Cities may well be key to reaching the goals of the Paris Agreement and the Paris Metropole has an opportunity to lead climate action at the local, national and European levels. Given its association with the 2015 Paris climate agreement the area has important symbolic value in efforts to tackle climate change.
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.
The past couple of weeks have seen something of a storm of protest directed at Bret Stephens of the New York Times, following the publication of his first column for that newspaper which happened to be on climate change. In the article Stephens does note ‘By now I can almost hear the heads exploding’ and that is exactly what happened.
While he could have easily avoided some of the petty criticism by not using words such as ‘modest’ to describe the extent of warming over the last century, his somewhat clumsy venture into the world of probability and uncertainty led many commentators to accuse him of climate denial – in fact they labelled him with the very names that he was cautioning were part of the problem with regards public disinterest in the climate issue itself. Stephens had noted;
Censoriously asserting one’s moral superiority and treating sceptics as imbeciles and deplorables wins few converts.
While I don’t subscribe to the way in which Stephens put together his story, he was nevertheless correct in his assertion that ‘much else that passes as accepted fact is really a matter of probabilities’. This issue is also a problem when it comes to discussing mitigation strategies.
While it is very clear that the Paris Agreement sets a goal of ‘well below 2°C’ and also challenges society to attempt to limit warming to 1.5°C, the current reality is that the world is not on track for this outcome and none of the Nationally Determined Contributions (NDC) submitted to date are aligned with the ambition that emerged from Paris. Yet there is almost no possibility of discussing the implications of such an outcome for fear in the minds of many that the discussion could become a slippery slope to reduced ambition. So there is a return to the language that Stephens encountered.
In my forthcoming book, Putting the Genie Back: Solving the Climate and Energy Dilemma, I do actually explore this issue. The discussion emerges from the world of climate probability and uncertainty, which is at the heart of the work of the MIT Joint Program on the Science and Policy of Global Change. Unfortunately, the use of a 2°C reference point has now become politically rigid, to the extent that it is hardly possible to explore what the number really means, let alone talk of surpassing it. The most common argument is that if 2°C is passed then society must be on a certain pathway to catastrophe. Talk of catastrophe and hopelessness can distance an audience, exactly the point that Stephens is making. Even the IEA 450 Scenario is based on probability; the mitigation pathway it delivers gives a 50% chance of limiting warming to 2°C; it is far from a guarantee of 2°C success.
By contrast, MIT have demonstrated that even a modest attempt to mitigate emissions could profoundly affect the risk profile for equilibrium surface temperature. They looked at five mitigation scenarios (see below), from a ‘do nothing’ approach to a very stringent climate regime (Level 1, akin to a 2ºC case). In the ‘do nothing’ approach, mid-range warming by the end of the century is some 5ºC compared to the late 20th century, but with a wide distribution, which means that there is a small probability of warming up to 8ºC or more – almost certainly a catastrophic outcome even when accounting for the small probability that it might occur. But even modest mitigation efforts, while not shifting the mid-range sufficiently for an outcome close to 2ºC, nevertheless radically changes the shape of the distribution curve such that the spread narrows considerably, with the highest impact outcome dropping by almost 5ºC. As mitigation effort increases and the mid-range approaches 2ºC, the distribution narrows further such that the highest possible outcome is limited to 3ºC (more like the IEA 450 case).
This is not an argument for limiting the global effort to modest mitigation, but recognition that if modest mitigation is the best that can ultimately be achieved, the risk reduction it delivers has very high value to society. It also highlights that a singular focus on a very difficult-to-achieve goal can be counter-productive if it results in a breakdown of the efforts that deliver a less ambitious outcome. Some thought along these lines may be required as the current US Administration ponders the Paris Agreement.
Perhaps a more pragmatic discussion about effort and outcomes would also garner more interest from a broader swathe of society and offer renewed interest in climate change for the 64% of Americans who Stephens notes do not care ‘a great deal‘ about the subject.
Given that 2016 marked the first full year of climate policy development after COP21 in Paris and was the year in which leaders lined up to sign and then ratify the Agreement, one might have expected a deluge of new carbon pricing policy initiatives. Rather, the picture was mixed, although there were some notable advancements. Three stood out in particular;
- The Chinese government confirmed that 2017 would see the start of its nationwide emissions trading system. This will supersede the various regional pilot systems and should emerge as the largest ETS in the world once it is up and running. The system is likely to commence in the second half of this year, probably at the start of Q4.
