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Trillion dollar question

This week, the UN climate negotiations kick off in Katowice, Poland. The 24th Conference of the Parties to the UNFCCC will focus on two big topics: ambition and implementation.

On ambition, it will review the national contributions to the Paris goals against a backdrop of a new scientific report from the IPCC on 1.5°C. Countries will feel the heat to do more.

On implementation, it will focus on completing the Paris Rulebook, which is slated for completion. It is supposed to provide implementation details on a wide range of important topics – transparency, finance, technology, capacity building, adaptation and markets.

The two topics are deeply intertwined. Unless they know the rules, it is difficult for countries to know whether they can strengthen ambition.

There are a few aspects to this. Countries need to know clearly how their neighbours are progressing, using the transparency framework. They need to know how to access finance and technology. Many need help strengthening their national capacity to govern climate emissions – and to develop adaptation strategies. Finally, they need rules on “voluntary cooperation” through Article 6, where market and non-market forms of cooperation are considered.

IETA will focus intently on the market provisions of Article 6. It isn’t just a business imperative for controlling costs. It is key to inspiring greater ambition. There is no way to achieve the Paris temperature objectives without international cooperation, given the finance and technology it can unleash.

In that context, we have started to ask, what is Article 6 going to be worth? Turns out, it is a Trillion Dollar Question.

We joined the economic modelling team at the Joint Global Change Research Institute at the University of Maryland to explore that mega question.

  • Their initial modelling runs of the current NDCs indicate that, by the end of the century, Article 6 cooperation could save $1 trillion per year in costs to the world economy.
  • Environmental Defense Fund’s modelling shows the flip side of the same coin, framed as ambition: if Article 6 cooperation goes global, it could enable double the ambition (ie, reductions) for the same cost.

Whether framed as economic or environmental advantage, Article 6 is a key ingredient in whether Paris will succeed.

This link between cooperation and ambition is not new. For those new to the topic, market approaches have always been at the centre of climate debates, dating back to the UNFCCC’s agreement in 1992. Markets have since appeared in the core agreements of the UNFCCC: the Kyoto Protocol, the Copenhagen and Cancun outcomes in 2009 and 2010, and the 2015 Paris Agreement. But the implementation details have sometimes failed to materialise.

When rules were agreed, the markets delivered projects, technologies and finance in a remarkable way. When they didn’t, the markets fizzled. Here’s a quick recap:

  • The UN Framework Convention on Climate Change allowed for “joint implementation” between Parties, following criteria to be adopted at COP 1. It agreed to criteria for a pilot phase, which could not be used for compliance.
    Market impact: a few pilot projects took place to illustrate the value of the instrument, but no major projects moved forward – given the lack of incentive.
  • The Kyoto Protocol, adopted at COP 3, had a suite of market approaches: international emissions trading or project-based “joint implementation” between countries with commitments; and a “Clean Development Mechanism” for projects hosted by developing countries, which had no mitigation commitments. The rules for these provisions were included in the Marrakech Accords adopted at COP 7.
    Market impact: the growth of the CDM and JI programmes into multi-billion dollar markets, driven by the EU ETS and Japan’s voluntary commitment programme. Developers registered over 7,500 mitigation projects from around the world.
  • The efforts to re-boot the system started in the run-up to Copenhagen’s COP 15 – eventually producing a “Framework for Various Approaches” (FVA) that never gained steam. The implementation rules due in Doha were punted to Lima – and then to Paris. No New Market Mechanism (NMM) rules were agreed.
    Market impact: the NMM market never materialised, so no projects moved forward.
  • The Paris Climate Agreement reframed the old ideas of FVA and NMM into a new approach in Article 6. It sets up a basic approach for accounting for transfers of internationally transferred mitigation outcomes in section 6.2, and it contains a new mitigation and sustainable development mechanism in section 6.4. The rules are due in Katowice.

If the rulebook succeeds, countries will know what they have to work with, so they can begin considering how to build out their climate action plans. Their companies will know how national, regional and international markets will work for them – and they can begin to secure partnerships, raise investments, develop projects and deploy technologies. If you are in the business of climate mitigation, there are lead times to pulling all of this together. It can take two to three years to complete this cycle and bring reductions to market.

If the rulebook fails, many countries may need to move forward without UN rules, given the timing challenges. The “nationally determined” nature of the Paris Agreement offers this flexibility. Regional efforts to form market linkages are already beginning prior to the Rulebook, whether in the EU-Swiss ETS linking agreement or the Carbon Pricing in the Americas declaration.

Still, we are convinced that cooperative systems will benefit greatly from a common Rulebook. It will offer an easier path for any country to gain market access or seek system linkages, if it so desires.

For Paris to achieve its true potential, it is vital to deliver a Rulebook in Katowice. In fact, it’s the Trillion Dollar Question.

Dirk Forrister
President & CEO

Meet IETA  

2-14 December: IETA will be hosting its Business Hub at COP24 in Katowice, Poland

IETA Publications


IETA Insights 2018, edition 4

 Focusing on the future of carbon
  markets and what to expect in 2019
  from the EU ETS 

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