Category: Brazil

An Article 6 Case Study: Brazil

dchone November 14, 2019

In a recent post I illustrated how Article 6 of the Paris Agreement might work in practice, using a small set of archetype countries as shown below. While there are many ‘Country A’ examples, it is more difficult to think about what sort of economies come close to ‘Country B’. Brazil could well be such an example.

Brazil is rich in renewable energy, it has a mature biofuel industry that could doubtless move towards new biofuel processes as they emerge and it certainly has vast potential for developing carbon dioxide sinks through reforestation and afforestation in the Amazon area of the country. Although it isn’t at zero emissions as illustrated in the diagram, the major current use of fossil fuels is oil for transport, which could diminish significantly through electrification, leaving a near zero emissions economy. In Brazil, industry makes considerable use of biomass for energy.

One would therefore imagine that Brazil could make considerable use of Article 6 of the Paris Agreement and generate real benefit for the domestic economy. But just how significant might this be for Brazil?

A recent analysis by the University of Maryland, underwritten by the International Emissions Trading Association (IETA) and the Carbon Pricing Leadership Coalition (CPLC), models the impact of Article 6 on the global implementation of the Paris Agreement. The study finds that the potential benefits through cooperation under Article 6 in achieving the Nationally Determined Contributions (NDC) are considerable and all parties could benefit. Potential cost reductions over independent implementation of countries’ NDCs total about $250 billion per year in 2030, although this number rises to $320 billion when Article 6 includes trade in carbon units related to land use change. This would appear as the sale of carbon removal units (or sinks) as a result of forestry and other land use change activities. Cost reductions from cooperative implementation are achieved through improved global economic efficiency and effective sourcing of the lowest cost mitigation opportunities. It should also be noted that the cost and benefit number produced are model outputs, which should be obtainable under perfect economic conditions akin to the model parameters, but otherwise are representative of the direction and scale of change that will be seen for the scenarios they represent.

2030 Potential Article 6 Reduction in Cost (Billions 2015 USD/year)
	Reduction in Cost	Increased Ambition
Fossil Fuels Only	$250 billion	5 Gt CO₂ per year
Land Use Only	$70 billion	4 Gt CO₂ per year
Combined Impact	$320 billion	9 Gt CO₂ per year

Modelling results show that land use policies are important for the cost-effectiveness of climate change mitigation. The comprehensive approach of integrating terrestrial and energy systems could further lower the cost of meeting the same mitigation target, consistent with findings of other studies. Meanwhile, the potential sellers and buyers in the virtual carbon market change depending on whether land-use mitigation measures are included or not.

Within the analysis there is the opportunity to look at a country such as Brazil and get some indication of the benefits for that country should Article 6 be fully implemented and then used to its maximum potential. With the inclusion of nature based solutions, Brazil, along with countries in similar latitudes in Africa, becomes one of the largest sellers of carbon units through to 2050, with China flipping to become a buyer.

The table below, extracted from the University of Maryland study, explores in more detail the implications of the inclusion of land-use mitigation measures for Brazil and the use of them under Article 6. In the fossil fuels and industry only scenario, Brazil is shown to be a marginal seller until 2025 and then switches to become a buyer after 2030. The inclusion of land-use mitigation measures under Article 6 contrasts sharply with this scenario. Brazil takes on the role of a prominent seller in the international carbon markets, which increases over time (as opposed to the decreasing trend in the fossil fuels and industry only scenario). Associated financial gains are also significantly larger and increase over time, as shown in the table.

International trade for Brazil through Article 6 (positive = seller; negative = buyer)
	2020	2025	2030	Units
Fossil Fuels Only	0.05	0.017	-0.049	Gt CO₂
Fossil Fuels Only	0.66	0.49	-1.88	US$ Billion (2015)
Fossil Fuels and Land Use	0.582	0.823	0.932	Gt CO₂
Fossil Fuels and Land Use	1.62	8.46	18.41	US$ Billion (2015)

The financial benefits associated with Article 6 cooperation, especially with the inclusion of land-use mitigation measures, are reflected in the GDP gains showed in table below.