- The Canadian Government announced that carbon pricing would apply on an economy wide basis from 2018 onward. This could be implemented at provincial level, but if not the Federal Government would intervene and apply it through a taxation based mechanism. For provinces with an explicit price-based system, the carbon price should start at a minimum of $10 per tonne in 2018, and rise by $10 per year to $50 per tonne in 2022. Provinces with cap-and-trade need: (i) a 2030 emissions reduction target equal to or greater than Canada’s 30 percent reduction target; (ii) declining (more stringent) annual caps to at least 2022 that correspond, at a minimum, to the projected emissions reductions resulting from the carbon price that year in price-based systems.
- The international aviation industry announced an offset mechanism to limit growth in commercial aviation emissions, effectively bringing a carbon price into that sector.
There were other developments and in the map below Australia has moved from blank to a light shade of green. This is because its Safeguard Mechanism started. It will require Australia’s largest emitters to keep emissions within baseline levels such that the country’s other efforts to reduce emissions (e.g. the Emissions Reduction Fund) aren’t eclipsed by emissions growth from existing facilities. The safeguard will apply to around 140 large businesses that have facilities with direct emissions of more than 100,000 tonnes of carbon dioxide equivalence (t CO2-e) a year. This will cover around half of Australia’s emissions. The entity with operational control of a facility will be responsible for meeting safeguard requirements, including that the facility must keep net emissions at or below baseline emissions levels. The mechanism will apply broadly to a variety of business entities, including corporations, partnerships, trusts, and local councils. Baselines will reflect the highest level of reported emissions for a facility (hence the light green) over the historical period 2009 to 2014 Entities with a baseline can comply by ensuring emissions are below that level or by buying Australian Carbon Credit Units.
But the year was not entirely marked by positive progress. In particular, there was the resounding defeat of Washington State’s Initiative 732, which sought to implement a tax on carbon emissions in exchange for cuts to existing taxes. Washington State rejected the idea of a carbon tax by 59 percent to 41.
So we end 2016 with some 23% of greenhouse gas emissions (including China) covered by some form of carbon pricing (Source: World Bank: State and Trends of Carbon Pricing 2016), operating at an average level of something like US$10 per tonne of carbon dioxide. It has taken 20 years to reach this point, with the Kyoto Protocol marking the starting point. To even match the market based Oceans outlook offered by the Shell New Lens Scenarios, carbon pricing needs to cover some 80% of the global economy at a level of $30 or more by 2036, i.e. in under 20 years. That scenario reaches net zero emissions within this century, but has been assessed by MIT as having the impact of limiting warming of the climate system to around 2.7°C, somewhat above the ambition of the Paris Agreement despite the net-zero outcome.
One can only conclude that much remains to be done in 2017 and beyond.
“The New Lens Scenarios” and “A Better Life with a Healthy Planet” are part of an ongoing process – scenario-building – used in Shell for more than 40 years to challenge executives’ perspectives on the future business environment. We base them on plausible assumptions and quantification, and they are designed to stretch management thinking and even to consider events that may only be remotely possible. Scenarios, therefore, 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.
It is important to note that Shell’s existing portfolio has been decades in development. While we believe our portfolio is resilient under a wide range of outlooks, including the IEA’s 450 scenario, it includes assets across a spectrum of energy intensities including some with above –average intensity. While we seek to enhance our operations’ average energy intensity through both the development of new projects and divestments, we have no immediate plans to move to a net-zero emissions portfolio over our investment horizon of 10-20 years.
Within the Decision Text supporting the Paris Agreement, paragraph II.21 calls on the IPCC as follows;
21. Invites the Intergovernmental Panel on Climate Change to provide a special report in 2018 on the impacts of global warming of 1.5 °C above pre-industrial levels and related global greenhouse gas emission pathways;
This has prompted a number of academic institutions and climate scientists to start publishing on the issue of a 1.5°C goal, with much more likely to come in the months ahead. One such paper (Huntingford, C. and Mercado, L. M. High chance that current atmospheric greenhouse concentrations commit to warmings greater than 1.5 °C over land. Sci. Rep. 6, 30294; doi: 10.1038/srep30294 (2016).) was reported on recently by the BBC, under the heading Debate needed on 1.5C temperature target.
