis, with NFTs granted in return for the entity adopting a carbon budget.
  2. Tokenise the implied carbon budget under an NDC, even though the sum of the current NDCs is leading to the global 1.5°C carbon budget being overdrawn. This approach could add considerable value to the voluntary market. A current issue in the voluntary world is the question of who owns and makes use of a carbon credit. Clearly if a project is launched in a particular country the emissions profile of that country will change, which in turn will be reflected in the reporting of its own emissions for the purposes of showing delivery of its NDC under the Paris Agreement. But if the reduction is contributing to a Paris Agreement objective, how can it also be made available to the voluntary market and in what context should the voluntary market use it? I discussed this issue in an earlier posting, but irrespective of how this matter is settled, a reduction unit is really only of value if more is known about the context of the reduction. This is why an allowance in an emissions trading systems has value – the market fully understands the context within which the unit was created and the scarcity associated with it. This is not the case with voluntary units extracted from a project that might represent a tiny part of the emissions of an economy, where information on total emissions is hard to come by. But if the project sat within an NDC and the emissions associated with the NDC sat in a clear accounting framework, then the reduction units would have context and the use of them either within the country or outside the country could be clearly understood by the market and priced accordingly.

None of the above would be simple to implement and option 1 might be impossibly difficult. But remaining within a carbon budget is entirely the purpose of emissions management and therefore the world needs some collective effort to achieve this. Management requires good accounting and transparency but today there is still very little management of carbon budgets, with systems like the EU ETS being the exception rather than the rule. While the workshop I attended was entirely about NFTs associated with voluntary reduction units, this feels like a rather simple problem for a sophisticated 21st century digital mechanism to target. The much harder application would be carbon budget management and the benefit to society would shift from modest to immense.

Back to Antarctica

April 22, 2022

As those familiar with this blog may recall, I have been fortunate to visit the Antarctic Peninsula on more than one occasion. These visits have been part of a long standing relationship between Shell and the 2041 Foundation. The 2041 Foundation is named for the point in time that countries may begin to consider reopening the Antarctic Treaty, or 50 years on from its agreement (2041) and eventual ratification (2048). The treaty currently prevents any use of Antarctica for commercial and development purposes, other than limited tourism and scientific research. The preservation of Antarctica has become 2041’s raison d’être, which also broadens into the subject of climate change given that surface temperature warming represents a direct threat to Antarctica.

In mid-March, after two years of COVID-19 deferments, a group of 170 people set off from Ushuaia in southern Argentina on board the Ocean Victory, headed for the Antarctic Peninsula. The group came from many backgrounds and countries, including entrepreneurs, venture capitalists, YouTube influencers, corporate staff, students, artists and academics and led by Robert Swan, the founder of the 2041 Foundation and the first man to trek on foot to both the North and South Poles. I was there, along with others, to give some talks on climate change and the energy transition to the broader group. Much of the material from various blogs I have posted over the last two years featured in the sessions.

The Ocean Victory in Antarctica

While the learning opportunity is excellent and the group of people were outstanding in so many respects, the scenery, wildlife and conditions of Antarctica loom large over everything. The continent, and noting that we saw just a tiny fraction of it, is majestic and presents itself on a scale that is unmatched anywhere else I have ever been. Having crossed the infamous Drakes Passage and experienced 7+ metre waves, the relative calm of the Peninsula and its accompanying archipelago awaits. The sights are astounding, from vast ice formations slowly edging their way into the sea where they end their days as haunting sculptures on the shore line, to penguins in colonies going about their business preparing for the winter. Whales can be seen on a regular basis, although on this trip it was primarily humpbacks that were spotted. We even managed a very quick dip in the ocean at Deception Island, the site of a long abandoned whaling station in the caldera of a dormant volcano. The water was at 2°C, so when I say “very quick”, I mean it.

A particular highlight for me was to travel with my son, who took the spectacular sunset photograph below. It was good to see him relaxing after a long two years of COVID tension as an NHS Junior Doctor.

As someone who has been to Antarctica several times over the space of more than a decade, I am often asked if I have noticed a change in the environment. The honest answer is no, but on this trip we did experience something that nobody on board had ever experienced before in Antarctica, rain. That was highly unusual, even for Robert Swan who has been to Antarctica many times over a near 40 year time span. But perhaps we shouldn’t have been surprised as while we were there the deeper continent experienced the largest temperature anomaly ever recorded, a swing from -50°C to -10°C (see below). These anomalous readings are becoming more common as the global surface temperature rises, which could ultimately threaten the stability of ice shelves and lead to faster and earlier rises in global sea level. During my visit in 2015 we were passing by an Argentine weather station on the day and at the time it measured and reported the highest ever recorded temperature on the Peninsula.

Image from Climate Reanalyzer (https://ClimateReanalyzer.org), Climate Change Institute, University of Maine, USA.

For now, Antarctica remains a pristine and largely untouched wilderness, still looking the same as when explorers first sighted the continent and when intrepid expeditions led by the likes of Scott, Amundsen and Shackleton trekked across the continent. It’s important for the sake of all of us that we ensure this remains the case.

For additional photographs from the expedition, click here.

Plunging into Islands?