Net GDP change for Brazil through use of Article 6 **
	2020	2025	2030	Units
Fossil Fuels Only	0.38	0.22	0.42	US$ Billion (2015)
Fossil Fuels and Land Use	1.61	8.27	17.66	US$ Billion (2015)

** Note that here are always gains in GDP growth as a result of Article 6 cooperation on NDC achievement but gain for Brazil are expected to be much larger as a result of the inclusion of nature based solutions under Article 6.

The University of Maryland analysis clearly shows the benefits of Article 6, but importantly it brings into context the scale of change that emerges for some countries when nature based solutions are incorporated within the carbon markets that will operate under Article 6. In the case of Brazil and the potential it has to develop these natural carbon sinks, the benefits rise towards US$20 billion per year by 2030, which could bring considerable economic growth to the Amazon region and encourage landholders to look at reforestation options. However, that potential can only be unleashed if Article 6 is designed to incorporate nature based solutions when the national negotiators sit down at COP25 in Madrid to finalize the rule book.

Carbon pricing policy in 2018. Was it a year of progress??

dchone January 10, 2019

Carbon pricing remains at the centre of most government policy discussions on climate change, but in a year which saw the Intergovernmental Panel on Climate Change (IPCC) give an unambiguous warning on the need for mitigation action, carbon pricing policy development rather stumbled along.

Undoubtedly the highlight of the year was the restoration of the EU Emissions Trading System (ETS) to again become a meaningful mechanism, with prices rising to over €20 as EU growth gained momentum and allowance supply tightening. The recognition that the Market Stability Reserve would be a feature of Phase IV in the 2020s certainly contributed to this. Also in the EU, discussions opened around the need for an EU ETS floor price, following the successful example set by the UK which has seen coal almost vanish from the generation mix since their implementation of such a system.

Singapore also moved forward with the implementation of its carbon tax.

But outside the EU and Singapore it was hard to find any stellar examples of progress, although intent remains high in many jurisdictions. Rather, 2018 was a year troubled by a number of developments in the carbon pricing space;

In Canada, a new government was elected in the province of Ontario and true to their election manifesto the new Premier took rapid action to remove Ontario from the cap-and-trade system it had only recently joined with California and Quebec.
Also in Canada, the Federal government moved ahead with its backstop pricing mechanism which will kick in for individual provinces if they do not implement a price through some mechanism of their choice. While this was a positive development, the prospect of litigation from some provinces (either by the current provincial government or by an opposition in waiting) means that this program may have a bumpy ride in the years to come.
In Brazil there has been discussion for some time now on implementation of a carbon pricing policy, but this is unlikely to continue under the new administration.
In Australia, even the possibility of a carbon based policy being implemented seemed to create political turmoil. Nevertheless, Australia is not devoid of a mechanism in that the Safeguard Mechanism put in place with the Emissions Reduction Fund has created a secondary market for Australian reduction units on the back of some industrial facilities exceeding their safeguard cap.
In France, protests erupted late in the year on the back of a carbon tax implemented in the fuels market, although many other factors also lay behind the demonstrations. The government was forced to delay implementation.
Finally, the year ended with failure at COP24 to agree on the rule-book for Article 6 of the Paris Agreement. While the Article 6 mechanisms are not there to directly implement carbon pricing, their use would certainly help catalyze such developments in many economies.

In between the highs and lows of 2018, there was still progress. China announced further details of its upcoming cap-and-trade system and continues to make progress in implementing their plans and Kazakhstan is now looking to reboot their early system. The very long running discussion on a carbon tax continued in South Africa with the prospect of a system emerging in 2019, although the parliamentary process has yet to conclude.

But this is not the required profile of action for a world that is intent on reaching the goals of the Paris Agreement. That profile was illustrated by the May release of the Shell Sky Scenario which highlighted the extraordinary rate of progress required in this policy area in the 2020s. Whereas in 2020 Sky shows only modest uptake of carbon pricing, reflective of the situation today, by 2030 some form of carbon pricing is covering the bulk of the global economy at a level between $25 and $60 per tonne of carbon dioxide.