In fact the paper was about where we are today in terms of temperature and reaches a similar conclusion to the one that I reported on recently after attending an MIT Joint Program forum. At that meeting, the response to my question about current levels of warming was as follows;
. . . . current warming is around 1.1°C since pre-industrial times, but that there is more to the story than this. The climate system is not at equilibrium, with the oceans still lagging in terms of heat uptake. Therefore, if the current level of carbon dioxide in the atmosphere was maintained at some 400 ppm, the surface temperature would rise by another few tenths of a degree before the system reached an equilibrium plateau.
Similarly, the paper reported on by the BBC, argues much the same line;
There is strong evidence that even for current levels of atmospheric GHGs, there is a very high probability that the planet is committed to a mean warming over land greater than 1.5 °C relative to pre-industrial times. Such warming could be greater than 2.0 °C, and in particular for large continental regions away from coastlines.
While a debate about the global goal wasn’t a feature of the paper itself, the BBC interviewed the authors and reported that while they believed it to be a good idea to have an “aspirational” 1.5°C goal in the Paris agreement, that nevertheless if the world is to take 1.5°C seriously, then a serious discussion needs to be held about the implications of that goal. The author of the paper is quoted as saying “I think there needs to be a very thoughtful debate about what’s to be gained at these different temperature levels, if approaching the lower levels meant severely damaging the economy,”.
Such a discussion has been largely absent, replaced with a somewhat myopic focus on 2°C and now “well below 2°C, with a view to 1.5°C”. I discussed this at some length in my first book, drawing on the work of the MIT Joint Program in their 2009 report Analysis of Climate Policy Targets under Uncertainty. In that report the authors demonstrated that even a modest attempt to mitigate emissions could profoundly affect the risk profile for equilibrium surface temperature. This is illustrated below with five mitigation scenarios, from a ‘do nothing’ approach (Level 5) to a very stringent climate regime (Level 1).
An important feature of the results is that the reduction in the tails of the temperature change distributions is greater than the shift in the temperature goal (represented by the median of the distribution). For example, the Level 4 stabilization scenario reduces the median temperature change by the last decade of this century by 1.7 ºC (from 5.1 to 3.4 ºC), but reduces the upper 95% bound by 3.2 ºC (from 8.2 to 5.0 ºC). In addition to being a larger magnitude reduction, there are reasons to believe that the relationship between temperature increase and damages is non-linear, creating increasing marginal damages with increasing temperature (e.g., Schneider et al., 2007). These results illustrate that even relatively loose constraints on emissions reduce greatly the chance of an extreme temperature increase, which is associated with the greatest damage.
But the other focus of the Paris Agreement stands apart from such debate. As previously discussed in several postings, Article 4 calls for a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century, i.e. a state of net-zero emissions. In fact such an outcome is eventually required irrespective of the temperature outcome; without it warming continues.
Net-zero emissions arguably brings a more practical focus to the task of emissions mitigation. It defines an end-point and allows a discussion on the pathway there, the types of technologies required and the shape of the energy economy once achieved. All of this features in the new supplement to the Shell New Lens Scenarios, A Better Life with a Healthy Planet: Pathways to Net-Zero Emissions.
Scenarios are part of an ongoing process used in Shell for more than 40 years to challenge executives’ perspectives on the future business environment. They are based on plausible assumptions and quantification, and are designed to stretch management thinking and even to consider events that may only be remotely possible.
As COP21 concluded I was reminded of a quote by Otto von Bismarck, ‘Laws are like sausages, it is better not to see them being made.’ Yet, over the course of the preceding decade I had done just that. I could now reflect upon the complex and torturous course of modern diplomacy that had worked to deliver a deal and which hopefully represents renewed global leadership on climate change.
Some 150 heads of Government and heads of state had turned up in Paris to kick off proceedings and although most departed immediately afterwards to leave the job with their negotiating teams, the telephones ran hot between capital cities across the world over the ensuing two weeks. Indeed, it was even rumoured that the newly forged friendship between the USA and Cuba meant that the two countries cooperated to put pressure on Nicaragua when it appeared that its negotiator was going to hold up proceedings with some fiery rhetoric in the final stages of the main plenary meeting.
