Category: Offsets

Getting going with Article 6 of the Paris Agreement

April 9, 2020

Article 6 was inserted into the Paris Agreement with a view to providing similar compliance flexibility to that offered by the trading mechanisms within the Kyoto Protocol (i.e. CDM, JI, AAU transfers). But given that the Paris Agreement doesn’t have strict targets and emissions management compliance in the way the Kyoto Protocol did, Article 6 was instead rephrased under the term cooperative approaches. The word trading (or trade) doesn’t appear in the Paris Agreement or its associated Decision Text.

The Kyoto Protocol was built from the ground up on an emission allowance basis (i.e. Assigned Amount Units or AAUs for developed countries), such that trade between developed countries (e.g. through Joint Implementation or JI) was strictly accounted for and the necessary adjustments made through the AAU system. But the protocol also included the Clean Development Mechanism (CDM), which offered the opportunity for developing countries to implement emission reduction projects and sell units into developed countries, which in turn incentivised a shift away from fossil fuels in the project host countries.  However, the CDM could not make use of the two sided accounting system that AAU and JI trades offered. This was because developing countries didn’t have targets under the Protocol and therefore didn’t have AAUs matched to emissions. The solution, in a qualitative attempt to avoid double counting, was to establish rules around the additionality of the projects, in other words to attempt to show that the project was a real reduction and wouldn’t have happened anyway. As such, project baselines and analysis of counterfactual energy trends became important areas of study.

Within the Paris Agreement, Article 6.2 offers the means to transfer bilaterally agreed emission units between countries and Article 6.4 offers a mechanism to generate units under UNFCCC supervision from various national approaches, but with an emphasis on projects. In many ways, Article 6.4 mirrors the CDM of the Kyoto Protocol, although under the Paris Agreement the 6.4 mechanism can be hosted in any country for potential transfer of emission reduction units to any other country.

Whereas the Kyoto Protocol had strict accounting provisions, albeit with the caveat of the CDM transfers as described above, the Paris Agreement has no such architecture. Nevertheless, the requirement to avoid double counting (Article 6.2 and 6.5) has led to proposals for the Paris ‘rule book’ which will require a detailed emissions accounting approach. The proposed accounting text that emerged from COP25 in Madrid is shown in part below;

Under the 6.2 rule book:

8. Each participating Party shall apply corresponding adjustments . . . . .

    . . . .

    1. Where the participating Party has a multi-year NDC:

i. Calculating a multi-year emissions trajectory, trajectories or budget for its NDC implementation period that is consistent with the NDC, and annually applying corresponding adjustments for the total amount of ITMOs first transferred and used each year in the NDC implementation period and cumulatively at the end of the NDC implementation period;

9. Each participating Party with an NDC measured in tCO2 eq shall apply corresponding adjustments pursuant to paragraph 8 above, resulting in an emissions balance, reported pursuant to paragraph 23 for each year, by applying corresponding adjustments in the following manner to the emissions and removals from the sectors and GHG covered by its NDC:

a) Adding the quantity of ITMOs authorized and first transferred, pursuant to paragraph 8 above;

b) Subtracting the quantity of ITMOs used pursuant to paragraph 8 above.

 Under the 6.4 rule book

 IX. Avoiding the use of emission reductions by more than one Party

 70. A host Party shall apply a corresponding adjustment for all A6.4ERs first transferred consistent with decision X/CMA.2 (Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement) . . . . .

In a Kyoto like world this could be easily implemented. NDCs would first be converted to emissions and AAUs assigned, which would give every country a clear carbon budget. As units were transferred between countries, then the necessary corresponding adjustments could be made via the AAUs. The challenge for the Paris Agreement and Article 6 is to do this in a world that doesn’t have such approaches built into the system but nevertheless needs them to fulfill the accounting requirements.

All the above brings me back to the current state of play on Article 6. Although some excellent text emerged from Madrid, it has yet to be agreed by all the Parties. In the interim, a number of organisations and some governments are pushing ahead with programs to operationalise Article 6 through demonstration. Most of these programs are focused on developing transfers through the 6.2 architecture, creating units under bilateral crediting systems and progressing with the physical transaction of the units between two parties, in some instances using technologies such as blockchain to track the transaction and ensure it is secure. The practitioners within these programs are looking at project baselines, calculating emission reductions, assessing additionality and building registries. But is this really the best use of their resources?

There is a solid twenty year history of project development and emission reduction unit issuance, starting in about 2000 with the likes of the World Bank and their Prototype Carbon Fund. This then led to the early days of the CDM and numerous other regulatory and voluntary market offset schemes. Collectively, we know how to do this and there is a high level of expertise in many institutions, companies and governments. We don’t need to learn this again. But not one of these offset schemes has ever dealt with the complexity of the problem posed by the Article 6 accounting requirements.

What we need are a number of good demonstrations of how corresponding adjustments can be implemented in practice and how they might work when dealing with the wide variety of Nationally determined Contributions (NDC) that currently exist. A prerequisite will be clear demonstrations of how robust emissions accounting can be applied to sometimes vague or non-economy-wide NDCs and to NDCs that have targets other than absolute emissions. Once there is trust around NDC accounting the application of corresponding adjustments is more straightforward and credible for everyone (including both the host country and recipient).