March 13, 2022

I, no doubt like you, am deeply concerned about Russia’s war against Ukraine and horrified at the resulting loss of life and humanitarian crisis enveloping millions of people. The protection of people should be everyone’s primary focus. But we are also seeing the impact of the situation on the world’s energy supply.

Just over a year ago the Shell Scenarios team launched the Energy Transformation Scenarios. The set of scenario stories looked at three possible pathways forward, built on societal trends that we saw emerging from the pandemic in our earlier work, Rethinking the 2020s. Those trends, illustrated below, were Wealth First, Security First and Health First, described as follows;

  • Wealth first: A focus on wealth and economic recovery, but this results in a late start to the rapid transition required to reach net-zero emissions around the middle of the century. Rather, the energy required to support growth in the 2020s comes from conventional sources. This led to the Waves scenario.
  • Security first: National sentiment shifts inwards and security issues prevail. The transition slows along with economic growth. Domestic energy resources prevail and while some countries proceed with a transition, the global pace of change required for the Paris Agreement just isn’t there. This thinking underpins the Islands scenario.
  • Health first: The pandemic leads to structural change across society, significant green investment and a realization that the broader health and well-being of society is fundamental. In this context the goals of the Paris Agreement are met under the Sky 1.5 scenario.
Shell Energy Transformation Scenarios

Islands always struck me as being a rather dystopian view of the world, but it emerged from a robust scenario development process as a very possible world. In more recent publications, such as our Singapore Sketch, it has been featured and discussed but not particularly emphasized. Both Waves and Sky 1.5 seemed more in tune with the times. Yet here we are, looking at the prospect of a world becoming very distracted from the energy transition by security issues.

While Islands is framed in the context of the pandemic and how it is dealt with, it nevertheless points to trends that are becoming visible in the world order as each day passes. As a nationalistic islands-type mentality takes hold in the scenario, growth in the global economy begins to stagnate, and efforts to address the climate challenge slow. Islands involves the triumph of the nation state and nationalism, while the forces behind globalization weaken. It is a more challenging economic environment where technology innovation and its diffusion are slow, and efforts to address climate change fragment. Geopolitics are re-calibrated and shift in tandem with increasing attention on national security and trade barriers. Security of energy supply and domestic socio-economics dominate agendas.

Even in Europe, with its strong focus on climate action, efforts to reduce emissions slow in Islands, particularly compared to Sky 1.5. Coal in primary energy remains high through to 2050 and the electric vehicle revolution stalls badly with no significant uptake until the late 2030s.

These trends may feel extreme in that, for example, there is already a visible shift towards electric vehicles in Europe. But scenarios are designed to push thinking to extremes, not forecast the future. Importantly, because they aren’t forecasts, we shouldn’t sit back and just imagine that Islands in now inevitable. Rather, we should take heed of the signals it is giving. There is the very real possibility of domestic security issues enveloping the world and slowing the energy transition, particularly if governments choose a path of rearming and shoring up their own borders. But other outcomes are also possible.

Sky 1.5 is built on strong international cooperation, which could be a possible silver lining in the current crisis. We imagined when developing the story that such cooperation emerged through actions related to the pandemic, but actions in response to the Russian invasion of Ukraine could also bolster the focus required for a major energy transition. What is hard to imagine is a rapid energy transition when governments are also deeply focused on security matters. That is perhaps the underlying Islands story.

Creating a 21st century energy hub in Singapore

February 17, 2022

About a year ago the Shell Scenario Team released the Energy Transformation Scenarios, which looked in detail at possible pathways the world might take in this century as society responds to climate change and other pressures. The scenarios were built on earlier work that focused on the more immediate changes that society could see in the 2020s as a result of the pandemic. But the global story is just the tip of the iceberg; there is a wealth of national and regional detail below the surface of the Energy Transformation Scenarios thanks to the team’s energy modelling capacity.

One region that is of particular importance to the energy system is Asia and within the region Singapore is a key oil products supply and distribution hub. Given its unique geographical location and history as a major trading port, Singapore supplies some 20% of global marine bunkers, 3% of aviation fuel and exports a sizeable portion of the oil products used throughout the region.

Singapore is a major oil products supply hub today (Source: Shell analysis of various data sources)

But as the energy system shifts and oil products are replaced with electricity and fuels such as hydrogen, how might Singapore adapt to the transformation and what might this mean for its role as an oil products supply and distribution hub? To help people think about these key questions for Singapore, Shell has released a new Scenario Sketch, Singapore: A 21st Century Energy Hub. The Sketch makes extensive use of the regional and country data within the Energy Transformation Scenarios, setting out three possible scenarios for the region.

These scenarios are not forecasts, predictions or plans, but possible pathways that could emerge if certain trends take hold. Only one scenario meets the goals of the Paris Agreement, which implies that very deliberate steps will need to be taken to ensure the goals are met. Scenarios can help craft our thinking about the future and catalyse the actions required to shape a particular outcome.

The three scenarios are known as Waves, Islands and Sky 1.5 and they reflect the underlying trends that can be seen across society as a result of the pandemic.

