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BRIEFING: Views on the use of carbon markets under a post-2020 climate deal

CHINA-ECONOMYPrepared for the 42nd session of the Subsidiary Body for Scientific and Technological Advice (SBSTA), 1 to 11 June 2015 in Bonn, Germany


Carbon Market Watch welcomes the opportunity to provide views on the deliberations of the Framework for Various Approaches (FVA) which will be discussed at SBSTA42.

UNEP estimates the remaining carbon budget to keep global average temperature increases below 2ºC to be only 1000 GtCO2e, and at current rates of emissions, this budget will have been spent in the mid-2030s. This means that there is very little room for offsetting, some room for emissions trading under caps, but that the focus of development and infrastructure investment needs to be on zero/ low carbon options.

Carbon markets can be useful tools to reduce emissions in sectors where there are not yet technical solutions available to reduce emissions. They can reduce costs in those sectors where emissions reductions costs remain high as the technical solutions have not yet been bought down the cost curve. While carbon markets are often seen as a cost-efficient means to reduce emissions, they may instead cause greater expense in the longer term, through allowing locking in of high carbon infrastructure that will need to be replaced before the end of its lifetime. For this reason, the use of carbon markets and in particular the transfer of international emission units should not be seen as a substitute for domestic action – in all countries and all sectors – to reduce emissions as rapidly as possible .

The development of the FVA, which is often referred to as “transparency framework” to enable the international transfer of units from market based approaches, needs be seen in the wider context of the negotiations towards a 2015 climate agreement: The role of carbon markets under the Kyoto Protocol was set under the context of a bifurcated differentiation between Annex I and non-Annex I countries. The future climate agreement in contrast will have to include climate commitments by most countries to prevent catastrophic climate change.

Before establishing a new platform to trade international units, experience with market based mechanisms to date such as the CDM, JI and existing emissions trading systems need to be reflected and addressed: The demand-supply imbalance caused by insufficient climate targets and lenient rules has led to a large supply of offset credits resulting the offset prices to nose-dive, not providing the investment needed for truly sustainable projects, especially in least developed countries. Experiences with the two biggest emissions trading schemes the European Emissions Trading Scheme (EU ETS) and International Emissions Trading (ET) under the Kyoto Protocol have been grim: they are severely oversupplied with 2 and 13 billion allowances respectively.

Market-based mechanisms alone will not suffice to finance adequate emission reduction activities. Public finance to seed mitigation activities by building capacity and governance infrastructures and by fostering mitigation policies is vital to enable sufficient private finance for global low-carbon development.

Carbon Market Watch key recommendations for the FVA discussions

1)      Establish robust eligibility rules based on the level of ambitious for countries to trade units:

  • Ambition: Only countries with an ambitious mitigation target well below the conservatively projected business-as-usual scenarios in line with the 2C degree target should be eligible to participate in international markets. Their ambition must increase over time
  • Type of target: Only countries with absolute reduction targets based on historical reference levels and quantified, multi-year CO2e budgets and economy-wide MRV and accounting of emissions should be able to trade allowances and buy international offsets credits
  • Supplementarity: The use of internationally traded units has to be supplementary to domestic mitigation

2)      Establish rules to meet established standards to ensure environmental integrity:

  • Launch of a work programme to establish stringent and comprehensive requirements for the quality of offsets and allowances
  • Establish a negative list to exclude project types and/or sectors with low likelihood of additionality or high risks of perverse incentives from being eligible as offset activities
  • Decide that REDD-plus and agriculture activities must be excluded from carbon markets

3)      Establish accounting rules to prevent double claiming & ensure net atmospheric benefits:

  • Host countries that sell internationally traded units must subtract those internationally traded units from the allowable emissions of their INDC, or alternatively buyer country must not be allowed to use the purchased internationally traded units for meeting their pledge
  • Buyer countries must not use purchased offsets for meeting their emission reduction pledges if their purchase is counted towards attaining their financial pledge
  • Establish rules for discounting of internationally traded units to achieve a net atmospheric benefit
  • Exclude the use of units generated pre-2021 to count towards pledge attainment

4)      Enhance co-benefits related to sustainable development, poverty eradication and adaption:

  • Establish rules to augment the Adaptation Fund with a share of proceeds from internationally traded units
  • Establish rules to expand the use of the CDM sustainable development tool to all FVA mechanisms

5)      Establish effective institutional arrangements and governance:

  • Appoint a UN body to function as a standard-setting organization and to assess the environmental integrity of all internationally traded units
  • Establish a rigorous, robust and transparent common accounting framework
  • Establish robust participation requirements for locally affected communities
  • Launch of a work programme to establish an institutional safeguard system, including social and environmental safeguard policies

6)      Improve consistency with international agreements:

  • ICAO: Increase cooperation and synergies with the ICAO process for a global MBM for aviation emissions to avoid fragmented standards across different international agreements and maximize environmental integrity
  • HFCs: Support the Montreal Protocol for a global phase-out of HFCs without the use of carbon markets
  • Posts-2015: Create synergies with the process towards Sustainable Development Goals and ensure that sustainable development objectives of UNFCCC mechanisms are fulfilled
  • Human Rights: Work with human rights bodies to implement existing human rights obligations in all activities related to climate mitigation

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