The Voluntary Carbon Market is Piling Pressure on UN Climate Envoys (2)

–Stark Choices: Profit Motive Can Spur Big Emission Cuts Over the Next Five Years
–There’s no guarantee the UN can create carbon markets that are better than current voluntary markets

By Mathew Carr

March 29, 2021 — LONDON: This week, the world is discussing how new markets of the Paris climate deal will work to cut greenhouse gas very quickly during the next 5 to 10 years.

Or, the talks will fail yet again.

The United Nations negotiations are crucial if countries are to have any chance at all of meeting the global target to limit temperature rises to less than 1.5C above pre-industrial levels. Annual greenhouse gas production needs to drop by about half by 2030 to reach that limit, scientists estimate.

The negotiations are happening at a time of global angst about the coronavirus pandemic, yet they are much more important for the planet than even that short-term concern. Without a climate solution, the world’s living environment is under acute threat, which could easily become a permanent crisis. Perhaps it already is.

The problem for investors thinking about where to put their money to work for a fairly safe profit cutting emissions is that there still isn’t a solid enough set of rules.

That means they could invest in a clean-tech business and then watch on as dirty fuels make that business uncompetitive in the markets, which still largely favour fossil fuels.

The envoys can now set up a system that would allow investors to sell emission cuts into the Paris framework, where demand should be huge because so many reductions are needed.

In broad terms, demand should be for a 3 billion ton cut of greenhouse gas every year globally, taking the total to about 30 billion tons of CO2 equivalent a year at the end of the decade from almost 60 billion tons now. Even more realistic cuts of 1.5 billion a year might leave the world with an outside chance of limiting temperature gains to 2C and would create a primary market of $75 billion a year at current carbon prices at EU levels about $50 a ton.

That’s a decent incentive but it’s nothing versus the $2.1 trillion wholesale value of crude oil produced each year.

So the UN envoys are still up against it, even though they have been trying for 30 years to fix this problem of markets working against the climate. Now, greenhouse gas cuts need to be so swift the only way to make them at the desired downward trajectory is to allow investors to make money as a reward for producing co2 credits.

Can global physical trade and emissions trade be unblocked on the same day?

The 2015 Paris agreement creates new carbon markets that are meant to link with each other starting this year and also with existing emissions markets. That will inevitably help change the trade in fossil fuels and energy intensive goods such as cement, steel, aluminium, chemicals and fertilizers.

But timing is still super unclear.

Here are the five carbon markets in simplified terms that will probably be created by or impacted by today and tomorrow’s UN talks, which are leading up to negotiations in Glasgow in November.

  1. Article 6.2 of Paris (country by country bilateral/regional cooperation – could potentially include existing programs such as the EU carbon system – the world’s biggest by traded volume) — traded unit is the ITMO, the Internationally Transferred Mitigation Outcome
  2. Article 6.4 of Paris (A new market overseen by the UN) — traded unit is the Article 6.4 emission reduction
  3. Existing Kyoto carbon markets
  4. Existing voluntary carbon markets
  5. Global airline carbon market known as Corsia — the Carbon Offsetting and Reduction Scheme for International Aviation

Merging these markets and further boosting the price – the incentive – to cut emissions would start to level the playing field with fossil fuels. The EU carbon price has almost tripled since just after the start of the pandemic, yet it’s still pretty low when compared with the potential cost of damage.

John Kerry, the special U.S. climate envoy, is now saying a global carbon market would be useful and China is building what could become the world’s biggest greenhouse gas program.

Building these markets are still going to take time and the only real game in town for many investors and countries — until the UN envoys get their stuff together — is the voluntary carbon market.

Unless the envoys of the biggest countries decide to urgently form some sort of voluntary carbon club — which is possible — countries will find the voluntary markets attractive because they attract capital from huge global conglomerates seeking to meet net-zero targets.

One guy dealing with emission cutting opportunities for clients is lawyer Peter Zaman, a partner at HFW (Holman Fenwick Willan LLP) in Singapore and one of the world’s most experienced climate advisors.

Zaman argues some of the voluntary structures of the Paris deal are still sinking in for global investors. That nature of that deal, the fact that it gives choice to nations, is crucial. Countries don’t have to choose Paris, even if they are signed up to it. They can choose the voluntary markets.

Countries are allowed to choose where they sell their emission cuts, if they want — where they can get the most money. They can also choose, it seems, how they account for the transaction, at least for now and probably for a few years yet.

To explain: When a country makes a pledge to cut or limit its emissions under Paris, it’s called a nationally determined contribution, or NDC.

As Zaman says: “What the NDCs are asking a country to do is to limit their use of that overall carbon budget until 2100 for the most immediate 5 year period (starting this year).”

“The impact of an NDC should be that a country is voluntarily giving up its ability to burn certain greenhouse gas emissions (that are within its NDC) by way of making its contribution to the overall 1.5C target. By non-developing countries doing this, developing countries get to burn more of that budget,” he says.

While the U.S. is lagging Europe, the richer countries are moving more quickly on emission cuts because they are most to blame for the climate crisis and voters are insisting on a cleaner environment.

When a developing country cuts emissions outside its NDC, “it’s giving up its own future emissions-burning capacity,” Zaman said.

Zaman didn’t say it this bluntly, but one of the upshots of his analysis seems to be that the developing country can decide whether to sell now into the voluntary carbon market and take the money and jobs associated with the emission-reduction project, or wait for potentially years for capital under the Article 6 elements of Paris.