  • Waves: A focus on wealth and economic recovery, but this results in a late start to the rapid transition required to reach net-zero emissions around the middle of the century. Rather, the energy required to support growth in the 2020s comes from conventional sources. The transition is rapid from the 2030s, with a clear focus on ending fossil fuel use rather than directly managing emissions. Net-zero emission is reached around the end of the century.
  • Islands: National sentiment shifts inwards and security issues prevail. The transition slows along with economic growth. Although the transition eventually takes hold, net-zero emissions is not reached until well into the 22nd century.
  • Sky 1.5: The pandemic leads to structural change across society, significant green investment and a realisation that the broader health and well-being of society is fundamental. In this scenario the goals of the Paris Agreement are met.

All three scenarios see the role of electricity expanding, for example in transport, the further emergence of biofuels and the introduction of hydrogen as an energy carrier for certain applications.  But the time lines are very different. However, these shifts in the energy system all challenge the supply and distribution model that Singapore has established for oil products and tend to favour local production. This is certainly the case for electricity, but may also be true for biofuels where feedstocks are available on a local level and hydrogen should electrolysers become the preferred mode of production. However, hydrogen supply may also lend itself to a distribution model if significant renewable electricity is available in a particular area, although this is not currently the case for Singapore.

The more immediate change for Singapore comes in the aviation and marine sectors, where airlines and shipping companies are beginning to plan and implement strategies to make use of sustainable fuels and develop possible roadmaps for hydrogen as a future energy carrier. Although progress is slow in Islands, both Waves and Sky 1.5 see early developments. This opens up the prospect of Singapore leading the way in supplying such fuels, maintaining its role as a supply hub.

In Sky 1.5 another opportunity emerges for Singapore through Article 6 of the Paris Agreement. A feature of Sky 1.5 is significant activity to develop carbon removals, both through reforestation and carbon capture and storage technologies. The use of removals to balance continued use of fossil fuels in some sectors is an important part of the global strategy for limiting warming to below 1.5°C in 2100, but catalysing the investment required for removals and directing the benefit to emitters requires a carbon trading market to emerge. With it’s strong history as a commercial and financial centre, Singapore could lead the way here, particularly as the region holds significant opportunity for removals and Singapore itself is a centre for the two sectors that may make greatest use of them, namely aviation and marine.

Singapore could become a major carbon trading hub

A feature that does emerge across the stories is just how long Singapore may find itself as an important regional distributer of oil products, even as the transition gather pace. The Asian region is still developing rapidly, with some 2 billion people (ASEAN and China) moving from modest to middle income and making use of a broader range of energy services in the process.  Immediate growth in the region will draw heavily on existing energy sources and services, given their availability and scalability. Only in the fastest of transitions is this trend overcome with new energy sources scaling quickly enough to match new demand.

Where Singapore stands as an energy hub in 2050 and beyond has yet to be established. But now is the time for the bold decisions necessary to create the best possible future. Scenario analysis is a useful tool for understanding new trends and directions. We hope this publication helps inform readers about an otherwise uncertain future and positions them for the journey ahead.

Also check out the scenario infographic here.

Shell’s scenarios, including this Singapore Sketch, are not intended to be projections or forecasts of the future and they are not Shell’s strategy or business plan. When developing Shell’s strategy, our scenarios are one of many variables that we consider. Ultimately, whether society meets its goals to decarbonise is not within Shell’s control. This Singapore Sketch is based entirely on the data and findings of the Shell Energy Transformation Scenarios, released in February 2021. Please read the full cautionary note at: http://www.shell.com/investor and http://www.sec.gov

The role of CCS in hydrogen production

February 9, 2022

A recent report by Global Witness has cast doubt on the value that carbon capture and storage (CCS) can bring to the mitigation of emissions associated with hydrogen manufacture from natural gas. This is based on an analysis of the Quest CCS project in Canada. However, the report fails to discuss the full context in which this project was developed and therefore draws an incorrect conclusion as to the benefits delivered by the project and the prospect for CCS linked to future hydrogen production.

Just over 20 years ago, I attended my first meeting of the Shell Canada Greenhouse Gas Advisory Panel. Shell Canada had established this panel to recommend and oversee measures to manage the carbon footprint of its operations at that time. Led by the then President/CEO, the panel included Shell Canada staff, representatives from Canadian and international NGOs and First Nations, and me representing the broader Shell group.

We met 2-3 times per year up until the mid-2000s and the Shell Canada team took forward a number of the panel’s recommendations to reduce emissions at Shell’s operations in Alberta. One of the earliest discussion points was around the need to develop CCS at Shell’s Scotford Complex in Alberta. These were the early discussions that led to the Quest CCS project.

Shell opened the Scotford Complex in 1984 with a refinery and chemicals plants, then expanded it in the early 2000s to process heavy oil into refined petroleum products. To do this, Scotford incorporated an ‘upgrader’, a unit that transforms bitumen into a light/sweet synthetic crude oil by fractionation and hydrogenation (improving the hydrogen to carbon ratio of the oil).