A demonstration program that seeks to establish best practice for corresponding adjustments will require strong cooperation between governments who are tasked with managing NDCs and national greenhouse gas emission inventories, the private sector who will be the likely investors and developers of projects and civil society who have a strong vested interest in environmental integrity and Article 6 itself. This is where the time needs to be invested to operationalise Article 6.

 

The third runway by the numbers

March 4, 2020

Last week the project proposal for a third runway at Heathrow in London was put on hold after a successful court challenge based on climate concerns. The courts sided with the plaintiffs who argued that the proposal did not adequately demonstrate how its overall emissions impact would be managed given that the UK has now adopted a target of net-zero emissions in 2050. While the emissions from the project itself are modest, with cement probably being the largest component, the ongoing emissions from aviation expansion as a result of the project could be considerable on a cumulative basis over many years.

At this point I should note that the third runway at Heathrow has been a contentious project since it was first proposed and there are many reasons put forward as to why it should or should not be built. My focus here is on the expected expansion of aviation in and out of the United Kingdom and the resultant emissions. Aviation has grown rapidly over the half century since the introduction of the widebody Boeing 747 (by which point it had grown considerably since the first intercontinental jet services some twenty years prior), to the extent that there are now over four billion passenger flights per year globally.

Of course airlines, airports and aviation companies are responding to a strong demand signal from consumers (the UK is an island). In order to drive change consumers also need to understand their own externalities and be prepared to manage them, most likely by a cost passed through with the ticket purchase.

A 2017 UK Department of Transport assessment of aviation showed growth for both capacity constrained and unconstrained scenarios, with the low constrained case showing a 60% rise through to 2050 and the high unconstrained case showing a doubling of demand.

UK Aviation Growth

Heathrow consumes about 20-25 million litres of Jet-A1 every day, so a third runway would increase this by 50%, or some 10-12 million litres per day.

A double check based on aircraft efficiency and expected distance of travel gives a similar number. If we assume that the runway operates for 18 hours per day with a flight interval of 90 seconds, with 50% of the time being used for take-off, that implies 360 additional departing flights every day. If we then assume that every flight is dedicated to longer haul, say New York or Dubai, then that means about 37,000 litres of fuel per flight based on the improved efficiency for modern aircraft of about 2.2 litres per 100 km per passenger, 300 passengers and some 5,500 km of travel, or a total of just over 13 million litres per day.

The consumption of 13 million litres of Jet A-1, 365 days a year, will result in the release of about 12 million tonnes per year of carbon dioxide when combusted. So the question that needs to be asked is how the mitigation of 12 million tonnes per year will be organised such that it has reached net-zero by 2050.

The answer lies with the sector itself, not just the airlines that own the planes or the companies that make them or the airport that is building the runway or the fuel providers that sell Jet A-1. All these parties will have to collectively own the problem and set about solving it. There are already the beginnings of some answers, but efforts will need to be accelerated such that the question posed through the court in relation to the net-zero goal of the UK can be confidently answered. For example;

All the above are still in their early stages of development and deployment, with bioJet looking to be the most promising immediate option. Nevertheless, over the coming thirty years it should be possible to bring UK aviation emissions to net-zero through some combination of the above.

But who should be responsible for implementing the strategy? Within the aviation industry, a framework already exists under which all this could be managed.

The airlines have already agreed and are now beginning to implement the CORSIA framework under the auspices of ICAO. This sets out a journey through to 2035 which will see global aviation emissions limited to current levels. It includes a facility to balance emissions through a trading arrangement where they cannot be directly mitigated through fuel changes, although the final rules of this have yet to be agreed and will involve Article 6 of the Paris Agreement. In almost any aviation scenario there will be unmitigated aviation emissions in 2050. CORSIA will need to evolve further after this first phase to be aligned with the emerging net-zero goals in many countries with major aviation hubs. The trading arrangement will eventually need to focus on removal of carbon dioxide from the atmosphere in combination with geological storage.

This form of emissions challenge to projects and development may well become more frequent, not just from campaigners but also from regulators, as the governments they represent grapple with the task of getting to net-zero emissions. There will likely be a real shift in focus from the projects themselves and their subsequent operation (i.e. Scope 1 plus Scope 2 emissions), to the broader impact they have on societal emissions (i.e. Scope 3 emissions). That will place more onus on project developers to think through and then manage the broader implications of their actions.

What happened to that vacation offset?

August 19, 2019

With many people in the Northern Hemisphere taking vacation at the moment, some may have clicked that button on the bookings website to offset the emissions from their air travel, cruise ship or even hotel. But what happens when the button is clicked?

In a recent article, the Guardian explored the nature of the voluntary carbon market and the wealth of project types that may be triggered as a result of that click. But they didn’t explore the very nature of the voluntary market from a carbon accounting perspective. This is where the Paris Agreement should change everything.

Today, as the Guardian article notes, that click leads to a project of some description executed through the voluntary carbon market. This is a market that has arisen over the years in the absence of cross-border compliance markets for regulating the emissions of carbon dioxide. Compliance markets are created and regulated by mandatory international, regional, and sub-national carbon reduction schemes such as the European Union’s Emissions Trading Scheme (EU ETS), the California Carbon Market and the largely defunct Clean Development Mechanism regulated by the Kyoto Protocol. By contrast, the voluntary markets function outside of the compliance markets and enable companies and individuals to purchase carbon offsets on a voluntary basis. For example, individuals who seek to offset their CO₂ emissions and companies who would like to become climate neutral can buy an equivalent in terms of carbon credits to “neutralize” or offset their carbon footprint.

