Accounting isn’t enough

As the World Bank and others ramp up the discussion on carbon pricing, heads are turning towards Paris with thoughts on how the issue will be incorporated into the expected COP21 global climate deal. I have said many times in the past that unless a carbon price makes its way into the whole global energy system, then its success in bringing down emissions is far from assured. While local carbon pricing wins will appear, the global effort could be undermined by a lack of global coverage.   This is true of other policy approaches as well, but in the case of carbon pricing there is the significant benefit of economic efficiency.  For me, the signs so far aren’t great, with the text that came out of the Geneva ADP meeting showing few signs of tackling this important issue.

In recent weeks I have heard some commentators and national climate negotiators argue that the Framework Convention itself is sufficient to underpin cooperative carbon market development and that all the COP21 deal needs is a framework to ensure that accounting of carbon based trades is robust and avoids issues such as double counting (two parties each counting a particular reduction under their own emissions inventory). The underpinning language within the Convention can be found in several places (examples below), but the references are oblique and without direct recognition of carbon pricing or carbon markets;

  • Efforts to address climate change may be carried out cooperatively by interested Parties;
  • These Parties may implement such policies and measures jointly with other Parties and may assist other Parties in contributing to the achievement of the objective of the Convention;
  • Coordinate as appropriate with other such Parties, relevant economic and administrative instruments developed to achieve the objective of the Convention;

While this language could be interpreted as a mandate to develop a global carbon market and the ensuing exchange of carbon pricing instruments between Parties, or companies within the jurisdiction of those Parties, it hardly encourages this process to take place, let alone become a key activity in implementing a global deal. Similarly, if a Paris deal just addresses accounting issues, I don’t believe that this will act as the necessary catalyst for carbon market development either. It’s a bit like agreeing how to calculate the GDP and then not opening the national mint to print and issue the currency!!

Looking back at the Kyoto Protocol, the Clean Development Mechanism provides some valuable learning. While it isn’t a comprehensive carbon pricing instrument the Protocol nevertheless catalysed its development with a few paragraphs of text, to the extent that it eventually pushed some $100 billion (some have estimated much higher levels) in project investment into various developing country economies. This far eclipses the $10 billion that has so far been pledged to the Green Climate Fund, clearly demonstrating that market based approaches will almost always outstrip direct public financing or funding.    To meet the developed countries’ commitment to mobilize $100bn per annum by 2020, it is clear that carbon market approaches including linking will be required.  It is difficult to see how it will be met without incentivizing the private sector in this way.

This is the sort of step that I think the negotiators in Paris need to take. Rather than just elaborating on core accounting principles, I believe that they need to incorporate a means of actively encouraging carbon market expansion. Given the nationally determined contribution based architecture that is emerging, such a development will probably be a bottom up process, perhaps with heterogeneous linking between various market based systems. The Harvard Kennedy School are offering valuable insight into how this might transpire.

One organisation, IETA, has put forward a proposal for Paris along these lines. It is a light touch approach, given the opposition that a real carbon market proposal seems to foster, but hopefully it will be enough to get things started. The IETA proposal calls for the development of a “unified international transfer system”, in effect a “plug-and-play” linkage approach for national trading systems. With wording along these lines in the Paris agreement, later COP decisions could establish the modalities for such a system, thus opening up and accelerating the process that the likes of California and Quebec went through to link their respective trading systems. Such modalities would include the common accounting framework that is needed irrespective of the approach taken to encourage the development of a global market. In all cases, accounting still remains central to progress.

I won’t claim that this is the quickest and most effective way forward, but it is where we are and probably the best that can be achieved, assuming the push from above is there to encourage it. Without such a push, we are all left to hope that something may transpire on carbon markets, but wishful thinking isn’t a solution to 2°C.