Where are the carbon market provisions?

With just 100 days to run until COP21 in Paris and a tenth of that available for formal negotiations, the various national delegations met in Bonn last week to try and push forward the 80+ pages of text, replete with hundreds of bracketed options, into something that looks like a climate treaty. By all media outlet accounts progress was slow. Although the process hasn’t reached the point where alarm bells are ringing, the political pressure is mounting with UN Secretary General Ban Ki-Moon set to confront world leaders at the end of September in New York.

A key issue that remains under discussion yet with little to show for months of effort is that of the role of carbon pricing in the Paris agreement. While the decision to implement a carbon price within a national economy will always remain a sovereign one, encouragement from the top is nevertheless important. After all, if a carbon price doesn’t make its way into the global energy system, it’s difficult to see significant curtailment of fossil carbon extraction taking place or equally, widespread deployment of carbon capture and storage to directly manage emissions when fossil fuels are used. This message has been sent loudly from all quarters, including business organisations, multilateral agencies such as the World Bank, NGOs and legions of observers in the academic community. The start of the session in Bonn coincided with an article from the Harvard Kennedy School in Cambridge, Massachusetts which argued that encouraging linkage of heterogeneous national systems should be a key element of the Paris agreement. Professor Rob Stavins and his colleagues aren’t seeking a complex structure, but a simple provision. The article concludes that;

“. . . . the most valuable outcome of Paris regarding linkage might simply be the inclusion in the core agreement of an explicit statement that parties may transfer portions of their INDCs to other parties and that these transferred units may be used by the transferees to implement their INDCs. Such a statement would help provide certainty both to governments and private market participants. This minimalist approach will allow diverse forms of linkage to arise, among what will inevitably be highly heterogeneous INDCs, thereby advancing the dual objectives of cost effectiveness and environmental integrity in the international climate policy regime.”

Such a provision would encourage (carbon) price discovery through market transactions at both inter-governmental and inter-company levels, which in turn could be passed through the energy supply chain, thereby shifting investment decisions. This isn’t a big ask, yet it seems to be a step too far for the national negotiators, even from countries with a long history of market development and support.

This is exactly what the International Emissions Trading Association (IETA) has been advocating for since this time last year and while many of the Parties to the UNFCCC have nodded their heads in agreement, very little has happened. IETA reports from Bonn that the mitigation group under the ADP produced a table that outlines the various issues that fall under the ‘mitigation umbrella’ which Parties want to include in the core Paris Agreement. That table is organised into three columns:

  • A column of issues that are largely agreed by Parties to be in the core Agreement,
  • A column of issues which require ‘further clarity’ on placement in the core Agreement,
  • A column of issues that will be in Decisions at the COP in Paris.

Carbon markets- including their function, governance, accounting, usage eligibility and future work programme all currently fall into the “further clarity” column, where Parties are still debating how to proceed. On the positive side (there is a real need to be upbeat about something) IETA notes that at the start of the mitigation session, some fifteen Parties mentioned the importance of an explicit recognition of market mechanisms in the core of the Agreement. They included the EU, the US, Marshall Islands (on behalf of AOSIS), Columbia, New Zealand, Norway, Tuvalu, Brazil, Australia, Switzerland, South Korea, Japan and Panama. After hearing Parties’ views the co-facilitators proposed to set up a spin off group led by Brazil to look further at joint implementation (i.e. transfers, trading etc.) and market mechanisms (e.g. the CDM is a market mechanism). This probably should have happened a year ago, but like the rest of the agreement it is coming down to the wire.

So the Paris agreement inches forwards and with it the fate of a global carbon market, at least for the near to medium term. The next and presumably last (no others are currently scheduled) negotiating session before Paris is in mid-October.