The issue that isn’t explored by the Guardian relates to the legal title to the carbon reduction. In an emissions trading system, legal title belongs to the owner of the carbon unit created by the system, which then gives that owner the right to surrender it against their emissions in complying with the rules of the trading system. But in the voluntary market this isn’t as clear, even though the units are widely referred to as offsets which therefore implies that the reductions they represent belong to the emitter. The word offset is derived from financial markets where an offsetting transaction is an activity that, in theory, exactly cancels the risks and benefits of another instrument in a portfolio. Offsetting transactions are risk management tools that allow investors and other entities to mitigate the potentially detrimental effects that could arise if they cannot simply cancel the original transaction.

But what about the title to the reductions in a project activated through the voluntary carbon market? In the new world of the Paris Agreement, governments have created Nationally Determined Contributions (NDC) in which a plan is developed that shows how the country in question will reduce its emissions. For example, Kenya has stated that it will undertake an ambitious mitigation contribution and seek to abate its GHG emissions by 30% by 2030 relative to the business as usual scenario of 143 MtCO2eq; and in line with its sustainable development agenda. This is also subject to international support in the form of finance, investment, technology development and transfer, and capacity building.

When the click leads to a project in Kenya and that project is successfully executed, the emissions reduction achieved will be swept up in the assessment of Kenya’s greenhouse gas emissions at some point in the future when they are reporting out against the NDC to show how they have achieved their contribution to the Paris Agreement. As such, the voluntary project has been useful for Kenya, but its impact will have been reported as part of the Kenya NDC, which means that it isn’t technically an offset transaction against emissions in another place. This is because the project has helped Kenya and presumably eliminates the need for them to find yet more reductions in their economy to deliver on the NDC – the notional cap that they have placed on their emissions is, in part, fulfilled by the project. So the voluntary market is meeting a very specific need; it is helping finance reductions in other places against the NDC covering that location. This means it isn’t strictly an offset against emissions in the buyers location, even though a reduction clearly took place and was financed by the offset purchaser.

Under the Paris Agreement and Article 6, all this potentially changes, but it depends on the nature of the transaction. The voluntary market could continue as discussed above, as a financing mechanism for reductions in other places, or it could evolve into a fully accounted and tradable unit. In the latter case, when the unit is created in Kenya (perhaps under Article 6.4) and exported, it will trigger a change in their NDC and a change in the NDC of the country in which it is used in. Both NDCs will be adjusted such that overall global emissions remain on the same pathway. Paris is strict about double counting. The unit would also be formally recognized by both governments so title would transfer through the transaction, but the unit would now be helping the country in which the offset was purchased meet its NDC, rather than the country in which the project was executed.

A final case could see only the project host country adjust its NDC due to the export of the unit, but the importing country makes no change. The carbon title therefore remains with the offset purchaser. The unit is not used to help either country meet its respective NDC. When the unit is retired (held in perpetuity by the offset purchaser), it then represents a real offset against emissions and it takes the world slightly closer to the goal of the Paris Agreement than would otherwise have been the case.

It is still early days for the Paris Agreement and the rules of Article 6 for cross border trade of units have still to be agreed. As such, the voluntary market will continue under the current procedures. But as the Paris rules get going, expect to see things change. A further complication will be the application of these units towards flights where the emissions from the flight are already being accounted for through the new aviation emissions offset system, CORSIA, but that is for another post.

In the meantime, enjoy your vacation!!

Achieving the balance

April 11, 2018

The Paris Agreement calls for a “balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of the century.” This emphasis on “a balance” – or what is also referred to as “net-zero emissions” in the case of the energy system – is a critical development because it recognises that surface temperature warming is directly related to the cumulative total of carbon dioxide (CO2) emitted to the atmosphere.

As climate change is a key issue to deal with and it is a cumulative problem, there is a need for the energy system to get to net-zero emissions to bring a halt to the rising level of carbon dioxide in the atmosphere. However, the time period society has to achieve this is less than it will take to find and/or scale up alternatives for all energy services, goods and products for 7.5 billion people that are currently provided by fossil fuels. In other words, society needs to fill an important gap between when we need to get to net-zero emissions and when we can actually get to zero emissions. The former is around 2070 to meet the goal of the Paris Agreement, whereas the latter may not be until sometime in the 22nd century.

That gap will be filled by “sinks”, which includes;

  • Geological storage of CO2 with carbon capture and storage (CCS);
  • Increasing the carbon stock in products held by society (i.e. carbon capture and use or CCU);
  • Increasing the carbon uptake of the biosphere through land management practices such as reforestation.

CCS and CCU will include;

  • Direct capture and storage applied in large point source emitting facilities such as cement plants and smelters;
  • Energy facilities operating with a sustainably produced biomass feedstock resulting in net removal of CO2 from the atmosphere when capture and geological storage is applied;
  • The production of various products, such as plastics, from fossil fuels or biomass.

All of the above feature in the new Shell scenario, Sky – but sharing the understanding of how they fit into the energy system and what can be achieved was one of the communication challenges behind the Sky scenario publication that was recently released.

Sky reaches net-zero emissions in the energy system by 2070, resulting in stabilisation of atmospheric CO2 and a limit on warming of around 1.75°C in 2100, or well below 2°C as called for by the Paris Agreement. By the time 2070 is reached, the global power generation system is largely renewables and nuclear, but fossil fuel use in certain modes of transport and heavy industry remains significant, albeit declining. The remaining fossil fuel emissions must be dealt with to achieve the goal of net-zero emissions.