At the time, some of the hydrogen at the Scotford Complex originated from a nearby industrial facility where it was a by-product. But as Scotford grew with increasing production, Shell built a steam-methane reformer (SMR) to produce its own hydrogen. This is a process where natural gas is converted to hydrogen, with the remaining carbon being emitted as carbon dioxide from the process. A simplified representation of the process is;

CH4 (natural gas) + 2H2O (water as steam) –> CO2 (carbon dioxide emitted) + 4H2 (hydrogen produced)

In the case of a conventional SMR, which the original unit is, additional CO2 is also emitted from the process when natural gas is burned to provide energy.

Fast forward to today, Quest CCS has been running since 2015 and captures just over one million tonnes of CO2 each year – more reliably and at a lower cost than expected – with the CO2 coming from the reaction outlined above in the steam reformer that produces hydrogen for the upgrader.

Quest was designed as a million-tonne unit to capture one third of the emissions from the Scotford upgrader. Its purpose was to demonstrate not only that CO2 could be captured, but also that it could be stored more than 2 km underground in a geological formation that lies under much of Western Canada called the Basal Cambrian Sands. Quest is part of a knowledge sharing effort with the governments of Alberta and Canada to encourage wider use of CCS technology and bring down future costs. As such, its designs, emissions data and certain intellectual property are publicly available on the Government of Alberta website.

Quest was not, however, designed to capture all of the CO2 emissions associated with steam reforming of methane to make hydrogen. Nor has Shell claimed in its publicity that Quest is capable of capturing all CO2 emissions from the hydrogen plants or the upgrader. Annual performance reports on the Government of Alberta’s website have been audited and reviewed, and reflect an accurate characterization of what Quest has achieved to date: it has successfully captured and then permanently stored underground more than six million tonnes of CO2.

And importantly, Quest was not designed to produce blue hydrogen, and as such, it should not be used as an example of blue hydrogen production. Rather, Quest was designed to demonstrate that capture and storage of CO2 does work; and it has done just that.

Diagrammatic representation of Scotford CCS. Source: Shell Canada

Since Quest began operating, the energy transition has gathered pace and the role of hydrogen as an energy carrier has become a focus of attention. As a result, how hydrogen is produced has also become an important consideration. There are two approaches under consideration for a world that needs to head towards net-zero emissions.

  1. Green hydrogen – this is produced by the electrolysis of water using electricity from renewable energy sources. The basic process dates back over 200 years, but it has remained a relatively small scale process, until very recently. Now electrolysers are growing rapidly in size with Shell amongst a handful of companies installing very large units. In July last year, Europe’s largest PEM hydrogen electrolyser began operations at Shell’s Energy and Chemicals Park Rheinland, producing green hydrogen.
  2. Blue hydrogen – this is produced through the conversion of natural gas to hydrogen, with a very high percentage of the carbon dioxide which would otherwise be emitted by the facility, captured and geologically stored. Although the Quest CCS project captures and stores CO2 from hydrogen production, this is not a blue hydrogen facility. That is because only a portion of the CO2 is captured, as per the design criteria discussed above.

The Global Witness report has drawn on the Quest experience and used it to criticise the carbon footprint of blue hydrogen. The report concludes that future blue hydrogen projects should not be considered based on the observation that the existing hydrogen facility on which Quest is attached continues to emit a good portion of total CO2 produced.

But the analysis fails to contextualize Quest and doesn’t consider that future blue hydrogen projects would be designed very differently to Quest and the associated hydrogen plant, even employing different process technology for the methane conversion itself which in turns makes CO2 capture much more manageable and cost effective. For example, the proposed Polaris CCS project that Shell is planning for Scoford’s refinery and chemicals plants would include what’s called ‘post-combustion capture’ which has the more than 90% CO2 capture rates needed to produce blue hydrogen.

The route towards the current best process for blue hydrogen is described in a white paper produced by Shell Catalysts and Technologies, with its infographic shown below. The paper indicates the possibility of >99% CO2 capture in the Shell gas partial oxidation process (SGP).

Hydrogen processes with CCS. Source: Shell Catalysts and Technologies

As the century unfolds and the energy transition takes hold, hydrogen may become an important part of the new energy system. So society needs to be able to produce it at scale and do this quickly. Hydrogen from renewable sources and from natural gas with CCS will be required to meet demand. Both routes are more than capable of delivering hydrogen with a very low carbon footprint and ultimately cost will decide the winner, including the carbon cost associated with managing any ongoing emissions attributable to either process.

Article 6: The importance of the corresponding adjustment

December 13, 2021

With COP26 behind us and the Article 6 rule book complete, attention should turn to operationalising Article 6 and particularly the transfer process that is detailed in 6.2 but applies to 6.4 units when they are created. There is real enthusiasm for getting 6.4 up and running, but there is also concern about the environmental integrity and inherent ambition associated with the units created. The ambition discussion emerged at the time of the Paris Agreement and is embodied in 6.4(d) which requires delivery of an overall mitigation in global emissions. That in turn has resulted in an automatic 2% retirement of  all 6.4 units that are created.

