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Glasgow’s Christmas (Article 6) Market

So here comes COP26, buffeted by Covid headwinds and soaring energy costs, not to mention rampant profiteering by the host city and the organisers, which Prime Minister Boris Johnson hopes will give him a green sheen to deflect some of the brown stuff being flung his way.

While a lot of column inches have been devoted to the challenges of hosting such a large event during a pandemic, in a city that may or may not be fully prepared for the task of hosting it, there are some reasons to be optimistic that Glasgow may end up as a success.

One of the lessons of COP21 in Paris was that it’s helpful to start the talks with political impetus, rather than to bring in the heavy hitters at the end, as happened in Copenhagen in 2009. In Paris, political leaders and heads of state gathered at the start of the event to pledge their commitment to a strong outcome, giving a stronger sense of purpose and direction to negotiators.

COP26 President-elect Alok Sharma seems to have taken this on board. COP26 will repeat the Paris format, with a World Leaders’ Summit over the first two days of the meeting expected to deliver momentum to the talks. And in addition to making sure there will be a strong political push at the start of COP26, Sharma drafted in ministerial help to try and build some momentum over the past months.

For example, he delegated the task of firming up developed country commitments to deliver $100 billion a year in climate finance by 2020 to ministers from Canada and Germany, and it appears as though they got the job done, albeit three years late. Sharma also brought in ministers from Norway and Singapore to drive progress on the main unresolved area of the Paris Agreement – the “cooperative mechanisms”, or Article 6. Over the past few weeks there has been some speculation that previous red-line positions may be softening on some key issues, which sounds positive.

It’ll be interesting to see how the co-option of political leadership as an integral part of the negotiating process has worked.

Speaking of Article 6, I’ve noticed that this year there’s an increased awareness and focus, among those outlets that normally deal in fairly generic reporting, of the importance of a deal on how to implement international emissions trading. Normally, media and indeed a lot of environmental NGOs studiously ignore the role of markets in helping to finance the transition to net zero. As I said, they tend to focus on political headline issues that involve The Big Picture, without acknowledging that behind every key issue is a cascade of sub-issues that enable these initiatives. They focus on the ambition and on money, sure, but not really on where that ambition and money will come from.

Think about Nationally Determined Contributions, the core emission-cutting pledges that each country has to update in Glasgow: this is probably the biggest headline of all for most casual observers and not-specialist writers, but how many of them have even read an NDC?

Many of these NDCs are reliant on outside assistance; NDC commitments are often conditional on countries receiving technical and financial assistance. And often this financial assistance is specifically referred to in terms of markets.

 

So Article 6 is absolutely central to the eventual achievement of many countries’ NDCs. Not enough people are aware of this. And because by now you know I’m a markets geek, this is where I’m going to spend my time today.

Article 6 of the 2015 Paris Agreement has been argued over since Marrakech in 2016. Bit by bit, piece by piece, issues have been resolved but a few big, hairy problems still prevented full agreement in Madrid in 2019. And because in UNFCCC-speak, “nothing is agreed until everything is agreed”, we won’t ever really be certain that a deal can be done until after it’s been done.

So this is by way of my quick guide to what will be at issue in the Article 6 talks. Any reader who has been “in the room” at COPs when these issues are discussed will probably find things here that are wrong or just ill-informed and I accept that, but as a journalist I rely on what I hear, read and learn. So.

 

Corresponding adjustments

This one cuts across both Article 6.2 (the mechanism for sovereign-level emissions trading) as well as Article 6.4 (the so-called sustainable development mechanism, which to you and me means the successor to the CDM).

Under Kyoto, the world was divided into the haves and have-nots: those nations that had binding reduction targets (37 or so rich countries) and those who didn’t (everyone else). Whenever a reduction was created through a CDM project, the buying country had the right to use that reduction towards its own reduction target, while the project host country got the investment and the clean tech that generated the reduction.

Under Paris, however, all nations are equal, and each country has set itself a binding reduction target (Nationally Determined Contribution, or NDC). So everyone is on an equal footing and accounting becomes more important.

If country A sells a reduction to country B, it’s effectively signing over the right to that reduction. Country B gets to set that purchased reduction against its own NDC (i.e. reduce its overall emissions for the year in which that reduction was made), and so it makes an adjustment to its emissions inventory. But Country A has to add an equivalent emission to its own ledger, because it sold its reduction to someone else.

So essentially, any reduction made in a country is a sovereign asset of that country, and selling these actually becomes a really big deal because it makes achieving that country’s own reduction target more difficult. If Country A had kept the reduction instead of selling it, it could have set it against its own target.

 

But the problem is, how are countries going to attract the finance they need to build clean tech, low-carbon tech if they *don’t* sell those reductions?

Now, you’ll notice that I’m refraining from saying “developed” or “developing” countries here because, under Paris, all nations are notionally equal, each one with its own NDC. But practically speaking, Paris Articles 6.4 and 6.2 really still mean that money should flow from rich countries to developing countries and emissions reductions should flow the other way.

 

(Article 6.2 could cover emissions trading between rich countries as well; for example, if the EU ETS and the Californian market were ever linked, any net transfers of allowances between the two would be governed by Article 6.2).

 

Some countries are very aware of this dilemma, and at previous COPs have said they want to be able to both sell reductions *but also* retain the right to use them against their own targets. And you’ll understand how that won’t fly with buyer countries or even private sector companies.

By the way, much the same debate is going on in the voluntary carbon markets.