To help scenario readers understand the change and see how emissions are managed, we developed a chart that illustrated the carbon flows in Sky as time went by. The sequence starts in 2020 and includes visual elements to help the reader understand what is going on. For starters, we used strata to show;

  • The upper lithosphere where fossil fuels are found;
  • Surface based energy activities;
  • The atmosphere.

Legend for Balances

Balance 2020

In the 2020 illustration above, fossil fuel production results in 35.2 Gt of CO2 emissions, from a potential of 37.8 Gt based on actual extraction. The materials produced include bitumen for roads and petrochemicals that don’t end up as energy products (e.g. combustion of plastic waste). The biofuel energy system is also shown, which results in a loop as CO2 is absorbed by plants, then released again as the biofuel is manufactured and finally used for energy. At this stage there is no real interaction between the systems.

Balance 2050

By 2050, the scene is very different. CCS has emerged at scale, both directly in fossil fuel applications such as industrial facilities using natural gas in furnaces and indirectly in the bio-energy system, where geologically stored carbon amounts to permanent removal of CO2 from the atmosphere. By 2050, BECCS (bioenergy with CCS) has also emerged at scale – this is the use of biomass for energy service provision, although principally for the generation of electricity, but linked with CCS.

BECCS is illustrated in the diagram below and is a technology that exists in parts today but hardly as a whole. For example, biomass is used to make ethanol (corn and sugarcane) at large scale in both the USA and Brazil and is a major energy source (woodchips) for the power generation sector in Sweden. CCS also functions at some forty sites around the world, but the combination of bioenergy with CCS is very limited. One such example is the Arthur Daniels Midland ethanol plant in Illinois, USA which stores one million tonnes per year of CO2. As this CO2 is from the ethanol process itself, it is, in effect, drawdown of CO2 from the atmosphere.

BECCS

By 2070 the energy system has reached net-zero emissions, primarily through a scale-up of the bioenergy with CCS sector when compared with 2050.

Balance 2070

Finally, by 2100, the energy system is net-negative, drawing 6.4 Gt of CO2 per year from the atmosphere. Fossil fuel use has declined further to 13.7 Gt equivalent of CO2, but this is all captured through one of the mechanisms discussed above.

Balance 2100

As BECCS does not exist at scale today, there are always questions about this pathway forward. However, bioenergy does exist at scale and CCS has been demonstrated many times at scale in early projects, so the combination of the two is entirely plausible. A competing future technology for drawdown of CO2 from the atmosphere is direct air capture linked with CCS (DACCS), but this doesn’t exist today other than at pilot plant size. Experience has shown that the time taken for energy and energy related technologies to move from pilot plant to meaningful commercial scale (i.e. >1% of system size, so in the case of DACCS, >200 big installations around the world) is measured in decades rather than years. For this reason, the drawdown pathway selected in Sky utilized BECCS rather than DACCS, but the latter should not be ruled out from future consideration.

 

It’s all in the numbers

February 13, 2018

One of the noteworthy features of the 160+ nationally determined contributions (NDC) submitted to the UNFCCC following the adoption (and now ratification) of the Paris Agreement, is that no two are alike. True to the Paris Agreement, countries have submitted a description of their contribution, with most offering some indication of the emissions outcome, but the way this information is transmitted varies considerably by country.

In May 2016, the UNFCCC released a synthesis report of the NDCs, aggregating them in the only way that makes sense given the nature of climate issue, by cumulative emissions. Every NDC was turned into a cumulative carbon release to the atmosphere (i.e. quantification), which were then summed and compared to the ideal global carbon budget for a ‘well below 2°C’ pathway. Needless to say, the UNFCCC analysts almost certainly had to make numerous assumptions to do the calculations.

The problem that confronted the analysts was that not one of the NDCs was presented in the format they needed. Many offered an end goal in 2025 or 2030, such as the EU which is targeting a 40% reduction by 2030 against a 1990 baseline. Baseline years also vary across the NDCs. In most NDCs, little to nothing is said about what happens in the intervening years, so an assumption must be made about the likely trajectory. Others were presented as an expected reduction against a notional future emissions trajectory and some were presented without any emissions trajectory at all.

The variation in NDCs is now a well-known story, but the lack of quantification of NDCs has other implications which extend past the obvious analysis of the environmental outcome. It also limits the ability for carbon trade between the NDCs and potentially runs up against the accounting provisions of the Paris Agreement.

Those accounting provisions are dotted throughout the Agreement, but Article 4.13 is perhaps the most comprehensive. It states;

Parties shall account for their nationally determined contributions. In accounting for anthropogenic emissions and removals corresponding to their nationally determined contributions, Parties shall promote environmental integrity, transparency, accuracy, completeness, comparability and consistency, and ensure the avoidance of double counting, in accordance with guidance adopted by the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement.

The above could be interpreted as a post-NDC (i.e. after the period for which the NDC applies) true-up of emissions, but even that requires summing all the emissions across all the years of the NDC, not just ticking off actions against a list or noting that emissions in the final year were as expected. Unless cumulative emissions are established for the whole period of the NDC, the environmental integrity of the NDC is questionable as it is cumulative emissions that determine the environmental outcome. Only a full assessment of the NDC in terms of cumulative emissions meets the other requirements of completeness, accuracy and comparability.