With a focus on ambition, we therefore might expect greater scrutiny over the selection of projects, the baselines chosen and the verification process. Certainly these were important aspects of the process surrounding the Clean Development Mechanism of the Kyoto Protocol (CDM). But Article 6 functions differently to the CDM, with one critical extra requirement – the corresponding adjustment. I have described this in several earlier blogs, but in short it functions as shown in the chart below;

In the example country A attracts inward investment for an avoided emissions wind project and exports 100 units to country B, which needs to reach net-zero emissions but has no further local abatement opportunities to call on. Under the transfer provisions of 6.2 country A adjusts its nationally determined contribution (NDC) accounts by 100 units as a corresponding adjustment for the sale, but then must take enhanced domestic action to maintain its net zero emissions NDC goal. In the example this comes in the form of additional natural sinks for which it has abundant potential. The difference with the CDM is that the last step would not have taken place.

The important action here, other than the investment that delivers energy infrastructure to country A, is the corresponding adjustment and the subsequent domestic actions it triggers. It is perhaps more important than a focus on the project itself.

Project verification leading to the issuance of emission reduction units (ERU) focuses on numerous factors, but the stringency of the chosen baseline was always important in the CDM. A generous baseline, for example arguing that the national alternative to wind was coal when in fact natural gas was the more likely outcome, would mean more reduction units being issued and a potentially larger carbon trading income for the project. But it also meant more units being sold into the international market, possibly undermining global ambition.

In the Article 6 process, a generous project baseline may result in an ‘own goal’ of sorts. When a project is set up under Article 6.4 it creates an economic incentive for the project in the form of carbon unit income, but at the same time it creates an economic liability for the host country due to the additional domestic actions that must be taken to balance the NDC. How governments ultimately deal with this liability remains to be seen, but allowing excessive credit issuance will likely be a non-starter as this will simply deepen the national liability to balance the sale made.

For quantified NDCs the corresponding adjustment rule is as follows;

Each participating Party with an NDC measured in t CO2 eq shall apply corresponding adjustments pursuant to paragraph 7 above, resulting in an emissions balance as referred to in decision 18/CMA.1, annex, paragraph 77(d)(ii) of the annex to decision 18/CMA.1, reported pursuant to paragraph 23 of this guidance, for each year, by applying corresponding adjustments in the following manner to the anthropogenic emissions by sources and removals by sinks from the sectors and GHGs covered by its NDC consistently with this chapter and relevant future decisions of the CMA:

  1. Adding the quantity of ITMOs authorized and first transferred, for the calendar year in which the mitigation outcomes occurred pursuant to paragraph 7 above;
  2. Subtracting the quantity of ITMOs used pursuant to paragraph 7 above for the calendar year in which the mitigation outcomes are used towards the implementation and achievement of the NDC, ensuring that the mitigation outcomes are used within the same NDC implementation period as when they occurred.

The above offers a very transparent approach to the adjustment, but of course not every country will have a quantified NDC. Where the basis of an NDC is policies and measures, then the rule shifts;

. . . to the anthropogenic emissions by sources and removals by sinks for those emission or sink categories affected by the implementation of the cooperative approach and its mitigation activities and by those policies and measures that include the implementation of the cooperative approach and its mitigation activities . . . .

  1. Adding the quantity of ITMOs authorized and first transferred, for the calendar year in which the mitigation outcomes occurred, pursuant to paragraph 7 above;
  2. Subtracting the quantity of ITMOs used pursuant to paragraph 7 above for the calendar year in which the mitigation outcomes are used towards the implementation and achievement of the NDC, ensuring that the mitigation outcomes are used within the same NDC implementation period as when they occurred.

Emissions accounting and corresponding adjustments on the above basis is more challenging than via explicit carbon budgets and may not be purely quantitative in nature in that a qualitive decision will need to be made in defining the scope of the categories and activities affected. Over time we may see Article 6 being a catalyst for change in NDC structure, with countries that wish to attract project investment and engage in ERU export shifting to quantified NDC and the transparency that they bring. This gives greater certainty to receiving countries that the transaction has not somehow increased global emissions. Ultimately that puts the world on course for more rigorous carbon budget management, which is where we need to be to meet the goals of the Paris Agreement.

Arguably the environmental integrity of Article 6 sits more with the corresponding adjustment than with the project itself and its verification. Provided the adjustment is transparent and the change is balanced by other actions by the host country, then the integrity of the project is less important than would otherwise be the case. It may transpire that receiving countries accept units more on the basis of how the corresponding adjustment is executed than on the precise baseline and emission reductions achieved by the project. It also means that verifiers may need to shift their approach from local analysis of a project to a broader look at the NDC, its reporting and the way in which the host country counts emissions.

The lesser told story of COP26

November 18, 2021

The much anticipated but delayed COP26 has come and gone, with many articles and commentary focussing on whether 1.5°C is still alive. I commented on this at the start of COP26 and although some additional enhanced NDC pledges have been made since then and there is a new goal to end deforestation by 2030, the situation remains largely unchanged. Apart from one thing! COP26 delivered an agreement on Article 6 of the Paris Agreement.

Article 6 was the last piece of the Paris Agreement to be negotiated back in 2015 and true to form it has become the last piece of the rule book to be completed. So why has it proved so contentious and why does it help keep 1.5°C alive?

