The role of future carbon markets will rank high on the agenda in Lima. Against the insufficient climate action pledges that have been made so far, a key issue in Lima will be to establish participation criteria that will only allow those countries with a mitigation target in line with the 2°C target to participate in international carbon markets.
Discussions on markets with possibly detailed provisions are expected to take place within the so called “framework for various approaches”. According to a new summary prepared by the co-facilitators on this issue, a “transparency framework” shall promote transparency of action and support, by providing information on the implementation of each Party’s commitments in an efficient and flexible manner.
Numerous countries, such as the EU, Norway, Australia and the US have already stressed that they see an important role of international market mechanisms in the new climate agreement. However, one important issue has so far been neglected: carbon markets cannot function without sufficient ambition and demand for units!
Some countries have hinted that those that want to use carbon markets must have a robust accounting framework in place. While accounting rules are essential to ensure that emission reductions are not double counted, experiences with existing carbon markets show that this alone will not suffice to ensure environmental integrity of markets. Accounting also does not create ambition.
An important lesson learnt from the Kyoto Protocol needs to be kept in mind: When countries set their Kyoto targets, it was very well known that targets for economies in transition such as Russia and Ukraine were set so weak that they allowed them to significantly increase their emissions. However instead of increasing emissions, these countries accumulated billions of carbon credits, so called “hot air” that severely undermined the economic viability and environmental integrity of international emissions trading.
A key issue for Lima and beyond will therefore be to learn from this lesson and ensure that only countries with stringent targets are able to participate in international carbon markets. In other words, a high level of ambition and the principle of supplementarity – the use of carbon markets units can only come on top of domestic ambition – must be a core eligibility criteria if countries want to use markets to count towards their commitments. Details for such eligibility criteria will have to be elaborated jointly with the necessary guidance for the intended national determined contributions (INDCs) presented by countries in 2015 as well as the assessment on whether these pledges are fair and will be collectively enough to limit global warming to 2°C.
For more detailed recommendations on eligibility rules and governance structure of a global carbon market, see our submission here.