Further, post-NDC quantification of emissions is unlikely to be sufficient for trading purposes, or in the language of the Paris Agreement, internationally transferred mitigation outcomes. This is because transfers out of a country require a local corresponding adjustment. While this could also be done post-NDC, it should be done at the time of the transfer such that the country can determine the new trajectory it needs to be on and ensure policy measures are suitably modified to ensure compliance, particularly if transfers are large compared to national emissions (say, more than 5%). Of course, if both countries were operating economy wide cap-and trade systems the correction would be automatic, but that is hardly the case today.

The above makes quantification of NDCs an important and perhaps necessary step for the Paris Agreement, but agreement on this by the Parties appears to be distant. However, such a step is inevitable. As countries get closer to declaring full emissions compliance with the Paris Agreement, i.e. achieving net-zero emissions (NZE) or ‘a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases’ in the words of the Agreement itself, quantification becomes essential.

NZE will occur when the country in question has balanced the remaining emissions with sinks and there will likely be some remaining emissions well into the 22nd century. Those sinks will either be developed locally or purchased internationally via the transfer provision of Article 6. But both the buyer and seller of such sinks will have to implement careful accounting to ensure the integrity of the net-zero claim. This takes us back to the quantification discussion.

The Paris Agreement is rigorous in concept and the negotiators of 2015 should be commended for the thoughtfulness of their text. But as the delivery of the Paris ‘rulebook’ approaches, that same rigor does not yet appear to have the full backing of all the Parties.

Building a transition into Article 6

September 26, 2017

It would seem that transitions are all important at the moment and while many may be focussed on the latest ideas for Brexit, I am actually talking about Article 6 of the Paris Agreement.

At the opening of the IETA Carbon Forum North America in New York last week, the Fijian Climate Ambassador gave a major push forward for Article 6, outlining to the attentive audience that it was perhaps the most important part of the Paris Agreement. Her assertion rested on the argument that a functioning global carbon market can enhance ambition. Looking some decades down the road, trade in carbon units can give confidence to nations to set net-zero emission goals, given that they will feel assured that the balance that needs to be reached against remaining emissions in their economy can be achieved by purchasing suitable units from a recognized international market. Without such a market, net-zero emissions is unlikely to be realized.

While the full need for such a mature global market may be many years away, the negotiators faced with the task of fleshing out Article 6 into suitable guidelines, rules and procedures need to consider that endpoint now. Although it is always possible to return to the table and build on existing systems, the history of this within the climate negotiations is not good. Back in May, IETA released a ‘straw-proposal’, outlining in very clear terms the necessary pieces required to further define Article 6. That proposal can now be found on the recently created IETA Article 6 Portal. It represents a desirable end-point for the shape of Article 6, which is a major step from where the international carbon market stands today.

But this may be insufficient for the current negotiators, who are also focussed on the near term and the role that carbon markets might play over the next five to ten years. Many have seen the Clean Development Mechanism (CDM) of the Kyoto Protocol bring much needed energy investment into their countries and some are keen for such projects to continue, rather than wait for a new round of activity to get going under a new mechanism; that could take some years. But the Paris Agreement will also bring fundamental changes to the accounting around these projects, given the existence of Nationally Determined Contributions. I discussed this in a previous post. But again, accounting of this nature may take some years to develop.

All the above points to a transitional arrangement; an approach which allows the structure, project pipeline and methodologies of the CDM to continue, but which sees the CDM subsumed into the new Article 6.4 mechanism as it emerges. Retaining aspects of the CDM and encouraging smaller energy development based projects in least developed economies and sub-national regions should be part of the new mechanism, but equally this mustn’t end up as the mechanism itself.

Article 6, including the transfer arrangements of 6.2, the mechanism of 6.4 and the non-market approaches of 6.8 must herald in trade and cooperative arrangements that operate on the gigaton scale, not kilotons and megatons as has been the case with the CDM. The mitigation challenge ahead is enormous and even the potential trade in a net-zero emissions world could be very large. Continued emissions from agricultural systems, chemical processes, smelters, aviation and shipping alone would require several gigatons of trade to offset with units representing removed carbon dioxide (i.e. sinks).

This points to a relatively short transition period, perhaps one or two of the five-year cycles for Nationally Determined Contribution (NDC) implementation and review. After that, if the Paris Agreement goals are to be met, NDCs should have expanded to cover all parts of every economy, therefore introducing the full accounting rules on which Paris is based. While project activity such as under the CDM will doubtless continue, it will need to be transparently accounted for within the NDC process. This in turn will change the nature of the trading arrangements for the reduction units coming from the projects.

The task for the negotiators in Bonn will be to find a balance between the shorter term needs of several Parties and the project investment pipeline that is important to their energy development, along with the creation of a new emissions mitigation mechanism and accompanying transfer provisions that are scalable and robust for the decades ahead. Transitional arrangements could be an important part of the solution.

 

Saving the CDM

May 29, 2017

Throughout the middle of May, the Parties to the Paris Agreement met in Bonn to continue negotiations relating to its implementation. Of particular interest to me were the discussions pertaining to Article 6, which contains the slightly opaque wording on transfers and mechanisms that could usher in a global carbon market.