Sky Scenario carbon pricing profile (Source: Shell analysis)

Developments in this space need to pick up pace dramatically in 2019, but perhaps the transparency and reporting framework agreed at COP24 will help in that regard. While the Paris rulebook makes no specific demands on governments to implement policy, it will put a spotlight on the actions they choose to take and the mitigation they seek to achieve. Carbon pricing policy ought to see some uptick under such circumstances.

Overview of carbon pricing developments (Source: own analysis)

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 http://www.shell.com/skyscenario.

Reality and distortions in Lima

dchone December 10, 2014

Wandering the COP20 campus, listening to side events and hearing senior political, business and NGO representatives talk about the climate issue results in a mild reality distortion field impairing your judgement; you start to feel sure that we must already be on a new energy pathway, that global carbon pricing is just around the corner and that the Paris deal will deliver something approaching 2°C.

Then something happens to shatter that field and realisation sets in that there is still a long way to go before a truly robust approach to the climate issue emerges. On Tuesday evening the field was disturbed by tweets from a colleague at PWC @JG_climate reporting on negotiators squabbling over INDCs, with Brazil’s concentric differentiation approach causing some angst amongst a number of developed countries and the proposed text describing the nature of an INDC expanding by some thirty pages. This negotiation is far from over and the road ahead to Paris will likely be very bumpy. There will be a few dead-ends to watch out for as well.

Another reality hit home on Monday afternoon with the recognition that many people in the civil society groups here in Lima just don’t want to hear about the reality of carbon capture and storage (CCS). The Global Carbon Capture and Storage Institute (GCCSI) held an excellent and well attended side event on Monday afternoon which was initially mobbed by some 100+ demonstrators and their press entourage. The demonstrators crowded into the modest sized room and the hallway outside, waited for the start of the event and then promptly left as Lord Stern opened the side event with his remarks on the need for a massive scale-up of CCS. Arriving and then departing en masse allowed them to tweet that civil society had walked out on Lord Stern. The demonstrators were equally upset that Shell was represented at the event with my presentation on yet another sobering reality; 2°C is most likely out of reach without the application of CCS; also a finding of the IPCC in their 5^th Assessment Report. They also took exception to flyers for my book which carries the same message.

What was really concerning about this walk-out was that the younger people who made up the group would rather protest than listen and learn. Had they stayed they would have heard a remarkable story by Mike Monea of SaskPower who talked about the very successful start-up of the world’s first commercial scale coal fired power plant operating with carbon capture, use (for EOR) and storage. This technology needs some form of carbon pricing structure for delivery and in the case of this project the bulk of it came from the sale of CO2 for EOR. There was also a capital grant from the government. Importantly, SaskPower noted that a future plant would be both cheaper to build (by some 30%) and less costly to operate. This potentially points the way to a technology that can deliver very low emission base load electricity at considerably lower CO2 prices than the ~$100+ per tonne of CO2 that current desktop studies point to. That may also mean CCS appearing without government support sooner rather than later. Of course, the actual construction and delivery of second generation projects will still be required to confirm this.

A minor reality distortion arose from a question directed at me during the GCCSI side event. One audience member asked me about Shell’s membership of ALEC, a US organisation that operates a nonpartisan public-private partnership of America’s state legislators, members of the private sector and the general public. ALEC doesn’t seem to think that a carbon price should be implemented in the USA, hence the question to me given Shell support for carbon pricing. Responding to the Climate correctly reported on my response, which was along the lines of “. . that despite their position on climate issues we still placed a value on their ability to convene state legislators”, but DeSmogBlog had their own interpretation of this. They reported on this under a headline which stated “Company ‘Values’ Relationship with Climate-Denying ALEC”.

It’s also proving a challenge to gain acceptance for the reality of markets and the role they are likely to have in disseminating a carbon price throughout the energy system. This means that carbon market thinking is still struggling to gain a foothold in text proposals for Paris, with one negotiator commenting at an event I attended that “we don’t see much call for markets at this time“. Silence on markets is the preferred strategy for some Parties, with others taking the view that specific mention and some direction is a must. More on this at another time as the Paris text develops further.