In the previous eighteen months, staff in French embassies all over the world had worked tirelessly to support the process, but in the end it was the negotiators themselves working through the night in the final days who delivered the deal. All manner of behind the scenes trade-offs were made to resolve profound disagreements on a dozen or so key issues including the temperature goal itself, the eventual need for net zero emissions of greenhouse gases and the level of financial assistance for developing countries. There were also hundreds of smaller issues and points of principle that got dealt with during the final days, ranging from continued specific recognition of developing countries in certain instances to the role of a non-market mechanism to support mitigation.
In the days before the start of the COP the text had extended to nearly one hundred pages, with multiple variations of almost every clause and hundreds of square bracketed words and phrases, indicating disagreement amongst the Parties. But unlike 2009’s COP15 that took place in Copenhagen where almost everything that could go wrong, ultimately did, the French Foreign Ministry had left nothing to chance and were to be congratulated on an extraordinary outcome. . . . . .
The rest of this story and a deeper analysis of the Paris Agreement can be found in my new e-book, Pathways from the Paris Agreement. It is available on Amazon for their Kindle (and Kindle app for iPad and Android) or as a print-on-demand publication and coming soon on a number of other e-book platforms.
All proceeds from this book will be donated to the Center for Climate and Energy Solutions (C2ES) and the 2041 Foundation, two NGOs that I have worked with directly over many years.
Three years ago when Shell released their New Lens Scenarios, the two views of the future looked out far beyond previous scenarios, taking in the period from 2050-2100. This offered the opportunity for both scenarios to explore ways in which the world might reach a point of net-zero carbon dioxide emissions, down from some 40 billion tonnes per annum at the moment. Such an outcome is critically important for the global environment as it means stabilization and then probably some decline in atmospheric carbon dioxide levels, an essential requirement for limiting the current rise in surface temperature.
Net-zero emissions is also a requirement of the Paris Agreement. Article 4 is very clear in that regard, with its call;
“so as to achieve a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century. . . “
Energy scenarios typically explore the nearer term and many limit their horizon at 2050, but that isn’t sufficient for seeing truly profound changes in the energy system. These will play out on longer timescales, given the size of the system, the capital and capacity required to turn the system over. Solar energy is a good example. Today, we are in the middle of an apparent boom, but that is founded on years of development and improvement in the underlying technologies, a process that is still underway. Even at current deployment rates, solar still makes up only a small fraction of the global power generation system and electricity only represents 20% of the final energy we actually use. But over many decades, an energy technology such as solar PV may come to dominate the system.
Looking at the emissions issue from the fossil fuel side, even if solar was to dominate, would fossil fuels and the associated emissions of carbon dioxide necessarily decline? Simply building more renewables doesn’t guarantee such an outcome and even a significant reduction in fossil fuel use could still mean a continuing rise in atmospheric carbon dioxide, albeit at a reduced rate. Scenarios help explore such questions and by extending the New Lens Scenarios to 2100, real solutions to reaching net zero emissions present themselves.
The original “New Lens Scenarios” publication from 2013 focussed more on the period through to 2060, but a new publication released by Shell looks specifically at the challenge posed by net zero emissions and explores plausible pathways towards such an outcome using the “New Lens Scenarios” as a backdrop. I have been involved in the development and writing of this publication, which started in earnest only days after the Paris Agreement was adopted. But the material within it comes from the strong base built up over many years through the various Shell scenarios.
The analysis presented sees the energy system doubling in size as global population heads towards 10 billion people. Today we collectively consume about 500 Exajoules of energy; this could rise to some 1000 Exajoules by the end of the century. The makeup of that energy system will most likely look very different from today, but it is probably not a world without fossil energy; rather it is a world with net-zero carbon dioxide emissions. Carbon capture and storage therefore plays a significant role. Even in 2100, hydrocarbon fuels could still make sense for sectors such as aviation, shipping, chemicals and some heavy industry. Electrification of the energy system would need to shifted from ~20% today to over 50% during the century.
The new supplement is called “A Better Life with a Healthy Planet. Pathways to Net-Zero Emissions”. The title highlights the intersection between the need for energy to meet the UN Sustainable Development Goals and the requirement of the Paris Agreement to reach net-zero emissions. A better life relies on universal access to energy. The publication comes with a wealth of online material to support it.