While there was considerable emphasis on the respective roles of Article 6.2 (transferable mitigation outcomes) and 6.4 (a new emissions mitigation mechanism), quite some time was also spent on a legacy of the previous global deal, that being the Clean Development Mechanism of the Kyoto Protocol (CDM). It has now been twenty years since the CDM was first described and it has been operating in earnest for about half that time. Over 8000 CDM projects have been registered, representing some $300 billion of clean energy and emissions reduction investment, leading to the issuance of about 1.6 billion CERs so far (Certified Emission Reduction units). One estimate claims that the CDM has had a material impact on global emissions, with reductions of nearly 500 million tonnes CO2e in 2014, or 1% of global emissions – i.e. without the CDM global emissions would be 1% higher.

But the CDM has been fraught with problems, the most dramatic being a substantial fall in demand for the emission reductions that it offers; hence CERs now trade for just a few pennies per tonne of CO2. This is because of the failure of nations to seriously engage in the Kyoto Protocol and for those that did, such as the EU, the end result was the eventual cessation of imports of CERs into their economies. This led to the collapse of many project developers, the failure of hundreds of projects and a backlog of CERs that could still be issued for further trading. A great deal of time, money and political capital has been invested in getting the CDM to where it stands today, so not surprisingly there is some ill feeling over its demise and some attempts to recoup losses before moving on to something new.

So in Bonn, as negotiators pondered new arrangements under the Paris Agreement, questions were also raised about the CDM. For example;

  • Would it continue under the Paris Agreement?
  • Could the CERs it produced be carried forward as reductions under the Paris Agreement?
  • What would happen if existing projects continued to generate CERs yet sat within a Nationally Determined Contribution (NDC)?
  • Could the CDM be incorporated under Article 6.4?
  • Should Article 6.4 simply be a continuation of the CDM?

These are all valid questions, but there is also a risk that attempting to answer them and accommodate all Parties that have either invested in or received investment from CDM activities, might actually hamper the development of Article 6 itself. A broad solution for the CDM is needed.

Perhaps it is first worth considering whether demand will ever materialise for project based reductions? The initial concept of credits flowing into an emissions trading system and easing the local hunt for reductions has been severely challenged by the experience in the EU. In that system, the CDM added to an already growing allowance surplus, resulting in a depressed carbon price and triggering efforts to correct the system. Although domestically produced offsets feature in systems such as the California cap-and-trade, the unchecked flow of credits into large systems is unlikely to be the design model of the future. That leaves demand for credits coming from uncapped offset systems such as aviation’s CORSIA, but these are unlikely to be large enough to absorb the potential global supply of reductions. The global shipping industry may also establish a similar system at some point. In the longer term, international demand for reductions, but particularly those involving removal of carbon either directly or indirectly from the atmosphere, ought to materialize. It is highly unlikely that the end goal of net-zero emissions can be realized across the entire energy system without some form of carbon unit trading.

Long term credit demand around the net zero emissions goal points to the need for Article 6.4 as a means of generating such units, as well as Article 6.2 to introduce the necessary accounting behind their transfer. But there is some distance to travel between the CDM as it is today and such an end point. A first step perhaps lies within 6.2 which will establish the accounting procedure for cross border transfers of mitigation outcomes. That procedure will require an adjustment to both the NDC supplying the units and the NDC receiving them. Although the CDM was not devised along such lines, the only real possibility for allowing it to continue (or potentially wind down but still generating remaining units) will be to invoke such an accounting procedure. This would bring rigour to the origination of the units and give recipient countries the confidence that a global reduction in emissions had taken place. It would also encourage many developing countries to move rapidly towards quantification of their NDCs, which would then encourage further investment and trade around mitigation.

But the real salvation for the CDM lies with the Parties and their desire to create real demand and trade by invoking the full spirit of the Paris Agreement. Without a concerted effort to reduce global emissions through real policy implementation, there will be no market for such instruments.

A firm proposal for Article 6

April 20, 2017

Next month negotiators will convene under the auspices of the UNFCCC to start in earnest the process of putting flesh on the bones of the Paris Agreement. Although this work has been underway for a year now, most of this time has been spent on further conceptual thinking about the necessary framework, rather than the specific text that will drive the Paris Agreement forward.

Within this process, there is also the need to further define Article 6, the part of the Paris Agreement that many hope will usher in a framework on which a global carbon market can be constructed. Although Article 6 doesn’t specifically mention carbon markets, the references to transferable mitigation outcomes and mitigation mechanisms can be readily interpreted as trade of carbon units for the purpose of monetizing and financing mitigation – i.e. carbon pricing.

Over the last twelve months, the International Emissions Trading Association (IETA) has published various articles and given presentations around its own view on Article 6 development. A summary of that view is as follows;

  • Article 6.2 – Underpins carbon trade between countries as cap-and-trade systems are linked and emitters seek to optimize their mitigation economics; e.g. California-Quebec (i.e. USA and Canada).
  • Article 6.4 – Offers a means of assigning units to mitigation actions, both at the project level and the system / sector level. This is a pre-requisite for trade.
    • Create allowances for a cap-and-trade system at national level.
    • Create credits within a sector baseline-and-credit system.
    • Create CERs for a specific project.
    • Certify carbon sequestration.
  • Article 6.5 – Changes the accounting for cross-border carbon trade, but particularly for project based units.
  • Article 6.8 – Non-market approaches, such as the Kigali Amendment to the Montreal Protocol, can offer solutions in areas that are not as well suited to emissions trading, therefore supporting the development of more robust carbon markets.

