The missing links after COP24

With much applause and many congratulatory statements, COP24 in Katowice finally ended on Saturday evening, after a marathon flurry of activity to get the Paris ‘rule book’ completed. What emerged was a lengthy and detailed 130+ page set of texts that introduces national governments to a version of the detailed questioning and transparency requirements that companies currently face under various carbon disclosure processes and protocols.

For example, under the framework required to track the progress on nationally determined contributions (NDC), countries are required to advise;

1. Target(s) and description, including target type(s) (e.g. economy-wide absolute emissions reduction, emissions intensity reduction, emissions reductions below a projected baseline, mitigation co-benefits of adaptation actions or economic diversification plans, policies and measures, and other);
2. Target year(s) or period(s), and whether they are single-year or multi-year target(s);
3. Reference point(s), level(s), baseline(s), base year(s) or starting point(s), and their respective value(s);
4. Time frame(s) and/or periods for implementation;
5. Scope and coverage, including, as relevant, sectors, categories, activities, sources and sinks, pools and gases;
6. Intention to use cooperative approaches that involve the use of internationally transferred mitigation outcomes under Article 6 towards NDCs under Article 4 of the Paris Agreement;
7. Any updates or clarifications of previously reported information (e.g. recalculation of previously reported inventory data, or greater detail on methodologies or use of cooperative approaches).

A similarly detailed requirement was agreed for reporting on emissions and removals at the national level.

But the reporting also includes an aspect that is unique to developed countries, i.e. how they are helping developing countries with financial resources to deliver their mitigation and adaptation objectives. The text includes various requirements to itemize this help, such as listed below;

1. Year (calendar year, fiscal year);
2. Amount (in United States dollars and domestic currency) (the face value and, on a voluntary basis, the grant-equivalent value);
3. Recipient, including, to the extent possible, information on the recipient region or country and the title of the project, programme, activity or other (specify);
4. Status (disbursed, committed);
5. Channel (bilateral, regional, multi-bilateral, other (specify));
6. Funding source (ODA, OOF, other (specify));
7. Financial instrument (e.g. grant, concessional loan, non-concessional loan, equity, guarantee, insurance, other (specify));
8. The type of support (e.g. adaptation, mitigation or cross-cutting);
9. Sector (e.g. energy, transport, industry, agriculture, forestry, water and sanitation, cross-cutting, other (specify));
10. Subsector, as available;
11. Additional information, as available (such as project/programme details, implementing agency and to the extent possible, link to relevant project/programme documentation);
12. Whether it contributes to capacity-building and/or technology development and transfer objectives, as available.

Much of this already exists in other documents prepared by governments (e.g. for their overseas development aid budgets), but seeing it in one place and focused on a single issue will doubtless bring a new level of scrutiny.

But despite the hard work of the negotiators in Katowice, running into many nights, the Paris rule-book is lacking on two fronts, and both are arguably critical to overall success.

The first is an issue that is inherent to the Paris Agreement itself; it is fundamentally about guidance to countries rather than instructions. Reading through the text, there is great detail on NDC reporting and equally on the role of the UNFCCC in aggregating this information and presenting an impact assessment against the goals of the Agreement itself, but there is no concrete approach to bridging any gap that exists between what is being done and what is required.

Rather, this depends on some version of diplomatic peer pressure, with a committee established under Article 15 of the Paris Agreement to oversee compliance with the rule book, but this is primarily related to submitting the NDC, reporting back and submitting an emissions inventory. Closing the gap, which is clearly a task that needs to addressed, is handled through the global stock-take being used as advisory input by each Party when they come to resubmit their NDC. The text agreed in Katowice, emphasizes that;

. . . . the outputs of the global stocktake should focus on taking stock of the implementation of the Paris Agreement to assess collective progress, have no individual Party focus, and include non-policy prescriptive consideration of collective progress that Parties can use to inform the updating and enhancing, in a nationally determined manner, of their actions and support in accordance with relevant provisions of the Paris Agreement as well as in enhancing international cooperation for climate action.

The key question going forward is whether this approach will be sufficient to close the gap and how various countries will respond. While a collective process is essential to address climate change, we all know from personal experiences that some form of constructive finger pointing can often help break a collective impasse. The issue is always about how it is delivered so as not to disenfranchise members of the group.

In the Sky Scenario, released by Shell earlier this year, the story highlighted that the necessary emission reductions could only be delivered if various mechanisms to share common interests worked extraordinarily well, but in combination with a drive by leaders towards a certain outcome.

The last point in the above text which references international cooperation, leads to the the second issue with the ‘rule book’. After two weeks of deliberations on Article 6 of the Paris Agreement, being the role of cooperative approaches, no consensus emerged on the rules that should apply. I have discussed this Article many times, but in short it is seen by most as the foundation elements for trade in carbon units, ideally giving rise over time to a more structured global market which in turn facilitates delivery of NDCs. In Katowice, a number of points of disagreement on Article 6 were still outstanding on the Saturday evening. As such, Article 6 is still to be negotiated and the Parties agreed to attempt this over the coming year. It is the missing chapter in an otherwise complete Paris ‘rule book’ and should receive ‘main event’ status at COP25 in Chile, where it will be in good hands with a government deeply engaged on carbon pricing matters. A hoped for silver lining is that increased focus leads to an even more ambitious outcome for Article 6; relegating it to project mechanism status as a simple follow on from the Clean Development Mechanism of the Kyoto Protocol is downplaying its potential.

The disagreements were fundamental and related to the accounting provisions (i.e. the avoidance of double counting which is of paramount importance), the call by some Parties for a share of the proceeds arising from international transfers and transfer of units out of an NDC and into a system such as CORSIA, the latter also being an accounting issue.

In the end, a light version of Article 6.2 (transfers of units between countries) appears in the accounting provisions for Article 13 (the transparency framework), but this refers back to the provisions and definitions within Article 6, which have yet to be agreed.

. . . . .An emissions balance reflecting the level of anthropogenic emissions by sources and removals by sinks covered by its NDC adjusted on the basis of corresponding adjustments undertaken by effecting an addition for internationally transferred mitigation outcomes first-transferred/transferred and a subtraction for internationally transferred mitigation outcomes used/acquired, consistent with decisions adopted by the CMA on Article 6.

Moving forward without Article 6 could be a real barrier to progress. It is akin to developing the global trading regime for goods and services but not agreeing on the implementation of currency markets necessary to make it work. Carbon markets deal with emissions, which can be a very different activity to the provision of clean energy, such as through renewable energy investment. The latter activity should continue undiminished, but a lack of focus on activities such as carbon removal may mean that net-emissions do not fall as fast as they need to. These activities need a price on carbon and carbon unit trade is an essential aspect of this for price discovery and investment flow.

Much remains to be done in 2019 and beyond to put the world on a pathway that meets the goals of the Paris Agreement.

Note: Scenarios are not intended to be predictions of likely future events or outcomes and investors should not rely on them when making an investment decision with regard to Royal Dutch Shell plc securities. Please read the full cautionary note in www.shell.com/skyscenario.