As companies around the world seek to burnish their green credentials, plans for a rigorous and regulated international carbon market to help countries and businesses reach their climate goals are becoming a key part of the fight against climate change.
Proposals were outlined in Article 6 of the 2015 Paris Agreement, which has been argued over by climate diplomats for six years. Now it's turning into one of the hot topics for the COP26 climate talks in Glasgow. While there are prospects that a deal can be reached, there are also plenty of worries about what could happen if it's poorly executed.
1. What is Article 6?
It provides a framework to help countries work together to reach emissions-reduction goals, primarily by trading credits that count toward their targets and sharing the burden of the climate fight. It was included in the 2015 Paris Agreement, which more than 190 countries have ratified, but the specifics were still in dispute at the 2019 COP meeting in Madrid, and the proposals since then haven't led to anything concrete.
2. Why the urgency now?
Diplomats are coming under pressure to agree to formalize them during the United Nations climate talks at COP26 in Glasgow, Scotland in November. If a country is cutting emissions faster than it needs to meet its Paris Agreement target, it could sell its success as credits to other countries that could count it toward their reductions. Article 6 could also help establish a global carbon-offset program, under which governments and companies could invest in emissions-reducing projects and then trade the credits they generate around the world.
3. Why is it important?
Accelerating emissions reductions could help keep global warming below 1.5 degrees Celsius compared with pre-industrial levels, in line with Paris Agreement goals, and help avert a potential climate catastrophe. The plans could lower the cost of implementing nationally-determined contributions, the emissions that countries have pledged to reduce to play their part. There aren't many independent estimates available, but that figure could be as much as $300 billion per year in 2030, according to claims by the International Emissions Trading Association, which represents emissions-trading interests. If invested in further measures, extra cash could facilitate the additional decrease of about five gigatons of carbon dioxide per year, the IETA said in 2019.
4. What's the effect?
There's strong potential in a market like this, mainly because it's expensive for some countries to reduce emissions, but less so for others. Companies and countries with the resources to do it may cut emissions further than their targets require because they know they can make more money by selling them. That could also alleviate the strain on countries with limited resources to reduce emissions quickly. Poorer countries could also benefit financially from more transparent offset trading.
5. What are the sticking points?
Much of the controversy comes down to the integrity of the accounting, making sure that each carbon credit is rigorously validated, isn't double counted and that its contribution to global emissions reduction can be verified. The most climate-conscious countries and campaigners are trying to ensure that each step to reduce emissions only counts once. Some campaigners warn that unless the rules are stringent, the same cut could count toward more than one national or corporate target, with little oversight to prevent abuse. Push-back is also coming from countries including Brazil, India and China, who have said they want to use old, unused credits from the 1997 Kyoto Protocol's defunct Clean Development Mechanism.
6. What could clear a path to a deal?
Brazil has been one of the biggest obstacles to progress, though it has indicated it could be willing to compromise. The custodian of one of the world's largest carbon sinks, the Amazon rain forest, Brazil knows that it has a lucrative asset for any future carbon-trading system. It's also unclear which entity will be responsible for regulating global markets and ensuring offsets traded are high quality. There's the potential for diplomatic spats over offsetting and accounting. Some worry that fossil-fuel heavy countries and companies will just try to offset their way to net-zero, continuing to burn fossil fuels while relying on buying credits from countries that are more serious about reductions.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.