The Article outlines ways in which some Parties can choose to pursue voluntary cooperation in the implementation of their nationally determined contributions (NDC), but the sub-sections 6.2 and 6.4 have been negotiated primarily as carbon market instruments, designed to allow trading between Parties, through linking of emissions trading systems and cross border investment in mitigation and removals to create tradable carbon credits. Simply put, carbon markets and trading of carbon units unleashes a commercial engine that can operate on a scale far surpassing the limits of local domestic action. It helps align the energy transition with other global commercial activities, offering the potential for lower overall costs to society which in turn can enhance ambition. Trade is a powerful tool that is at the heart of the global economy and carbon trading can serve to unlock mitigation opportunities that would otherwise be neglected. As I discussed in a recent post, a potential future standstill in global emissions is brought to net-zero through Article 6 cooperative action between countries and the aviation sector developing carbon removal opportunities in various parts of the world. Trade requires price discovery, so indirectly Article 6 helps in the development of liquid carbon markets and carbon pricing, although these don’t emerge from Article 6 itself but from national systems which are open to Article 6 transfers.

The newly agreed rules behind 6.2 are simple but powerful and importantly bring clarity to the issue of environmental integrity. Article 6.2 allows transfers between counties in carbon designated units, thus impacting the NDCs of the buyer and the seller. The buyer is able to meet NDC goals more cost effectively and the seller receives an income stream for domestic mitigation activities. This may seem like a straightforward approach to mitigation, so why has it proved so difficult to negotiate?

The rule for a transfer between Parties requires an adjustment to the related NDCs which brings with it a need to account for each NDC in carbon budget terms. Over time, this drives the Paris Agreement to operate more like a rigorous cap-and-trade system rather than a collection of national mitigation activities presented as a list of actions. With national actions based on a carbon budget architecture, transparency is vastly improved and actions are increasingly focused on mitigation rather than simply supplying more clean energy. The two may align but are not necessarily the same. With so much at stake, negotiators have been careful to get the rules right. Further, carbon budgets are easy to add up and derive a global total, which then puts pressure on the Parties when that budget exceeds the available capacity of the atmosphere for a given temperature limit. Ultimately, it may also open up the highly contentious question of who can use the remaining budget. While the Paris Agreement isn’t operating like this today, widespread use of Article 6 could accelerate such a development.

Article 6 also brings with it a mechanism to assign common units to a mitigation project,  carefully defining it in terms of tradable carbon credits. These would be issued by a Supervisory Body operating as part of the Paris Agreement implementation.  While 6.2 is essentially a bilateral transfer approach, 6.4 is a multilateral mechanism, introducing a notional Paris carbon currency. However, transfer of these units between countries will still follow the rules of 6.2. Article 6.4 follows on from the similar Clean Development Mechanism of the Kyoto Protocol, but with a clearly quantified transfer approach.

Both 6.2 and 6.4 are voluntary in that attainment of NDCs can be realised without them, but when used they bring the power of trade to the job of mitigation. Analysis of the benefits of such an approach by the University of Maryland found that international cooperation under a well-functioning Article 6 of the Paris Agreement could save as much as $250 billion per year by 2030. Translating this back into the potential for greater mitigation becomes tangible and meaningful in the already very narrow window of opportunity for limiting warming to 1.5°C.

Glasgow doesn’t mean job done on Article 6, but it does set the stage for activities to commence. The onus is now on national governments to encourage the use of these mechanisms, by allowing their mitigation activities to be open to Article 6 transfers. This could start with well-developed systems such as the EU ETS recognizing 6.4 units, particularly if they are associated with carbon removal projects which the EU will need to meet its goal of net-zero emissions by 2050. Successful implementation could also allow the EU to consider an earlier NZE goal if required to keep 1.5°C in play. But given that the Article 6 rule book was finally agreed in the United Kingdom, perhaps the British government might be the ones to step up and allow Article 6 to flourish within the new UK ETS. After all, in the wake of Brexit trade has become the topic of the day in the UK.

Article 6 has been a hard won policy development, but it’s completion in Glasgow makes COP26 a success, even as some commentators have pronounced some disappointment with the precise wording of the Glasgow Climate Pact. We should thank the negotiators for their efforts over many years and reward their long nights at various COPs with rapid and successful implementation.

The last chance COP? Some more carbon budget maths!

November 1, 2021

With world leaders and thousands of delegates and observers meeting in Glasgow for COP26, there is much talk of this being the last chance to save 1.5°C. It wouldn’t be the first time a COP has been described as the last chance we have, but in the case of COP26 and 1.5°C, it is a fair assessment of the situation. It all rests on the available carbon budget which I discussed in a recent post.

In the August 2021 6th Assessment Report from IPCC WGI, the carbon budget analysis for 1.5°C was published, as shown in the table below. 

Estimates of historical CO2 emissions and remaining carbon budgets (Source: IPCC)

In its recent NZE 2050 scenario, the IEA used the mid range figure of 500 Gt from 1.1.2020 as the carbon budget for the analysis, although we should recognise that for a greater degree of certainty of not exceeding 1.5°C a lower number is more desirable. But we are two years on from the baseline of 1.1.2020 with cumulative carbon dioxide emissions since that time of some 80 Gt, so from 1.1.2022 which is now just a few weeks away, the carbon budget for 1.5°C is closer to 400 Gt. This sits against global annual carbon dioxide emissions of over 40 Gt, comprising 33 Gt from fossil fuel use, 3 Gt from the calcination of limestone for cement manufacture and 6 Gt as a result of land use change practices, which includes ongoing deforestation.