The challenge is to turn the above into a text framework that can be built on as more granular rules, modalities and procedures are required to fully define the operation of Article 6. That more granular work will likely emerge after COP24 in 2018, but for now an initial text framework is required. IETA has taken a first step in this direction by writing a straw-proposal for negotiators to consider, in a format that would be suitable for inclusion in a COP24 Decision. It draws on the work the association over the past 18 months and builds on the straw-proposal launched in 2014 which helped deliver Article 6 in the first instance.

The straw-proposal can be obtained directly from IETA by contacting the Secretariat at secretariat@ieta.org.

One particular aspect of the proposal is the rule required to ensure avoidance of double-counting of carbon emission reductions when Parties instigate a mitigation transfer between their economies. Avoidance of double-counting is a key provision of Article 6 of the Paris Agreement. This is easily managed in conventional cap-and-trade systems, such as the linked Quebec-California system (Canada-USA), but is more complex between nationally determined contributions (NDCs) which may not be similar in structure. IETA have chosen to follow a route the requires quantification of the NDCs, even if their initial basis is not in terms of absolute emissions. For example, the IETA definition of an internationally transferred mitigation outcome (ITMO, as given in Article 6.2 of the Paris Agreement) has a specific reference to quantification, that is later used to ensure double-counting cannot take place;

An internationally transferred mitigation outcome (ITMO) is the subtraction of a given absolute quantity of greenhouse gas emissions measured in tonnes of carbon dioxide equivalent from the quantitatively defined nationally determined contribution of a given Party or sector within said contribution and the addition of an equivalent amount to the quantitatively defined nationally determined contribution or sector of another Party.

The IETA straw-proposal is a starting point, but nevertheless an important one. It takes the concepts of Article 6 and moves them forward into a format which can be further debated and improved. Hopefully, it helps accelerate the negotiating process and leads to an outcome that is both suitable for the Parties themselves and workable for the business world that the Parties will likely turn to for full implementation of the Paris Agreement.

Linkages within Article 6 of the Paris Agreement

March 16, 2017

National negotiators are in the process of getting their thoughts together on Article 6 of the Paris Agreement, both in preparation for the next round of negotiations in Bonn in May, but also for submissions to the UNFCCC in preparation for the Bonn meetings. Article 6 is a key provision of the Paris Agreement in that it encourages cooperative action between parties through approaches that are compatible with carbon pricing and carbon market development.

While much has been written about the use of Article 6 in the context of linking between national emissions trading systems, it is perhaps the linkages within Article 6 itself that are the ones that really need to be thought through. There are three key provisions within the Article;

  1. Paragraph 6.2 proposes the use of ‘internationally transferred mitigation outcomes’. This has been widely recognized as an arrangement between two parties – either governments or companies – that results in a bi-lateral adjustment of national emissions inventories.  This could be after a transaction in an emissions trading system, such as the trade of European Allowances (EUAs) between countries in the EU and Norway.
  2. Paragraph 6.4 proposes a mechanism to promote the mitigation of greenhouse gas emissions while fostering sustainable development. Within this, section (c) notes that the reductions can be used by another party to fulfil its nationally determined contribution (NDC), but Paragraph 6.5 makes it very clear that both Parties cannot benefit from the use of the mechanism in terms of delivery of their NDCs, i.e. no double counting.
  3. There is the less talked about but still important paragraph 6.8 which is focussed on non-market approaches to promote mitigation and adaptation ambition.

One question that negotiators face is how these three provisions sit together, or should they be viewed as entirely separate approaches?

Perhaps the most immediate consideration is the link between 6.4 and 6.2. While 6.4 defines a mechanism, it is not specific as to what this mechanism might look like or how it might operate. However, the history here lies with the Clean Development Mechanism (CDM), which generated project-based Certified Emission Reduction units that were then traded across borders for use under the compliance requirements of the Kyoto Protocol in developed countries. But there is a fundamental difference with the CDM, in that the Paris Agreement introduces more robust greenhouse gas accounting. As such, a cross border trade impacts both parties in terms of the accounting around their nationally determined contribution (NDC). Of course, this new mechanism doesn’t have to result in a cross border transfer, but if it does then is this a mitigation outcome transfer under 6.2?

One possible construction for Article 6 is that all cross border carbon unit denominated trades fall under paragraph 6.2. This would be all trades that are executed between those areas of the respective economies that are covered by NDCs and where a quantified adjustment equivalent to the amount of the trade is then made to each NDC. Such an adjustment requires quantification of each NDC, as I discussed in a post last year. This is quite a straightforward process between linked emission trading systems, but less so when these may not be in place.

The purpose of Article 6.4 then becomes clearer; it facilitates the process of quantification of mitigation activities, such that trades can be executed and the necessary adjustments to the NDCs then made. This allows the necessary funding for the mitigation activity to be directed efficiently and with the required financial rigour and emissions quantification to support the investment.

But this may not be the only use of 6.4. Mitigation activity could take place within the NDC of a single economy that attracts external climate finance, but does not result in carbon units crossing borders. Such an arrangement might help channel funds from green investment banks. This would be more in line with the intent of 6.4(b) which positions the mechanism to incentivise and facilitate participation in the mitigation of greenhouse gas emissions by public and private entities authorized by a Party. Nevertheless, this is still likely to involve facilitation through quantification of the mitigation activity.

