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Will Carbon Markets Help or Hinder a New Climate Deal? (Newsletter #4)

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At COP-19 in Warsaw, Parties will continue to discuss the Framework for Various Approaches (FVA), a framework for trading units from various carbon markets. . Any decisions taken in Warsaw must reflect the impact these markets may have on a post 2020 agreement. The FVA negotiations have to be closely related to the discussions on accounting, pledges and ambition for a new climate deal.

New regional carbon markets – such as emissions trading schemes and offsetting programmes – are being developed in many countries, including Japan, California, China and South Korea. A crucial question is to what extent such market mechanisms should follow a framework of rules under the UNFCCC. Parties decided at COP-17 in 2011 that such a Framework for Various Approaches (FVA) should be established. The FVA aims to set common rules for domestic and regional carbon markets that will sell market units to other countries for compliance with their climate commitments under the UNFCCC.

But Parties do not agree on the role and scope of the FVA. On the one hand some Parties, such as New Zealand would like to establish only minimal international guidance under the UNFCCC and allow for maximum flexibility for countries to establish their own governance structures. On the other hand, NGOs and Parties such as the members of Alliance of Small Island States (AOSIS) have been calling for comprehensive centralized international oversight. Parties also disagree on the scope of the rules and at what level FVA rules should be defined,  e.g. should they include only general rules for standards and unit tracking or should the FVA contain specific rules on the conditions under which countries can participate either as buyers or sellers, on how to set baselines, validate, verify and issue credits?

Parties will discuss the FVA ahead of COP-19, at an UNFCCC workshop on October 9 in Bonn, Germany. At COP-19 in Warsaw, Parties will continue to negotiate these issues.

The most pertinent issues

The FVA discussions at COP-19 can support the negotiations for a new climate deal. Yet this can only happen if a few important elements are taken into account:

Require mitigation ambition

Carbon markets can only function if they are part of an ambitious climate regime that leads to a substantial overall reduction in emissions. As current market experience has shown, if mitigation ambition is insufficient, demand and prices for market units are too low to ensure that markets can function properly. In addition, low ambition can lead to low quality of market units (e.g. not enough incentive to set stringent baselines). Reduction commitments (pledges) need to be comparable and transparent. Single year pledges for example pose a host of integrity issues that are difficult to address through accounting rules. Therefore requirements for clear and ambitious pledges need to be established as a prerequisite for setting eligibility criteria for the participation in international trade of market units under a framework for new carbon markets.

Ensure environmental integrity

The market units have to have environmental integrity, for example, be additional and permanent, and based on realistic and conservative baselines. The FVA requirements for unit quality have yet to be defined and implemented. The wealth of experience gained through the CDM and JI should be taken into account, e.g. projects or sectors with clearly detrimental climate impacts such as coal should not be eligible.

Avoid double counting

The units need to be adequately accounted for to ensure the emissions reductions are only counted once. For example, “double claiming” could happen where both host and buyer country count the emissions reductions achieved through an offset mechanism towards their mitigation targets. Types of double counting should be clearly identified and potential rules to address them assessed.

Achieve net atmospheric benefit

Parties agreed that the new carbon markets should lead to “net decrease and/or avoidance of greenhouse gas emissions.” It is important to note that any net reductions in GHG emissions can only be achieved if all double counting issues are addressed. A net decrease should not simply help host country to achieve their emissions targets. It should instead lead to emissions reductions beyond the mitigation targets i.e. a net atmospheric benefit. Only a net atmospheric benefit will lead to additional mitigation action beyond the targets and pledges.

Achieve sustainable development

Rules and structures need to be established that can implement the goal of sustainable development. This should include for example standards requiring that sustainable development impacts are monitored, reported and verified, that the development of activities with high co-benefits are promoted, and that interests of local communities are taken into account through stakeholder consultations.

Clarify how rules will be applied pre-2020 and post-2020

It is important that any rules established under FVA clearly stipulate for which period they are applicable. FVA rules that will apply post 2020 must ensure that all quality and accounting issues are addressed, so that the use of international market units cannot undermine mitigation targets and pledges.

FVA Pilot Phase Could Set a dangerous precedentUNFCCC New Log

Some organisations and Parties, most notably Poland who is hosting COP-19 have been advocating establishing an FVA pilot phase under the UNFCCC. In principle, piloting new schemes and mechanisms is a good idea as it can help build capacity and ensure quality. Yet an FVA pilot would risk the integrity of a future climate deal.

Advocates of a pilot phase under FVA have stressed that the units generated under such a pilot phase should be recognized under a post 2020 climate deal currently being discussed under the ADP. This means that countries participating in such a pilot FVA would be able to claim benefits for early actions under the new post 2020 climate treaty, for example in the form of receiving reduction units which they could use for compliance under the new climate regime.

The discussions under the ADP have so far been general. The discussions have not included specifics on the types of targets countries would have to commit to and how these would be accounted for. Also the use of markets under a new regime has not been discussed yet.

Early recognition under a pilot phase would set a dangerous precedent: Once units are eligible for compliance it would be difficult to retroactively tighten accounting rules or exclude low quality units. The experience with both the CDM and JI shows that establishing  lenient rules to get a mechanism off the ground in the hopes that rules can be strengthened later on is difficult at best and in many cases politically impossible.

It is premature and potentially damaging to allow for the recognition of any early action under a post 2020 agreement before the negotiations on some of the fundamental principles for the new post-2020 climate regime have been established.

Image: Warsaw, courtesy of flickr/Nikos Roussos

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