International carbon markets at the frontier to the wild west

The failure to agree on rules for international carbon markets at COP 25 has been a victory for some and a disaster for others. Looking at it pragmatically, it was very much a “disaster averted” outcome since the rules on the table would have legitimised the use of markets riddled with loopholes. Far from ideal, however, this means that the main responsibility to ensure that markets benefit people and the planet now lies with individual countries.

An NGO action at COP25 called for Article 6  that protects human rights and the environment

We are certainly better off without the proposed rules which opened the door for double-counting of emission reductions and the use of old credits, but the COP 25 outcome – or lack thereof – further complicates the future of carbon markets. It also means that the risk remains that carbon markets could undermine climate action overall.

What will happen to the Kyoto Protocol markets?

In the absence of a decision at COP, there are several scenarios as to the fate of Kyoto markets under the Paris Agreement. The most desirable scenario is one where using credits from the Clean Development Mechanism (CDM) under the Paris Agreement, or any other international agreement, is considered cheating because the CDM, like the other “flexible mechanisms” established under the Kyoto Protocol, was set up to meet Kyoto targets and nothing else. There is no legal basis for using Kyoto-era credits towards any non-Kyoto objective.

Another, perhaps more realistic, yet more chaotic and dangerous scenario, is that of a wild west of carbon markets after 2020. Given that few rules exist on what can or cannot be done, countries will each be free to act as they please. Those spearheading low ambition and loopholes, such as Australia and Brazil, will be able to sell and use their old junk credits, provided they can find unscrupulous buyers. At the same time, others will try to defend a certain level of environmental integrity. In the final hours of the COP, 31 countries committed to adhering to the “San Jose Principles”, which form a good basis to operationalise post-2020 markets, e.g. by avoiding double-counting and ruling out the use of old credits. However, these principles miss a reference to human rights or the inclusion of sufficient social and environmental safeguards, which must be corrected.

The one rule that could bring some transparency in this chaotic scenario is the only market-related measure adopted at COP 24 in 2018: the so-called “article 77d” of the transparency framework. It provides that countries must report on their trades with other countries, including the application of corresponding adjustments to avoid double-counting. Operationalising this article will be crucial to ensure that there will be some level of reporting on carbon market trades after 2020. However, further discussions on this topic (and all broader elements of the transparency framework) also failed at COP25. Some countries have even threatened to block these discussions until a decision can be reached on carbon markets.

In this context, one minister negotiating at the past COPs became so desperate as to suggest that article 6 negotiations should be placed on hold, in order to focus on more important elements of the Paris Agreement, such as increasing ambition of the national climate pledges and moving forward to implement policies and measures necessary to meet these targets.

While kicking the can down the road is not an ideal outcome, it is important that countries use the extra time to make sure they get the rules right so that carbon markets reduce emissions, benefit local communities and protect human rights and the environment. In the meantime, the main responsibility to ensure that only credits that meet the above criteria are used post-2020 now lies with countries, in particular, those planning to use credits to meet their targets, or deciding on which credits airlines can use under the future aviation offsetting scheme CORSIA*.

*See our CORSIA article for the specific implications of COP 25 on the aviation scheme