Carbon pricing and COP21

As we get closer to COP21 there will be plenty of articles and opinion pieces put forward describing the process, speculating on the outcome and generally trying to help readers understand what exactly is going on. One such piece appeared in the Financial Times recently, written by Pilita Clark. It’s a good summary and has some thoughtful insights but requires some clarification around what the six oil and gas industry CEOs actually argued for in their letter to the UNFCCC.

Pilita Clark rightly points out that a Paris accord, if reached, will be based on many widely differing national contributions, rather than a single agreed policy such as a global carbon price. But the article further qualifies this conclusion with reference back to the letter that the CEOs of Shell, BP, ENI, BG, Statoil and Total wrote to the Executive Secretary of the UNFCCC and the French Presidency, with the following remark;

“. . . the European oil and gas companies that have called for a global carbon pricing framework ahead of the Paris meeting have done so safe in the knowledge this would never emerge from the talks.”

In fact the letter didn’t call for a global carbon price or pricing framework for the very same reason that Pilita Clark gave; this isn’t on the agenda and would never be agreed by the negotiators assembled in Paris.

Rather, the main agenda item for Paris is the negotiation of a framework within which the Intended Nationally Determined Contributions (INDC) will sit. This will probably include provisions for measurement, reporting, verification, peer review and financial assistance for implementation.   An important tool for nations to meet their mitigation goals will be through  carbon pricing mechanisms, which are referenced in a few Parties’ INDCs but not often enough.   The framework agreed in Paris could also include another important provision; the notion of cooperative implementation through the transfer of the obligation under the INDC to another party. This would allow emission reductions to be made at lowest cost globally, which in turn could assist the process of review and agreement on greater ambition.

The International Emissions Trading Association (IETA) have been advocating for such a provision for over a year, with a proposal that would require such transfers to be reconciled in terms of carbon units of some description. The transfer of units would lead to price discovery and therefore the emergence of a carbon market at international level. IETA proposed the following short text insertion within the expected Paris agreement:

Cooperation between Parties in realizing their Contributions

Parties may voluntarily cooperate in achieving their mitigation contributions.

• A unified international transfer system is hereby established.
• A Party though private and/or public entities may transfer portions of its nationally determined contribution to one or more other Parties through carbon units of its choice.
• Transfers and receipts of units shall be recorded in equivalent carbon reduction terms.

IETA have also proposed alternative formulations of the same idea as various Parties (national governments) have put forward their own versions of the concept. Like almost every piece of language proposed so far, this has been incorporated to some extent in the 55 pages of text about to be negotiated, along with its multitude of bracketed options and alternative language possibilities. What survives remains to be seen?

In their letter, the CEOs alluded to this idea, when they called for the following;

Therefore, we call on governments, including at the UNFCCC negotiations in Paris and beyond – to: 

• introduce carbon pricing systems where they do not yet exist at the national or regional levels
• create an international framework that could eventually connect national systems. 

National carbon pricing systems make complete sense, such as the ETS in Europe and the proposed carbon tax in South Africa. The framework that could connect them would allow for the speedy and transparent transfer of a national obligation across a border through emissions trading, which is exactly what happens today between Norway and the EU, between countries within the EU and arguably even between the USA and Canada through the California – Quebec ETS linkage. But this needs to be a much more widespread activity in order to quickly leverage the full potential for emission reduction that exists at any point in time.

This isn’t an empty call for a global carbon price, but a reinforcement of the call that IETA has been making for some time and a plea to the UNFCCC, the French Presidency of the COP and the respective Parties to see such a measure included in the Paris agreement. It’s a simple practical step that is needed to catalyse the development of a global carbon market.