The evenings in Lima have been filled with some excellent events. With so many people in town, dinner discussions are convened by the major organisations represented here, which results in great conversations, useful contacts and plenty of new ideas to think about. The Government of Peru have organised and run a very good COP, despite early concerns that there were initially no buildings on the site they chose for the event.

Brazil is back; but are they a decade late?

dchone December 7, 2014

COP20 in Lima ended its first full week on a mixed note, but with some positive signs for the ongoing process. The detailed discussions on the role of carbon markets under the SBSTA ended in disagreement and postponement which was disheartening, but there remains hope that this key subject will still see the light of day under the ADP during the coming days. Curiously, China (and others) opposed deepening the market discussion at SBSTA because of a lack of guidance from the ADP itself, but according to the Earth Negotiation Bulletin they stated in the ADP when reflecting on the Paris Agreement non-paper (ADP.2014.11.NonPaper) that “sections on market and non-market approaches, and new market-based mechanisms could prejudge discussions under the Subsidiary Bodies”. They seem to be setting themselves up for their own private Catch-22 there. It was also unfortunate that those who will pick up the ongoing challenge posed by carbon emissions and climate change were reported on as follows; “YOUNGOs noted that markets have not delivered what they promised and called for a moratorium on markets.” Perhaps they have been reading Naomi Klein’s book “This Changes Everything”.

One document in particular that drew attention was a paper circulated by Brazil, detailing an idea they had proposed at the October ADP meeting. Brazil have a long history of creative intervention in the process, being the country that “invented” the Clean Development Mechanism (CDM), which over the decade of its operational life has delivered tens, if not hundreds of billions of dollars (depends on your measurement definitions) of carbon finance to developing countries. It appears that Brazil is back to its creative best with a paper on “concentric differentiation”, which draws together both the concept of CBDR-RC* and the need for universal acceptance and eventual implementation of absolute targets as the route to atmospheric stabilisation of carbon dioxide.

The paper is best described by referencing a diagram included by Brazil (see below). Initially the INDCs** of various parties are scattered throughout the circles depending on their capabilities, with all developed countries starting in the middle. The crucial change to previous attempts at agreement is the inclusion of the proposal;

“developing country parties are expected to include in their respective NDC a type of economy-wide mitigation targets, leading to absolute targets over time”

This means that everyone migrates inwards as their capabilities allow, but that developing country parties at least start with an emissions goal, albeit intensity based, per capita based or based on a business-as-usual (BAU) deviation. Least developed economies start in the outer ring and are encouraged, but not required to present an INDC. Eventually all parties end up with absolute targets in the middle.

This is a very encouraging proposal by Brazil and it also includes an extensive reference to markets, cap-and-trade, a reformed CDM and so on. But without wanting to take away from the importance of their thinking, it does raise the question of whether it is a decade or more too late. This is the proposal that should have come when parties were negotiating onward commitment periods of the Kyoto Protocol (KP), thereby giving that agreement new life and making it fit for purpose in the 21^st Century. Almost all the necessary pieces were already in place, it simply (!! – nothing is ever that simple) required the addition of the middle ring and the provisions for promotion.

In KP language, the centre ring is the AAU (Assigned Amount Unit) world, now only home to the EU, Norway, Australia and Ukraine. Even Japan has left. The outer ring is the CDM world, which relies on financial flows from the inner ring. A renegotiation and addition to KP could have inserted the middle ring and promotion requirements and even developed a new carbon accounting unit for intensity based targets. With all three rings based on carbon units, the much needed “global carbon market” could have taken off relatively quickly. Such a design might have even brought back countries such as the USA given that its objections regarding developing country actions would have been addressed.

One aspect of the Brazil proposal that has some traction in the ADP is the idea that “backsliding” on INDCs won’t be permitted. In other words, once you have declared an INDC with an absolute target, that is where you stay.

The Brazil proposal is for the ADP and not for the KP; which means that parties will have to reinvent everything from scratch. But at least Brazil is there with its creative input leading the way. On to Week 2 in Lima where the Parties are at least into the process of negotiating text, rather than negotiating the procedures under which they would even consider text.

* Common but differentiated responsibilities and respective capabilities

**Intended nationally determined contributions