Last week I presented a simple analysis of the temperature data over the last 50+ years which showed that there was good reason to think that the global surface temperature was rising by about 0.18°C per decade. But a further question to ask is when the current upward trend really started in earnest and therefore where are we today against a baseline of the pre-industrial temperature (i.e. 1850s or thereabouts). This is an important question as we have collectively established a desire to keep warming well below 2°C, but with the real prize being to limit this even further and ideally to 1.5°C.
If the current strong warming trend started in the middle of the last century, say in the post-war boom, then at 0.18°C per decade that results in warming over that period of nearly 1.2°C. The 1950s were also presumably warmer than the 1850s as CO2 levels had risen by some 30 ppm (parts per million) over that period, which argues for the current level of warming to be something more than 1.2°C.
Another way of looking at this is to use the climate sensitivity relationship between cumulative carbon and peak warming, which was estimated at 2°C per trillion tonnes of carbon by Myles Allen and his team in their formative paper published in Nature in 2009. A look at the associated Oxford University website will show cumulative carbon now stands at over 600 billion tonnes, which implies associated warming of about 1.2°C.
Yet another way is to seek an answer from a group of climate scientists and I had the opportunity to do just that earlier this week. I am in Boston for the 39th Forum of the MIT Joint Program on the Science and Policy of Global Change. I posed the question and one respondent (Chatham House Rule applies) argued that current warming is around 1.1°C since pre-industrial times, but that there is more to the story than this. The climate system is not at equilibrium, with the oceans still lagging in terms of heat uptake. Therefore, if the current level of carbon dioxide in the atmosphere was maintained at some 400 ppm, the surface temperature would rise by another few tenths of a degree before the system reached an equilibrium plateau. That would take us perilously close, if not over, the 1.5°C goal of the Paris Agreement. This implies that 1.5°C is only possible if we see a fall in atmospheric carbon dioxide, back below 400 ppm; but noting that it is currently rising at 2-3 ppm per annum.
This isn’t to say there are no routes forward to a 1.5°C outcome, with the Joint Program itself publishing one such pathway back in 2012.
MIT analysed four pathways that result in different temperature outcomes, including 1.5°C. These are shown in the chart above against a business as usual trajectory based on the 2010 post-Copenhagen national pledges.
- An immediate drop to net zero by 2015, starting in 2010 (Natural only after 2015).
- A very rapid drop to net zero by 2035, but with growth from 2010 to 2030 (Natural only after 2035).
- A more extended drop to net zero by 2060, with the decline commencing in 2010 (Alternative).
- The IEA 450 scenario, with emissions peaking around 2020 and reaching net zero by 2070 (IEA 450).
Pathway 3 (Alternative) results in peak warming of just over 2°C, but with a return to 1.5°C by the end of the century. Of the three MIT extreme mitigation scenarios, it also represents an outcome that could at least be envisaged, albeit still very challenging to implement.
The ocean also plays an important role here, but in a different way to that described above. Atmospheric CO2 begins to decline once net zero anthropogenic emissions is reached as the ocean continues to take up significant quantities of CO2 from the atmosphere, but with nothing additional being added from human activities. This is because the ocean is also lagging in terms of its ability to dissolve CO2. After some 20-30 years, as the ocean’s upper layer comes into balance with the atmosphere, uptake of CO2 slows. The fall in atmospheric CO2 that results also brings down the global surface temperature by about 0.5°C.
However, this scenario required a very sharp decline in emissions from 2010. Current Paris NDC plans show emissions continuing to rise through to 2030 at which point there are good signs of a plateau but by which time atmospheric CO2 may be at 430-440 ppm. The conclusion from all the above; any pathway that eventually delivers 1.5°C is likely to require a fall in atmospheric carbon dioxide back to 400 ppm or even below.
The first UNFCCC talks since the adoption of the Paris Agreement are now underway and the various delegations are getting down to the tough task of implementation. I was in Bonn on the opening day of the two week meeting, representing the International Emissions Trading Association (IETA) in a side event hosted by the Clean Development Mechanism (CDM) Executive Board (EB). The aim of the event was to draw on the learning from a decade of CDM operation and apply this experience to Article 6 of the Paris Agreement. This is the Article that provides a potential new foundation for carbon market development. I was there to present the IETA Article 6 Vision paper which I posted a story on recently.
