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FEATURE: What role for carbon markets in the Paris climate agreement?

Nations are hoping to reach a new agreement in Paris in the next two weeks, which will replace existing rules governing international emissions trading. Over half of the national pledges submitted to date plan to use or are considering the use of market mechanisms. Alessandro Vitelli from the Legal Response Initiative explains that it’s still unclear exactly how these commitments will be housed in the agreement in a way that ensures that developing nations have access to the market.

In Paris during the next two weeks, nations are expected to agree a new climate treaty that will succeed the 1997 Kyoto Protocol. With that, the system that has governed international emissions trading will be replaced.

Under the Kyoto Protocol, 38 developed nations were given goals to reduce their emissions by specific amounts compared to a 1990 baseline. Developing nations did not take on binding targets, but were able to participate in the market by creating emissions reductions that could be sold to ‘capped’ countries.

The Paris climate agreement is likely to treat markets in a substantially different way than the Kyoto agreement. This will reflect a general consensus that the new treaty cannot operate as a “top-down” accord, in which the UNFCCC establishes a goal for Parties to achieve.

Instead, 160 nations have submitted to the UNFCCC their Intended Nationally Determined Contributions (INDCs) to date, consisting of, among others, domestic goals for emissions reduction, development and deployment of clean energy sources, and intended actions to adapt to the impacts of climate change. Many of these INDCs also include the option to develop national carbon markets.

It’s important to note that these domestic markets will not derive their legal status from the Paris agreement but from national laws. However the new treaty may offer ways and means for national markets to cooperate with each other.

The draft text for the Paris accord offers a variety of solutions. Within the framework of an agreement to keep global temperature increases to below either 1.5 degrees or 2 degrees Celsius, there are options to:

a. retain existing mechanisms and establish linkages with new national markets
b. set up a new system that allows mitigation results to be transferred (similar to the Clean Development Mechanisms, or CDM)
c. build a new emissions trading system with an “enhanced” CDM. Allied to this option is a call for parties to promote the cancellation of Certified Emission Reductions to boost the integrity of the existing mechanism.

Finally, there is also an option under which no mention of markets is made.

Any of the four options outlined above would act as legal acknowledgement that international emissions trading should continue, though what form it will take remains unclear. For developing countries, it is critical that some form of international trading should continue in order to protect the work that has been done already

The Kyoto Protocol’s flexible mechanisms, the CDM and Joint Implementation, established a market framework that has generated more than 2.5 billion metric tons of emissions reductions to date. Through these mechanisms, developing countries and economies in transition have gained clean-energy technology while generating verified emissions reductions that have a value on the international market.

Countries that have benefited from markets include Bangladesh, which has leveraged CDM market finance to set up clean energy projects with the potential to reduce emissions by more than 4.5 million tonnes a year of CO2, Cambodia (more than 400,000 mt/yr), Senegal (about 300,000 mt/yr) and Bhutan (more than 4.5 million mt). Looking ahead, the New Climate Institute found in October that more than 50% of INDCs submitted to the UNFCCC favoured or were open to participating in international carbon markets including a number of LDCs, while 7.5% of INDCs explicitly rejected market mechanisms.

There is support from many Parties to find a way to bring the existing mechanisms, or at least the CDM, into the new treaty so that it can continue to funnel resources for clean-energy development. This might mean taking all the current CDM institutions such as the various Boards and registries and housing them in a new system. Alternatively, it could mean building a new mechanism based on the principles of the CDM, or simply recognising the existing mechanism in the new treaty.

There isn’t enough information yet to speculate as to which option may succeed, and indeed there is still the chance that some new formulation could emerge. But it’s important to bear in mind that many developed country Parties will be keen to mobilise private sector finance to flow to developing countries to reduce the strain on the public purse. A system that allows payments for emission reductions is therefore likely to attract the most interest.

There is opposition from some quarters to the concept of carbon markets on the grounds that it represents commodification of the environment. Indeed, the word markets is conspicuous by its absence from the draft text. Nonetheless, with half of the INDCs submitted to date making references to emissions trading or carbon pricing, it would seem appropriate for the Paris treaty to recognise that most countries see market mechanisms as a useful tool to combat climate change.

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