Finally, there is paragraph 6.8, the framework for non-market approaches. While quantification of emission reduction activities is important in developed or emerging economies, building a developing economy along a different energy and emissions pathway to what might otherwise take place is a more holistic activity; in fact the word ‘holistic’ even features in the text of the paragraph. Establishing a reference, quantifying emissions and trading carbon units around this may not be appropriate for an energy system that is largely a blank sheet of paper. This is perhaps where 6.8 can add value, along with cooperative activities such as under the Kigali Amendment of the Montreal Protocol and the various global methane programs.

Much remains to be done to fully define Article 6, but linkage of the pieces within it to suit various economies in different ways is perhaps a useful starting point.

First steps forward for aviation

October 13, 2016

Along with the rush to ratify the Paris Agreement and pass the 55 / 55 criteria for entry into force, last week saw the International Civil Aviation Organisation (ICAO) agree on a global Market Based Measure (MBM) system to begin to manage the emissions of CO2 from international aviation. The most recent IEA assessment for the aviation sector (2014 data) puts emissions at 504 Mt CO2, or 1.5% of global CO2 emissions from energy use. This represents a rise of 95% over 1990 levels versus a 58% rise in CO2 emissions more broadly over the same period. Nevertheless, this indicates a considerable efficiency improvement for aviation, as Revenue Passenger Kilometres (RPK) have nearly tripled in the same period. That same IEA report highlights a recent slowing down in global emissions, but the outlook for aviation does not appear to be following a similar pattern. A September market update from Boeing notes that China alone could order over 6,800 planes to a value of $1 trillion in the next 20 years.

As was the case with the Kyoto Protocol, international aviation emissions are not covered by the Paris Agreement. Rather, the aviation industry has spent the last few years negotiating an industry agreement to manage emissions. While there is an important emphasis on efficiency improvements and the longer term application of synthetic fuels, primarily from biomass, the centrepiece of the approach is an offset system utilising the global carbon markets. Collectively the approach will be known as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). This is similar to an approach that the IMO were considering for the marine sector in the run-up to COP 15 in Copenhagen, but didn’t implement.

The CORSIA calls for international aviation to address and offset its emissions through the reduction of emissions elsewhere (outside of the international aviation sector), involving the use of “emissions units”. Two main types of emissions units exist: “offset credits” from crediting mechanisms and “allowances” from emissions trading schemes. Offsetting could be through the acquisition and redemption of emissions units, arising from different sources of emission reductions achieved through mechanisms (e.g. UNFCCC’s Clean Development Mechanism), programmes (e.g. REDD+ – reducing emissions from deforestation and forest degradation in developing countries) or projects (e.g. substituting coal-fired stoves with solar cookers). The CORSIA will be implemented in a phased approach throughout the 2020s.

Offsetting of aviation emissions is really the only practical route forward for the industry, although synthetic fuels will likely play an important role in the decades ahead. But the offset strategy and approach needs to look toward a world of net-zero emissions, as required by the Paris Agreement. Recent scenario work by Shell that looks forward at possible pathways to a net-zero emission energy system sees aviation little changed from today, other than in size (expanding from 7 EJ today to 30 EJ by late in the century) and efficiency. While the overall transport scenario sees significant electrification, for aviation the primary fuel remains hydrocarbon based.

transport-aviation

By later in the century hydrogen based jets may have appeared, but such a development remains distant with no current line of sight to such an outcome. Although planes have an operational life of about 25 years, a series, such as the Boeing 747 family, can extend for considerably longer. In the case of the 747 development started in the early to mid-1960s and with the order books seemingly drawing to a close on the 747-8 (despite a recent significant order for 747-8 freighters), the last 747 might leave the skies as late as 2050. That’s 85 years. This is because of the huge development costs for new planes, let alone what it might take for a fundamental shift to hydrogen.

While the offset approach envisaged for the 2020s will use the full range of current emissions trading instruments, as emissions fall globally aviation will need to look to a sequestration strategy – i.e. sinks, to use the terminology of the Paris Agreement. ICAO have hinted at this with the inclusion of REDD+ in the portfolio of measures, but a long term reliance on forestry may not be sufficient to meet their needs.

At the Chatham House Climate Conference held in London very recently, the subject of carbon dioxide sinks was on the agenda. The speakers noted that sinks would be an important part of the portfolio of actions to reach net-zero emissions. Within the sinks, there is a portfolio of approaches as well, with the likely outcome that all will have to be used. This includes direct CCS in conjunction with fossil fuel use, but also a variety of atmospheric carbon dioxide removal technologies (see below).

cdr-options

Coming back to the task confronting ICAO, one speaker at the Chatham House Conference noted that the journey to net-zero emissions cannot rely solely on soil carbon and reforestation approaches. This is simply because we cannot hope to get the biosphere back to the state it was in 200+ years ago and yet go forward with a population reaching 10 billion people and the pressures that will put on the expansion of our agricultural system. Hence the argument for a portfolio approach to CCS.

As ICAO moves forward they will also have to consider a portfolio approach. Current carbon trading instruments will work for now, but they also need to consider early investment in nascent technologies such as BECCS (bio-energy with CCS) and DACCS (direct air capture with geological storage). While industrial CCS has emerged as a scalable technology, offshoots such as DACCS operate at pilot scale. Given sufficient attention from ICAO, these could be at a demonstration level in the 2020s, with the goal of scalability by 2030.

 

 

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