So with at most 400 Gt of remaining budget and it diminishing by 1 Gt every 9 days (so 1.5 Gt while COP26 is on), the challenge facing the conference is huge. 2021 (originally 2020 in the Paris Agreement but delayed due to COVID-19) is the year in which countries are asked through the Paris Agreement to reassess their initial Nationally Determined Contributions and to increase ambition in light of the prevailing science. Indeed, that process is well underway and a quick look at the UNFCCC NDC Registry will show many new submissions, with more appearing each day. 

A quick analysis of the NDCs reveals that in the 2020s global society is likely to consume much of the remaining carbon budget for 1.5°C, which implies that the temperature goal is breached soon after the decade is over (although it may be some years after that the IPCC and WMO confirm this). Just ten medium to large emitting countries account for some 200 Gt in the 2020s, based on the emissions pathways they have announced through their existing or revised NDCs and assuming that these are delivered. That list includes China, the USA, India, the EU, Australia, the UK, Canada, Korea, Japan and Russia. These ten make up about two thirds of current global energy system emissions. China is the largest, with emissions currently around 10 Gt per year. Their revised NDC was submitted last week and brings forward their peaking of emissions to ‘before 2030’. I have assumed that their emissions plateau now, then being falling in 2027 and drop to 9 Gt per year by 2030.

Most of the countries outside my ten, albeit not all, either have modest current emissions and are therefore likely to see short term increases as development continues, or at best will plateau at their current levels. This includes Brazil, Indonesia and all of the African (1.3 Gt energy emissions in 2019) and Middle East (2.1 Gt energy emissions in 2019) countries. The 10+ Gt per year for nine years that these countries represent is around 100+ Gt, so that takes the total to 300+ Gt. Add to this international aviation and marine bunkers over a decade and another 15-20 Gt of the budget is consumed. The total by 2030 is therefore becoming perilously close to 400 Gt and will certainly exceed the tighter 67% and 83% numbers in the table above. At best the NDCs might see carbon dioxide emissions at around 30 Gt per year by 2030, with a remaining budget of 60-80 Gt going into the 2030s and beyond.

While there is a very strong focus at COP26 on net-zero emissions in 2050, the real challenge for 1.5°C is within this decade. The next round of NDCs won’t be submitted until 2025 if the Paris schedule is maintained, by which time another 160-200 Gt of carbon dioxide could have been emitted based on a global plateau at current levels. This really will be too late to make changes for 1.5°C, so it has to be in 2021 with COP26 acting as the catalyst for change.

Article 6 at COP26

October 11, 2021

My home country, Australia, seems to reside permanently in the international climate doghouse, but a closer look reveals that they have made steady progress on some of the less advertised fronts related to mitigation. This was highlighted again recently when the government’s Energy and Emissions Reduction Minister Angus Taylor announced that carbon capture and storage (CCS) projects would be eligible for emission reduction credits.

This might seem like a distraction to some, but Australia has been forging a clear path towards growing its carbon removal capacity for some years now. The Federal Emissions Reduction Fund (ERF) has long targeted opportunities in soil carbon, forest management and reforestation and now CCS is added to the list. Short of a miracle in energy technology development and deployment, the current mechanisms for energy supply do not hold within them a net-zero emissions solution available within 30 years, so it is only through the addition of direct carbon dioxide management in the form of removals that the goal of the Paris Agreement can be met. Unfortunately, this doesn’t seem to be widely appreciated, with the exception of the United States and their 45Q tax incentives for CCS, Canada with their early demonstration projects and Australia with its behemoth Gorgon CCS project, creation of the Global Carbon Capture and Storage Institute and domestic focus on removals. Other countries are now scrambling to establish similar initiatives, but are somewhat lagging.

The case for CCS and carbon removals is an easy one to make – it emerges from any credible analysis of the energy system that accounts for likely future energy demand, real world deployment rates and the expected fossil fuel legacy that will persist into the 22nd century even as significant reductions in use are made. Depending on assumptions, removals can stretch to a trillion tonnes of carbon dioxide over the course of the century. It is only in a scenario with a very constrained future energy demand that removals become less important, but still don’t disappear. The chart below, which I have posted before, shows the four IPCC 1.5°C archetype scenarios (P1, a high sustainability consciousness develops across society, to P4, a technology driven society with high energy demand and technical solutions to environmental issues) and the Shell Sky 1.5 scenario – all require carbon removals. In the P1 scenario sink use is quite low, highlighted by an end to land based anthropogenic emissions and the subsequent development of the land as an enhanced sink from mid-century on, at about 5 Gt per year drawdown of carbon dioxide. P1 makes no use of geological storage. By contrast, the P4 scenario makes very extensive use of geological sinks with BECCS playing a substantial role even as land based emissions are eventually reigned in.

