Provisions supporting international carbon trading were agreed by countries under a new Paris Agreement on Saturday, which also established a new market-based mechanism that is expected to move beyond traditional offsetting while building on the lessons of the Kyoto Protocol’s schemes.

The mechanism’s rules now need to be drawn up, in a process that could take several years, and while few countries are expected to use the mechanism initially when it’s launched after 2020, parties including the EU and Brazil pushed hard at the COP-21 summit for certain items to be included in the text.

“[The Paris Agreement] has provisions to support robust accounting and avoid double counting. We didn’t get everything we wanted but we have what we need,” Jos Delbeke, the European Commission’s top climate official, told Carbon Pulse on the sidelines of the conference.

The new trading provisions, which are contained in the Agreement’s Article 6, are open to developed and developing countries alike, meaning that similar to Kyoto’s Joint Implementation programme, any signatories can be buyers or sellers of emissions units, which may now be called “internationally transferred mitigation outcomes” or ITMOs.

The new mechanism will likely combine many elements of Kyoto’s CDM and JI schemes, attempting to learn from their mistakes while adopting their best practices and possibly their project methodologies.

“There will be a process akin to the elaboration of the CDM rules … [and] a decisive issue will be how far the existing CDM and JI rules can be built upon,” said Axel Michaelowa, managing director at climate policy consultancy Perspectives.

However, it will after 2020 effectively completely replace the two schemes, which have been instrumental in channelling hundreds of billions of dollars towards low-carbon projects.

COP meetings before 2020 will need to hammer out how a potential transfer from the Kyoto mechanisms to the new one would occur.

NEW RULES, OLD PROBLEMS

International carbon trading schemes under the CDM and JI were meant to provide the glue for different carbon markets to link together, but trade in the two programmes has ground to a halt due to scarce demand from countries and questions of environmental integrity.

New national and regional emissions trading schemes are emerging annually to add to the number already in operation, but most continue to co-exist in a disconnected patchwork that lacks an international regime to link them.

The Paris deal has the potential to eventually revive international trade after 2020 “provided a reasonable rule book emerges next year”, said Dirk Forrister, president and CEO of the International Emissions Trading Association (IETA).

“It needn’t take as long as it did to establish the rules for the CDM and JI – we’re not starting from scratch this time. We’ll be leaving Paris with significant momentum to take this forward.”

However, even with agreed rules and a solid infrastructure, demand is poised to be the missing ingredient, as only around five or six of the countries that support using markets to meet their climate pledges are likely to be buyers: Canada, Japan, New Zealand, South Korea, Switzerland and possibly Norway.

“If you see it as something that is more on a bilateral or small group basis, I think, the current agreement could expand international carbon trading… But looking back at how long it took for the Kyoto Protocol to be ‘active’, I do not expect new action to happen quickly,” said Judith Schroeter, lead analyst on US carbon & offset markets at ICIS Tschach.

Observers said some additional appetite could come via a 2018 stocktake, which was agreed by negotiators in Paris and will feature an examination as to whether existing emissions reduction pledges can be made more ambitious.

In addition, existing emissions trading schemes could in theory open up their markets in future trading periods to allow emitters to use carbon units generated by the Paris Agreement or under bilateral or regional mechanisms created outside the UN sphere.

WHAT WAS AGREED?

– Taking a “cooperative approach” to fighting climate change, the agreement calls for a mechanism to be developed to contribute to the mitigation of greenhouse gases while supporting sustainable development in developing countries.

– While the agreement doesn’t explicitly mention “markets”, under it parties can voluntarily use ITMOs to help them meet the reduction targets set out in their Nationally Determined Contributions (NDCs), while ensuring that transparency and the environmental integrity of the regime is maintained.

– The reductions must be “real, measurable, and long-term”, suggesting that land use and forest carbon initiatives will be eligible. Some groups had been pushing for reductions to be “permanent”.

– The system moves towards wider “policies and measures” and away from the project-based system seen under the CDM and JI.

– Reductions must be additional, relate to ‘specific scopes’ of activities, and be verified and certified by designated operational entities (DOEs).

– The mechanism is to be supervised by a body designated by the 196 delegations, which is all but certain to be the UNFCCC, which manages the CDM and JI.

– The mechanism is open to both public and private entities to take part, which was a slightly contentious issue as some nations wanted to bar business’ involvement.

– A share of the proceeds of any activities under the mechanism is to be used to help vulnerable nations adapt to the effects of climate change, while also going to cover “administrative expenses”.

– And perhaps one of the most notable features of the language agreed is that the mechanism will deliver “an overall mitigation” in global emissions, which means it will differ from the offsetting concept established under Kyoto’s Clean Development Mechanism.

OVERSIGHT

“Whether the ‘overall mitigation’ is interpreted as a net mitigation that leads to discounting of credits, or whether it will more be seen as a generic principle like supplementarity, will emerge in the next years,” said Michaelowa.

Eva Filzmoser, director at carbon trading watchdog Carbon Market Watch, welcomed the provisions on robust accounting rules and a shift beyond pure offsetting.

“However, the new mechanism is very complex so a watchful eye will be required when developing the modalities and procedures in the course of the next few years,” she added, also urging that measures be taken to avoid the creation of so-called “hot air” emissions units.

AAUs, a third type of carbon unit traded under Kyoto based on each nation’s absolute emissions target, were also heavily criticised as ‘hot air’ units that were mostly the product of the collapse of the Soviet Union rather than low-carbon policies.

“Generally, I think the market provisions are a good start, however, the future of them will depend a lot on what countries are going to do with it,” said ICIS’ Schroeter.

FINALLY AGREED

Delegations meeting at UN talks have been wrestling for years over whether and how to include provisions for market-based approaches in a new global climate deal.

Some efforts focussed on designing defined new market mechanisms, while others were aimed at a developing a looser framework for various approaches.

Support was centred around countries that back emissions trading or that operate their own carbon markets, while opposition came mainly from developing countries like Venezuela and Bolivia, which view the industry as the spawn of capitalism and the commodification of the atmosphere.

Fast forward to last weekend, when COP-21 hosts France, mid-way through the two-week talks, convened a number of ‘facilitator groups’ to focus on different aspects of the agreement, in an effort to reach compromise on the 10 or so main issues.

The talks on markets were facilitated by new Canadian Environment and Climate Change Minister Catherine McKenna and Minister of Foreign Affairs of the Democratic Republic of Congo Raymond Tshibanda N’Tungamulongo.

By Mike Szabo – mike@carbon-pulse.com

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