FOCUS: Carbon Markets within and beyond the Paris deal

One of the key themes under discussion at COP23 was Article 6 of the Paris Agreement, which will allow Parties to voluntarily undertake cooperative approaches for the implementation of their NDCs. The article establishes the use of internationally transferred mitigation outcomes between Parties (Article 6.2) and the creation of a mechanism to support mitigation action and sustainable development (Article 6.4) as well as the creation of non-market mechanisms (Article 6.8). On these three issues informal notes have been prepared by the co‐chairs of the negotiating groups on the basis of the views that Parties have submitted prior to COP23 and discussed in the two weeks of negotiations. These contain draft elements on the major features about these mechanisms and the rules to make them operative. Although the elements in the text are still preliminary, they outline the headlines and sub-headlines of the future decisions, which would form the Paris Agreement’s rulebook to be adopted by the end of 2018.

What has clearly emerged from the discussion within the three contact groups on Article 6 is that finding an agreement on the matter continues to be challenging, as countries have very different views. As for the contents, negotiations on some of the points were particularly difficult, as for example on how to ensure environmental integrity of emissions reduction and transparency. Other elements need to be better defined, like the definition and operationalization of the “Adaptation ambition”. One of the major problems slowing down the whole process was however a formal issue on the status of the co-chairs’ informal notes. COP23 final decisions just took note of them and an initial disclaimer was added to specify that the elements in the text “should not be considered as final or exhaustive” or “prevent Parties from expressing their views at any time”. The texts are therefore still open even though the facilitators are invited to provide an outline of the possible contents to be discussed in May when negotiations will resume.

The Kyoto Protocol’s Clean Developed Mechanism (CDM) was also discussed at COP23 in Bonn. The Conference took note of the over 7,780 CDM project activities registered so far along with 310 programs of activities, which have led to over 1.88 billion certified emission reductions (CERs) being issued. Over 124 million of them have been voluntarily cancelled either in national registries or in the clean development mechanism registry. The geographical distribution of activities and CERs has being mainly concentrated in the Asia Pacific region.

Although the CDM Executive Board has been required to continue to simplify the process for the development and approval of standardized baselines and to support designated national authorities in developing standardized baselines, it is still unclear how the transition from the old to the new Paris-backed mechanisms will be conducted. The price of CERs price currently float below € 0.20.

Over the course of COP23, European decision makers agreed on the EU ETS reform for the period 2021–2030, bringing the law-making process started in 2015 closer to completion. On 9 November a provisional deal was agreed during the trilogue talks and on 22 November the EU Council endorsed it.

Key elements of the new framework for the post-2020 period include a 2.2 percent linear reduction factor (the rate at which the cap on the total volume of emissions will be reduced annually), the doubling of the Market Stability Reserve’s withdrawal rate until the end of 2023, and provisions to protect EU industry against the risk of carbon leakage. Two main funding mechanisms are envisioned: the Innovation Fund (the new version of the existing NER300 facility) is set to support low-carbon innovation and it will include Carbon Capture and Utilization technologies; the Modernization Fund will channel the revenues of 2 percent of the total allowances auctioned for fostering low carbon energy development in EU member states with a GDP per capita below 60 percent of the bloc’s average. The reform needs to be adopted by the European Parliament before becoming law. Hopefully, it will serve as a boost for the EU carbon market, whose benchmark contract is now traded above € 7 after that a slightly bullish trend started to push the price up since the beginning of the summer.

Beyond the EU borders, uncertainty surrounds the launch of the China’s national emissions trading scheme, initially expected during the COP23 climate talks in Bonn. Once fully operational, the Chinese scheme will be the world’s largest carbon market and it is planned to start by the end of this year. However, monitoring and regulatory issues are still to be worked out and Chinese officials at COP23 released few details about the functioning of the awaited trading scheme, announcing it is waiting for authorities’ approval. According to media reports, the ETS may run on a “testing phase” for the first two years of operation, covering a limited number of companies and industrial plants.

 

(Image: Blue and yellow graph on stock market monitor. Photo credit: energepic.com/Pexels)