Can global carbon markets help us reach the Paris climate goals? 

What is the state of play of the talks on the Paris Agreement market mechanisms? How do we ensure that markets reduce emissions instead of shifting them around the globe? And that climate action drives sustainable development and benefits local communities? 

A Carbon Market Watch webinar on Monday 25th of November took a deep dive into the hot topic of the upcoming UN climate conference in Madrid -Article 6 – which relates to the adoption of rules to regulate international carbon markets under the Paris Agreement. A panel consisting of representatives of government, private sector and civil society discussed key open issues and the role global carbon markets can play in a climate emergency. 

No to double-counting and old credits

The EU believes that international carbon markets can increase climate action by lowering compliance costs and stimulating investments, but only if there are strong rules in place to ensure the environmental integrity of these mechanisms, said Jacob Werksman, head of the EU delegation to the climate talks. 

Two issues, in particular, could undermine the effectiveness of Article 6 and must be tackled in Madrid.  

First, there is a risk that one emission reduction could be counted towards multiple climate commitments. This so-called double-counting occurs when a country reduces emissions, and reports this towards its climate commitment but also sells it to another country or entity that uses it to comply with its own target. This could happen between countries but also between countries and airlines under the future aviation offsetting scheme CORSIA. To avoid it, countries trading emission reductions must make a correction to the level of emissions they report.  

Another risk is the carry-over of old credits that were generated under the Kyoto Protocol mechanisms, such as the Clean Development Mechanism (CDM). There could be four billion old credits on the market if no restrictions are applied. To put this number into perspective, demand from airlines – which face a mandatory offsetting obligation for the growth in their international emissions over the next fifteen years – is only about 2 billion.

We want to learn as many lessons as possible from the Clean Development Mechanism that produced huge quantities of low-quality credits and avoid these mistakes as we set up the successor to the CDM under article 6.4.”, said Werksman. 

Small island states want to move beyond offsetting, businesses prioritise clear rules

“Offsetting alone will not get us to net-zero emissions,” said MJ Mace who represents the Alliance of Small Island States (AOSIS). For AOSIS, moving beyond the zero-sum game of offsetting is a priority for the upcoming talks. 

Mace explained how partial cancellation of each credit would be a simple and effective measure that would achieve emission reductions but also bring various other benefits. These include higher profits for project developers as credit prices increase, more investments and the possibility to finance more costly projects for host countries. It would also bring more credibility to the new system after the Kyoto Protocol mechanisms have failed to deliver meaningful climate action.

The Kyoto Protocol mechanisms have taught us that cost efficiency alone does not lead to more climate action”, Mace pointed out.

“Clear, practical and simple rules to ensure credibility and environmental integrity of Article 6 are a priority for the private sector”, Stefano De Clara from the International Emissions Trading Association (IETA) told the webinar audience. 

IETA believes that there is big potential in Article 6 to increase climate action and, if implemented correctly, it can function as an international framework for linking national carbon pricing schemes. Most importantly, Article 6 can act as a driver of business engagement in climate action and be a key tool to get to net-zero emissions as fast and as cost-effectively as possible. 

Human rights are not negotiable

Gilles Dufrasne from Carbon Market Watch echoed the calls for environmental integrity through the banning of old credits, avoiding double-counting and moving beyond offsetting. He also warned that Article 6 could allow countries to trade ‘hot air’ instead of real emission reductions.

But beyond environmental integrity, Dufrasne reminded the audience that carbon markets and climate action have concrete impacts on people on the ground. “Human rights are not negotiable”, he said. We have to learn from past mistakes where climate projects have led to violations of local communities’ rights and include social safeguards into the market mechanisms. These include mandatory local stakeholder consultations and an independent grievance mechanism for those affected.

A sceptical audience

Overall, the speakers agreed that as a priority, national contributions under the Paris Agreement must be significantly strengthened to help us reach the global climate goals, but, if designed well, Article 6 could contribute to the effort. 

The audience of about 100 attendees though was less convinced. When asked whether global carbon markets can deliver the kind of emission reductions needed to reach the Paris goals, the majority was sceptical. Could it be the long shadow of the CDM and other failed attempts to use markets as a tool to drive climate action? Perhaps. In any case, it sends a strong message to governments arriving in Madrid: if we are to use markets as part of the climate tool pack, they must be transparent, operate under strong accounting rules and promote human rights and sustainable development.

The recording of the webinar is available here