So how does all the above relate to COP26? Of course ambition is very much on the agenda and removals are required to deliver on that ambition, but so are many other steps. However, one of the features of carbon removals is that they will likely have to emerge through cooperative action between governments. Remaining emissions and the availability of removal sinks probably won’t exist in the same geographies, so a global trade in emission sinks will need to emerge. This would happen under Article 6 of the Paris Agreement, which still remains as unfinished business after the rulebook negotiations at COP24 in Katowice. Article 6 establishes a framework for cooperative action between countries in realizing their NDCs, which includes trading carbon units across borders.

The charts below illustrate how a standstill in global emissions (at 300 units in the illustration) is brought to net-zero through cooperative action between governments and the aviation sector. Large scale cross border investment results from the development and trading of carbon units, including removals, that would otherwise not take place. This is why Article 6 is so important – it helps all sectors and Parties to the Paris Agreement reach net-zero emissions.

While the UK Government has many ambitious plans for COP26, and Article 6 is certainly among them, I believe that agreement on the Article 6 rulebook is the most important outcome needed from Glasgow. Apart from its future value to society, an agreement on this difficult piece of rule-making would demonstrate that countries can work together to achieve an outcome that may not be in their immediate self-interest. Article 6 brings a rigour to emissions reporting and accounting that we must have for net-zero emissions. It introduces concepts such as carbon budgets and emissions inventory adjustments for trade to take place, which progressively caps the emissions of nationally determined contributions and forces them towards exact quantification, rather than narrative description. Of course nations aren’t required to use Article 6, it’s voluntary, but once they choose to they must also choose accounting rigour.

After the failure to agree on the Article 6 rule-book at Katowice, great progress was made at COP25 in Madrid, but final agreement still wasn’t possible. Nevertheless, a text emerged that would do the job, although it was entirely bracketed. But the text did capture the key elements that are required for Article 6 to function;

  • Removals specifically referenced.
  • A simple but robust approach for adjusting nationally determined contributions (NDC – the national plan for emissions reduction and adaptation put forward by a country) when an Article 6 transfer takes place.
  • A centralized accounting and reporting platform, with a clear focus on the avoidance of double counting of mitigation actions.
  • The creation of a supervisory body for the 6.4 mechanism.
  • Specifications for the design of a 6.4 activity and subsequent issuance of associated emission reduction units.
  • An approach to meet the requirements for adaptation funding required under 6.6 of the Paris Agreement.
  • A transition arrangement for ending the Clean Development Mechanism (CDM) of the Kyoto Protocol. The CDM has left several countries holding project carbon units that they are keen to monetize so as to support the underlying internal project investment.
  • A simple framework giving some structure to Article 6.8, the non-market approach cooperation.

Nevertheless, some disagreement between countries remains and these issue will need to be resolved in Glasgow.

There is a set of issues related to the scope of an NDC and whether some activities that are in addition to the NDC and involved in a transfer should be subjected to the same adjustments as the Madrid text outlines. This feels like a distraction for two reasons; the NDCs should rapidly expand to cover all activities within an economy and if there are activities still not covered by the NDC, they have no place under Article 6 anyway as this provision of the Paris Agreement is about cooperation to achieve NDCs.

Another tough issue has been the need to give meaning and substance to 6.4 (d) To deliver an overall mitigation in global emissions. The proposal in the Madrid text is to cancel a portion of the emission reduction units issued to the 6.4 activity, but this is unnecessarily punitive. It also risks pushing all activities into simple 6.2 transfers, which would undermine the whole purpose of having a project based mechanism which is more suited to many countries. The discussions in Glasgow simply need to recognize that, by definition, a 6.4 activity and related transfer with NDC adjustments always results in an overall reduction in global emissions. This is illustrated in the diagrams above and is the inherent purpose of an emissions trading structure.

Finally, there is the lingering problem of how best to wind up the CDM and what then becomes of the projects still delivering reductions and the legacy unused CERs sitting in registry accounts. For projects that continue to deliver reductions, the answer seems straightforward – they continue to operate, produce CERs and these are transferred under the provisions of 6.2, which ensures corresponding adjustments to NDCs. In the case of legacy units, I think the IPCC have answered the question, both in the 2018 SR15 and the 2021 AR6 reports. Both reports show that the temperature rise is now around 1.2°C and both offer a carbon budget requirement from 1.1.2018 and 1.1.2020 respectively to ensure that 1.5°C isn’t passed. By rebasing the climate issue in 2020 (in the case of AR6), anything that happened before that is now irrelevant in that it is part of the 1.2°C baseline. The carbon budget they developed has subsequently informed Parties on their NDC requirements and is already being used by the UNFCCC to assess the NDC gap . Adding pre-2020 units to current mitigation activities is simply undermining the carbon budget calculation.

With an agreement hopefully reached on Article 6 in Glasgow, the spotlight will then turn to national governments to open up the possibility of cooperative arrangements. This could come through linking of trading systems, opening up trading systems to external units and encouraging the private sector to develop mitigation projects through Article 6.4. Importantly, governments should also follow the lead of Australia and develop protocols for removals, as these are the units that will be in particular demand as net-zero emission goals and targets need to be met. Europe, in particular, will need to accelerate its removals thinking, an area where it is lagging in its mitigation efforts.

On to Glasgow!