COP25 and a challenging international carbon market framework
It's clear that the hot topic for COP25 organized by the UNFCCC this year in Madrid is to discuss and ratify further the Article 6 of the Paris Agreement. Most of the other articles have been agreed upon by all parties (Countries participating in the Paris Agreement) and Article 6 is one of the only outstanding articles in the Paris Agreement for which the technical details need to be sorted out.
Article 6 in a nutshell
Article 6, is a framework under which international carbon markets can flourish through the means of Country A financing de-carbonization projects in Country B or by Country A simply buying carbon credits from Country B in order to meet their target NDC (Nationally Determined Contributions) or in other words, their Paris Agreement targets.
A similar approach was already taken in Kyoto Protocol, the first international treaty that addressed climate change through the reduction of green house gas emissions, where the trading of carbon credits was done internationally under the framework called the Clean Development Mechanism (CDM).
Well the bad news is that there were massive loopholes in the system which allowed for all kinds of inefficiencies in the system. The good news is that the international bodies such as UNFCCC can learn from their past mistakes and can make the framework more stringent to address these loopholes going forward after COP25.
So what are the loopholes and how do we address them? This was exactly the topic of discussion in one of the many events organized by scientists, politicians, NGOs, and expert speakers on various topics of climate change at COP25.
What's the issue with "additionality"?
A key issue that need to be addressed is the topic of additionality. Under this definition, carbon credits contributing towards the national targets is only relevant when de-carbonization projects (e.g. alternatively energy projects) with the help of subsidies is implemented against fossil fuel projects or the business-as-usual scenario. Carbon credits should not be generated in the instance where the alternative energy project is already financially more attractive than the fossil fuel projects. This definition ensures that the projects implemented truly represent the activities that are working towards de-carbonization under the Paris Agreement.
Academics researching this topic have further categorization of the additionality issue that is to be further defined in the Paris Agreement. One such researcher who has previously served in the CDM Executive Board and has over 20 years of experience on this topic, Dr. Axel Michaelowa, spoke of the different “shades” of additionality exploration.
Additionality I is the classic interpretation where the activity should be different from the business-as-usual scenario.
Additionality II is the debate of which projects can be considered for carbon credits versus which projects are deemed appropriate for a Country’s own NDC commitments.
Additionality III could be a further classification that defines mitigation interventions that go beyond the general definition of emission reduction but actually are aligned fully with the long term goal of the Paris Agreement which is to keep global warming below 1.5ᵒC.
Challenges from the past in the Kyoto Protocol have shown that the governance of these additionality issues is not straightforward. For example, setting up stringent baselines has not shown to guarantee a generation of additionality activities. This is because some stakeholders argue that any activity below this baseline should count towards carbon credits even though they are technically non-additional activities. Also, auditors have to ensure enough checks and balances are set up and exercised so that the private sector shows the relevant data that determines whether an activity is additional or not.
How can hot air credits be generated?
The relevance of these checks and balances is prominent for activities counted towards the NDC targets to avoid “hot air”. Hot air is a terminology used for inadequate carbon credits that have been obtained under false pretences.
An example is when the allowance to pollute is exaggerated by a country so that business-as-usual is continued alongside buying some cheap carbon credits to meet their already weak NDC targets. A total of around 20 billion tonnes of carbon credits under the current NDCs currently run a risk of been utilized for this type of hot air activity according to one of the leading NGOs in this space, Carbon Market Watch.
Another risk of creating hot air credits is when emissions are created only to be then traded for carbon credits in order to claim target activities. Such activities are known as perverse incentive when an incentive which is meant to be positive has unintended negative consequence. One such example is of the carbon credits issued by Russia and Ukraine under the UN Scheme known as the Joint Implementation where they sold those credits to the European Union carbon market. Some studies, such as one conducted by the Stockholm Environment Institute, show that in some projects climate-warming chemicals were created and then destroyed to create such hot air credits
A just international carbon market
The Emissions Gap report by the UN shows that a steep increase in ambition is required to meet the Paris Agreement goal of 1.5ᵒC. The achievement of such goal requires a robust and just international carbon market.
Mr. Gilles Dufrasne from Carbon Market Watch shares some key insights from an NGO perspective at the Carbon Market discussion event at COP25, in terms of impact and transparency.
1) Activities that count towards carbon credits must incentivise good projects. These projects should benefit the local communities and contribute towards sustainable development
2) Reductions in emissions must be accounted for properly which means no hot air credits should be avoided by establishing a robust framework and having international oversight
Mr. Dufrasne pointed out repeatedly at the press conference: Article 6 and the overall carbon market framework can really make or break the Paris Agreement since it determines the quality of the activities that are used for the carbon trading, fulfilling the NDCs and setting more ambitious NDCs in the future.