In an effort to force the issue in 2019, a group of developed and developing countries got together in Madrid to set down the San Jose Principles for High Ambition and Integrity in International Carbon Markets, which pledged that they wouldn’t double-count emissions reductions that were traded internationally.

Sadly the effort didn’t resolve things at COP25, and this issue will be on the table again in Glasgow.

 

CDM Transfer

Tacitly acknowledging that Article 6.4 is basically a copy-and-paste of the Kyoto Protocol’s CDM, there has been a heated debate over just how much of the CDM, in terms of projects and Certified Emission Reduction offsets, should be transferred into the new Article 6.4 sustainable development mechanism (we’re still not certain that’s what it will be called, but that’s as good a name as any).

A lot of developed nations, as well as the least-developed countries and small island nations don’t want much, if any, of the CDM to be brought into the new mechanism. They’d prefer to bank the reductions made under the CDM, and build a whole new system with greater environmental integrity.

Part of the problem is that teleporting CDM projects into the new market would teleport many of the issues that affected the CDM as well. This isn’t something I want or need to go into here, but if I say (cough) “additionality” and (cough) “baselines” you’ll get a sense of the technicality that’s involved.

Paris is meant to be a re-boot, a fresh start, and it gives the opportunity to set up a new system that’s more aligned to the current economics of clean energy as well as to the increasingly robust demands of the planet. That may mean, for example, that renewable energy is not longer seen as a technology that needs the extra support from the sale of emissions reductions.

Of course, the countries that stand to benefit the most from teleporting the whole, or large parts of, the CDM into the new mechanism are that system’s major host countries (I will refrain from naming names), and they have so far resisted any significant limits to the so-called carryover.

There have been proposals to allow a limited number of CDM project and offsets into the Article 6.4 system, maybe setting a cut-off date for the project registration or the year in which the reductions took place, but so far we’ve not had an agreement on the criteria for transferring projects and reductions.

 

Share of Proceeds

Someone – or something – has to pay for the administration of an Article 6.4 mechanism. Under the CDM there was a “share of proceeds” that went towards the operating costs of the Secretariat, over and above the cost of getting reductions independently verified and reported.

There has been some disagreement over how much of an “SoP” to apply to each transfer of reductions, and whether some of this levy should also go towards funding the Adaptation Fund – an overall UNFCCC fund that helps developed countries build resilience to the impacts of climate change.

It hasn’t appeared as though the principle of a levy is in question, just the amount, but of course it’s a bargaining chip for any country that isn’t happy with something else.

There’s also a question over whether Share of Proceeds should apply to both Article 6.2 as well as Article 6.4.

 

Overall Mitigation of Global Emissions (OMGE)

This one’s a bit hairier. In order to ensure that the entire Article 6 mechanisms result in actual reductions in global emissions, some countries – particularly the least developed nations – have pushed for a “haircut” to be applied to each transfer of emissions reductions. By reducing the number of reductions that are actually traded, the thinking goes, this guarantees *some* overall reduction in emissions.

Developed countries don’t like this idea. They want to be able to acquire exactly what they paid for, and while they’re happy to pay a small levy to help the operation of the market, they think a properly designed market should lead to overall reductions in emissions without having to “guarantee” it with an additional haircut.

(Climate Analytics has done some analysis on OMGE, SoP and the CDM transition here.)

 

Inside/Outside NDCs

There’s also an unresolved issue of how to treat emission reductions that are generated outside the scope of a country’s NDC. Not every NDC is necessarily “economy-wide”; some may leave out specific industries or even jurisdictions, but reductions may still be made in these sectors or places.

Should “outside” reductions be subject to corresponding adjustments, since they don’t count towards a country’s NDC? And should there be a limit on how many “outside” reductions can be generated? Do they need special status and authorisation? How should they be reported?

And if an NDC grows in scope over time, how does that impact projects that begin life outside an NDC but later find themselves included?

 

Common Timeframes

There are a few additional issues that aren’t necessarily market-specific, but which do have the potential to impact Article 6 talks. One of these is “common timeframes”.

The Paris Agreement requires Parties to submit updated Nationally Determined Contributions but it does not say how often, and what period those NDCs should cover. Five years? Ten? Two five-year periods? You can read up on this issue at the WRI website.

******

If you’re interested to know what the starting point for the Glasgow talks will be, the COP presidency has already said that the basis for Article 6 negotiations will be the texts that were in development towards the end of the Madrid COP two years ago. There were a flurry of different versions of these texts that flew around in the final days of COP25, but these versions are the ones that the chairs of the process felt would be the best starting point.

Article 6.2

Article 6.4

And if, after all this, you’re still keen to dig into the technical details of these negotiations, the chair of the Article 6 stream has published an informal paper outlining the options for these particularly tricky issues.

 

On with the show!

 

This article was first published on www.carbonreporter.com

 

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When a prospective buyer approached a group that restores Myanmar’s endangered mangroves about purchasing the credits used by companies to offset their carbon emissions, they were told the tokens had sold out.
Carbon Markets

Biography

Alessandro Vitelli
Host - Carbon Culture
CLIMATE TRANSFORMED

Alessandro is an independent journalist with more than 30 years of experience in energy markets. He joined Carbon Pulse on a part-time basis in July 2021 to report on carbon markets and climate policy from London, while continuing to freelance for a handful of other energy-related publications. Since 2004 he has also worked as a journalist and analyst covering global carbon markets and climate policy. Alessandro has written for S&P Global Platts and Bloomberg, and since 2015 as a freelancer for publications including Carbon Pulse, Petroleum Economist, Interfax Energy and Gas Strategies.

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