The side event was packed out and many were standing in the corridor leading to the room; there is clearly considerable interest in this topic. Over the years the CDM has been a successful mechanism, resulting in nearly 8000 projects and some 1.7 billion Certified Emission Reduction (CER) units issued. Even at a €5-10 per CER (as it was in the earlier days of the EU ETS), this still represents a carbon price based financial injection of up to €10 billion into developing economies. The CDM spawned a small industry of project developers, assessors, MRV professionals and climate finance experts and clearly demonstrated that even a gentle application of the market can have a significant impact. Little wonder that there is such interest in the mitigation mechanism embedded in Article 6 and its potential to drive change.
However, the CDM (or a version of it) is unlikely to be repeated or replicated under Article 6, at least not under the terms that existed within the Kyoto Protocol. It was clear from the discussion during the side event that this new reality is going to take a while to hit home and settle in. The CDM became an important source of climate finance for developing countries, where the only real obligation on the part of the host country for a given project was to provide the necessary governance structure to ensure eventual issuance of the CERs. But that is no longer the case given the provisions of the Paris Agreement and Article 6 are now effectively the same for all countries.
Over time, Nationally Determined Contributions (NDC) will expand to cover all greenhouse gas in all economies. Every NDC, either specifically or notionally (for assessment and stocktake purposes) is linked to a quantitative carbon budget and there is an expectation from the Paris Agreement that these budgets will be delivered. While the Paris Agreement doesn’t say this in such stark terms, it is nevertheless implied. The whole approach that the UNFCCC used to assess the NDCs in their latest synthesis report, released on May 2nd, underpins this. Their aggregate analysis is summarized in carbon budget terms as follows;
The implementation of the communicated INDCs is estimated to result in aggregate global emission levels of 55.0 (51.4 to 57.3) Gt CO2 eq in 2025 and 56.2 (52.0 to 59.3) Gt CO2 eq in 2030. The global levels of emissions in 2025 and 2030 were calculated by adding the estimated aggregate emission levels resulting from the implementation of the communicated INDCs, that is 46.5 (44.3 to 48.9) Gt CO2 eq in 2025 and 48.0 (45.1 to 51.4) Gt CO2 eq in 2030, to the levels of emissions not covered by the INDCs. Global cumulative CO2 emissions after 2011 are expected to reach 533.1 (509.6 to 557.2) Gt CO2 in 2025 and 738.8 (703.6 to 770.9) Gt CO2 in 2030.
As I noted in my last post and drawing on Article 6.5 in the Paris Agreement, this means that the transfer of credits from a project across a national border (in the style of the CDM) will impact the national inventory reports of both parties. These transfers will then have to be executed in the style of Joint Implementation (JI) of the Kyoto Protocol, which effectively required an adjustment to the project host country’s national goal if the crediting unit was to be used by another Party to meet their goal.
I raised this issue as part of my presentation and the message was then amplified by a couple of people in the audience during the Q&A. But the response from some in the room was close to one of denial of this new reality, even though the Paris Agreement makes the need for such adjustment clear. The discussion almost drifted back into the old reality of developing countries not having goals and targets, but fortunately we didn’t land there. We didn’t resolve the issue either, which means that there are probably some tough discussions ahead as the negotiators get down to business.
A week later in Bonn and after many hours of discussions on Article 6 by the Parties, there has been some progress. At a side event on the second Monday also on Article 6 and also standing room only, I heard one central African delegate note that we had certainly left the world of the CDM and that perhaps we were somewhere between the constructions offered by CDM and JI of the Kyoto Protocol, albeit this would have to be interpreted to match the new bottom up global architecture of the Paris Agreement. I also heard another national delegate argue strongly that the new mechanism was not a sustainable development mechanism and should not be referenced as such, even if sustainable development was an important outcome of the implementation of the mechanism. Several panellists talked about quantification of NDCs as an important precursor to the avoidance of double counting.
The various concerns and issues that have been raised in these early discussion are very valid and the answers aren’t immediately obvious. Many developing countries have placed the need for finance as a condition on at least some portion of their mitigation contribution and in the past the CDM offered such finance. But if the reality of a new mechanism is a tighter national goal as a consequence of using it, there may be some push back. In the IETA paper one possible solution to this was proposed, namely the direct purchase of project units from the host country of the mitigation activity by multi-lateral funds. But this is unlikely to reach the necessary scale of mitigation envisaged by the NDCs, so other approaches will have to be developed. Interesting times ahead!
