With the end of COP26 came mixed emotions. Many felt a combination of hope, but also the sense that so much more needed to be achieved. Along with an outline for how countries will actually meet the Paris Agreement goals, the rules for the carbon market became more formalised in the Glasgow Climate Pact, the agreement made at the end of the climate summit.
This is contained within Article 6 of the Paris Agreement. The Climate Pact sets out better defined rules for how the Carbon Market will work.
Article 6 is an extremely important part of the agreement, as it aims to illustrate the way in which countries can make decarbonisation cheaper. In doing so, it hopes to make it easier to move away from fossil fuels. It also calls upon countries to produce a detailed plan of how they aim to take on climate change, which is called a country’s NDC (nationally determined contribution).
The new plans established by the Glasgow Climate Pact centralise the carbon market system, creating a partnership between public and private sector. However, there will also be a bilateral system where countries are able to trade carbon credits. Carbon markets have sprung up around the globe, so this move aims to formalise them through regulations, making sure as many as possible follow certain rules.
The system acknowledges Article 6’s call for no “double-counting” of emission reductions. This is implemented through rules on “corresponding adjustments”. For example if a country buys ITMOS (Internationally-Transferred Mitigation Outcomes – these are carbon markets that are cross-border), in another country, the emission reduction is not counted twice.
On the first day of trading after #Cop26, European carbon prices – which help put a cost on polluting for EU utilities and industry – have jumped almost 5% to an all-time record above €66 a tonne.
The market does not think it was a failure pic.twitter.com/p4GI9tiNby
— David Sheppard (@OilSheppard) November 15, 2021
The country where the carbon capture is taking place must note and change its greenhouse gas inventory (in other words, how much the country is emitting) to note that the emission reduction is being credited to a different country.
The new rules will also require a “transaction fee” whenever carbon credits are purchased, meaning that buyers will have to pay a fee, as well as giving 5 percent of credits purchased to a fund that helps poor countries adapt to climate change. This rule was quite contentious during talks.
Another issue that was contentious, but did not come with such a positive resolution, is the re-issuing of millions of old carbon credits into the carbon market system. These, critics argue, are of poor quality, as they were created under the 1992 Kyoto Protocol, and many of the projects they are tied to would have happened even if they were not connected to a carbon trading scheme.
The Carbon Market – a brief explainer
The carbon market gives emitters of greenhouse gases certain allowances for how much they can emit. These allowances can be bought and sold on a market. But given the limited amount of allowances available to each polluter, emitters have to pay to pollute more. Those who offset their emissions, through methods such as reforestation, can then sell their allowances in the form of credits to emitters who want to emit more greenhouse gases.
The idea behind the carbon market and emissions trading is to make the market work towards solving the issue of climate change. The Paris Agreement began the framework for a carbon trading system six years ago in its Article 6, and now countries are trying to fully implement it.
The largest carbon market in the world is run by the EU, but there are thriving carbon trading markets elsewhere, notably in California, and China has just launched its own market.
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The significance of new rules
There are lots of reasons to be concerned about the carbon market, and specifically the developments at COP26. Most notably, the inclusion of old credits is worrisome. If we are to believe the critics, many of these old credits are next to useless when it comes to actually reducing or offsetting emissions.
On the positive side, we could see through the “transaction fee” system much more coverage of “loss and damage” for poor countries. Since the Paris Agreement failed to deliver on its promise to developing countries the $100 billion pledge, this could inch rich countries closer to meeting the funding desperately needed.
Yet here is a criticism that arises again and again when discussing the carbon market: that many carbon capture projects are either not effective enough “carbon sinks”, or would have taken place with or without a carbon market. Australia found this to be the case recently when a study showed that as many as one in five of the carbon credits created by the government had not made an impact on reducing deforestation.
#Article6 deal invites junk credits into the #ParisAgreement, but it's clear that meeting private sector net-zero targets can't happen with double-counted credits.
Shame that we continue to have to fight for such basic things. https://t.co/uGcUIyN6ys
— Gilles Dufrasne (@GillesDufrasne) November 13, 2021
However, the expectation is that with stricter rules on issues like this, and on “double counting”, this will be harder to achieve.
There is always the concern that the carbon market will be used by big polluters to go “all-in” on a massive amount of offsets, while continuing to pollute as usual. Of course, reducing emissions “to the bone” by actually transitioning to renewables is key to stopping global warming, and offsets and carbon capture must be supplementary to that.
The ultimate objective of carbon markets is to put a “fair” price on carbon, thus favoring the transition to green energy sources. This is also why, from the start, carbon markets have been viewed by neo-liberal economists and all those who believe in free markets as the best way forward. Those with this mindset would rather rely on market price mechanisms rather than resort to placing a tax on carbon emissions.
Unfortunately, so far, this objective has not yet been achieved, given all the above-mentioned deviations from “perfect markets” and exploitation of “profit opportunities” by the fossil fuel industry. Whether the new rules will be enough to ensure a fair functioning of the carbon market remains to be seen. But at least the idea that the market needs regulation is broadly accepted – and that is a step forward.