Climate Envoys Divide Over Reviving UN’s ‘Zombie’ Carbon Market

Ewa Krukowska
Climate Envoys Divide Over Reviving UN’s ‘Zombie’ Carbon Market

(Bloomberg) -- The role of markets in slashing fossil fuel pollution is returning to the center of the political debate about how to fight global warming.

Envoys from almost 200 nations agreed in 2015 to work toward some kind of global system for exchanging allowances covering greenhouse gases through the Paris Agreement on climate change. A deal on how to do that remains elusive and held up progress at last year’s round of discussions hosted by the United Nations in Katowice, Poland.

This week in the former German capital Bonn, delegates from energy and environment ministries will try to narrow their differences about how to revive UN carbon markets that came out of the 1997 Kyoto Protocol. The biggest of them, the Clean Development Mechanism, was once worth $8.2 billion a year and helped step up aid flows to emerging nations needing assistance in curtailing emissions.

“The devil is in details,” said Lidia Wojtal, a Berlin-based climate policy expert who has been taking part in the UN negotiations since 2007. “There are numerous sticking points, and reaching a deal requires unanimity. The outcome of the Bonn talks will show whether a deal on new mechanisms succeeding the zombie markets under the Kyoto Protocol is within reach.”

The envoys are focusing on a system that will be in place after 2020 when the current rules expire and the Paris Agreement starts to take hold. While U.S. President Donald Trump has pledged to withdraw from that agreement, almost all other nations are moving forward to implement it as one of the tools to fight climate change.

The goal in Bonn is to advance work on shaping a new system of tradable credits for emission-reduction projects that would succeed the CDM. That program ultimately reduced or avoided about 2 billion tons of greenhouse-gas emissions, which is almost as much as India’s total annual output of CO2. The CDM lost ground as concerns grew about the quality of the program and a surplus in the EU emissions market. That resulted in a plunge in the price of CDM credits.

Climate envoys in Bonn want to hone the rules of the new program, which may be dubbed the Sustainable Development Mechanism, or SDM. Ministers would have to iron out any remaining differences and approve the measures when they convene for the UN’s annual climate conference in December in Santiago.

The difficulty is in creating a robust financial instrument that would translate work national emissions-reduction pledges into comparable, exchangeable units. The framework needs to be flexible enough to attract investment while also credible enough to avoid issues that sank the CDM.

Some of the issues dividing the envoys include:

DOUBLE COUNTING: New market rules need to ensure nations avoid double counting when trading carbon credits. In the UN jargon, the key word here is "corresponding adjustment," which means provisions for adding or subtracting emissions that nations must account for. The sticking point at last year’s talks in Katowice was how to apply accounting rules to carbon markets. Negotiations were deadlocked with Brazil resisting a proposal about how to keep track of additions and subtractions to the ledger tracking credits. The South American nation, quietly supported by several others, wanted accounting to kick in only after any credits generated by carbon markets changed hands. INSIDE/OUTSIDE: Another disagreement is about whether SDM credits can cover programs beyond each nation’s formal pledges under the Paris Agreement. Those pledges are known as Nationally Determined Contributions. Some countries want to limit the transfer of units generated outside NDCs on concerns that a wider program would risk double counting of certificates. Others want a broader system that encourages a wide variety of programs to make the SDM credits. SINGLE YEAR VS MULTIYEAR: There’s a question about how to compare NDCs that use multiyear budgets with those that use a single-year target. The Kyoto-era system was designed to ensure compliance over a period of a few years. Most pledges under Paris are now defined as single-year targets. KYOTO LEGACY: There’s a significant surplus of emission units built up under the pre-2020 compliance period. Some countries including the U.S. and Australia want to allow use of those emission rights after 2020, with some restrictions. African nations oppose that solution, saying it could undermine the ambition of the new accord. TRANSITION OF CDM PROJECTS: No decision was made in Katowice on the future of the existing Kyoto mechanisms. The two systems -- CDM and Joint Implementation -- have issued about 2.8 billion tons of CO2 emission-reduction credits. Those cover a significant number of existing projects which will run for many years after 2020. Investors remain uncertain over whether these projects will continue to issue credits, and how they will interact with the Paris Agreement. The difficulty is also to design rules that would ensure the new mechanism avoids the mistakes of the CDM, where prices slumped from 23 euros ($26) in 2008 to 2 cents in 2014. They have remained at close to zero since. In the meantime, prices in the European carbon market jumped five-fold to 25 euros as the bloc strengthened the program in a series of reforms. AVIATION: Nations must decide on how to account for credits under Corsia, the global carbon-offsetting initiative for aviation, which aims to stabilize net emissions from airlines at 2020 levels. Currently, 76 states representing 76% of international aviation activity want to voluntarily participate in Corsia. However, this does not include three major polluters: China, India and Russia. GOVERNANCE: The sticking points include the role and functions of the Supervisory Body and different governance arrangements for the new markets. Options vary from a centralized mechanism, such as the CDM, to bilateral programs or voluntary markets.

To contact the author of this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

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