Update: The co-chairs in the UNFCCC discussions on Article 6 have released informal notes on ITMOs (here) and the proposed mechanism (here). These are a summary of points made in the initial discussions in Bonn.
Within the Paris Agreement sits Article 6, a carefully crafted set of provisions to foster, in the parlance of the UNFCCC and the Parties to the Agreement, cooperative approaches. This includes a provision for cross border transfer of mitigation outcomes and a mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development. But for those outside the negotiating process (and hopefully those inside as well), this Article is seen as the foundation for carbon market development. There was a great deal of advocacy effort behind the Article, particularly from the International Emissions Trading Association (IETA) who argued strongly that such a construction within the Paris Agreement was essential to see accelerated adoption of government implemented carbon pricing; widely recognised as a critical policy instrument for managing carbon dioxide emissions.
The wording of Article 6 needs some deciphering and for those now assembling in Bonn to begin the process of implementation of the Paris Agreement, some steer from the private sector will hopefully be helpful. After all, if the provisions do enable the development and expansion of carbon markets then it will almost certainly be the private sector that is most deeply involved. To that end, IETA have now published a first thought piece on Article 6, setting out a vision for its implementation.
The IETA vision for Article 6 is built on the need for governments to implement carbon pricing, ideally through market based approaches such as cap-and-trade or baseline-and-credit. This starts with the internationally transferred mitigation outcomes (ITMO), described in 6.2 and 6.3. These transfers are effectively carbon market trades between governments or private entities operating through emission trading systems. One example is the link between California and Quebec, which effectively ties parts of the Nationally Determined Contributions (NDCs) of Canada and the United States together. Similarly the link between Norway and the EU ETS is doing the same for their respective NDCs. IETA argues that for clean and simple accounting and the avoidance of double counting, that the concept of exchange of carbon units, either notional or real, should be an underpinning feature of any ITMO. That means the basis for cooperative approaches is, for the most part, a market based one. For governments to access the economic benefits and cost effectiveness of a cooperative approach, they will need to implement carbon unit based emissions management systems within their economies.
IETA also recognises that not all governments may be ready or able to implement trading based systems, so its vision draws on another aspect of Article 6 to enable this. Paragraphs 6.4 (a) – (d) describe an emissions mitigation mechanism (which IETA have given the designation EMM). While some commentators are already arguing that this is a future version of the Clean Development Mechanism of the Kyoto Protocol (i.e. CDM 2.0), IETA makes the case for a much broader interpretation and use of this mechanism. Such implementation could see the EMM offering both universal carbon allowance and crediting units for those countries that choose to use them, facilitating trade between NDCs (i.e. ITMO), providing registry accounting and offering the prospect of carbon pricing in many economies.
The EMM could also be designed to establish sector baselines and issue sovereign credits for performance in excess of those baselines, which might then be purchased by external climate funds to channel investment. In this way it would function more like the CDM. But as IETA notes in its thought piece, the world in which crediting from one country acting as a direct offset in another is coming to an end. Under the CDM this was possible because the project host country had no quantified emissions management goal. As such, national accounting effectively took place on one side only, although the project itself had to have a credible baseline against which it operated. But as NDCs progressively expand to cover all national emissions (if they don’t then the Paris Agreement can’t claim to manage global emissions), paragraph 6.5 prevents such one sided accounting;
Emission reductions resulting from the mechanism referred to in paragraph 4 of this Article shall not be used to demonstrate achievement of the host Party’s nationally determined contribution if used by another Party to demonstrate achievement of its nationally determined contribution.
This means that the transfer of credits from a project across a national border (in the style of the CDM) will impact the national inventory reports of both parties. IETA argues that these transfers will then have to be executed in the style of Joint Implementation (JI) of the Kyoto Protocol, which effectively required an adjustment to the project host country’s national goal if the crediting unit was to be used by another Party to meet their goal.
The Paris Agreement introduces a very different world of international emissions trading to the one that exists today and has operated in recent years. The IETA paper concludes with a visualisation of how this might end up.