That’s why the envoys meeting virtually today are under considerable pressure to come good, this time.

By selling the credits within the Article 6 mechanisms, the country would be “benefitting another Paris Agreement country that wishes to use the benefit of that activity towards its NDC,” Zaman said.

“The ITMO or Article 6.4 ER is therefore treated as a benefit to that acquiring country and an asset to the host country. If therefore, the same activity has a choice of qualifying under article 6.2, article 6.4 or the voluntary markets, it is natural that a host country would wish to ensure that its asset is sold in the market where it attracts the greatest value.” 

But there are no or limited real options right now for many countries under 6.2 and 6.4.

If a current voluntary market activity qualifies as an ITMO or Article 6.4 unit, then it isn’t a voluntary market unit anymore and there’s no accounting overlap problem. But since not all voluntary market credits wish to be ITMOs or Article 6.4 ERs (e.g. some may be CORSIA eligible units), a tension arises as to which markets might pay the best price or offer the best solution. 

“Under the Paris Agreement accounting framework that starts from 1 January 2021, this is a choice that should rest with the host country,” Zaman said.

Selling countries won’t want to be seen to be going after quick bucks. But if they have little other choice, they have little other choice.

Today, because the article 6 guidelines don’t exist, there’s no significant alternative to voluntary markets, although ITMO arrangements such as those between Switzerland and Peru are beginning to emerge.

The tension between voluntary and compliance carbon markets is not new, but it’s reaching a bursting point.

Brazil, India, China and many other countries seem to favor UN oversight of global carbon markets and if the world was a democracy with a first-past-the-post voting system, they would have their way. But the structure of the UN climate unit requires all nations to agree — consensus is required.

Given that high hurdle and failure to get agreement after three decades, further delay in changing markets for good does not seem to be an option.

It’s not even clear that UN system to be able to strike a system that’s better that what the private sector is offering already, said Charlotte Streck, co founder and director at Climate Focus.

“These are different things with different actors, justifications and jurisdictions,” she said in an emailed reply to questions. “I am in favour of plurality of incentives and keeping the private and voluntary separate from the mandatory and public. It is in the hands of the governments to adopt ambitious climate policies that make the voluntary market obsolete.”

“Anything that removes incentives for action just to make sure the accounting is correct, is highly problematic. I am always inclined to support action – rather mitigation outside of NDCs than no mitigation. I am very pragmatic in this. I also think we face a far-too urgent emergency to allow ourselves to discourage actors to invest in mitigation,” Streck said.

So, given the urgency, emissions need to be cut hard, whether or not they happen to fall within a nation’s official Paris contribution.

Many G20 countries should have their NDC covering all sectors and all greenhouse gases already, but not all.

The U.S. has called a meeting of the biggest emitters next month to spur bigger cuts.

For example, “even though China has announced it will be carbon net zero by 2060, that doesn’t necessarily mean it has to include all of its sectors and greenhouse gases into its NDC immediately. Eventually, that will be the case, but it is at China’s determination and pace,” Zaman says.

The Paris Agreement recognises common but differentiated responsibility and respective capabilities, and expressly states at article 4 that “Developing country Parties should continue enhancing their mitigation efforts, and are encouraged to move over time towards economy-wide emission reduction or limitation targets in the light of different national circumstances”.

Similarly, the Paris Agreement decisions therefore distinguish between:
(i) what a country has to report regarding its anthropogenic emissions by sources and removals by sinks of greenhouse gases — that is all its greenhouse gas, and
(ii) the information necessary to track progress made in implementing and achieving nationally determined contributions.

Having these two sets of accounts is necessary because of the structure of Paris — each country gets to define the contribution that comes into the deal (but separately every nation needs to account for every ton of greenhouse gas, so what portion is inside the NDC may become an important metric for each nation interested in selling emission credits and/or attracting capital.

A country with less of its emissions inside its NDC may find it more difficult to find buyers for its carbon credits, but it should be free to try, according to the Paris rules.

Zaman says: “This dual reporting regime reflects the fact that for some countries some activities, greenhouse gasses and sectors will be inside their NDC and for others, they will be outside their NDC. If a host country wishes to pursue market mechanisms under article 6, this inside vs outside NDC distinction will translate to areas where voluntary market projects have less likelihood of overlap with some of the article 6 opportunities“.

Some may argue that this distinction increases the risk that countries will be disincentivised to increase their ambition under their NDCs.

However, to this, Zaman says according to the Paris Agreement “it’s the role of the Conference of the Parties to the Paris Agreement (CMA) to ensure that ambitions of the countries, reflected through successive county NDCs,  are consistent with the Paris Agreement goals“.

It’s not the role of the private sector to determine whether a country is ambitious enough, but buyers of carbon credits will have many options because of the structure of Paris.

Big corporations seeking to hit net-zero targets will probably choose to favor credits from ambitious nations, because that will leave them less vulnerable to public relations risks.

Millennial customers will become a lot less tolerant of greenwash as the climate deteriorates.

The bottom line seems to be that if United Nations envoys don’t move much more decisively this week and over the next few months, the voluntary market is set to make the UN talks irrelevant.

News outlets are right now filled with a potent symbol of trade blockage.

The Taiwan-based Evergreen-operated container ship that’s blocking the Suez Canal is the perfect example of the fragility of global cross-border buying and selling.

That Taiwan is involved, as are the Indian workers that man the vessel, seems representative of the importance of China and India in the world’s biggest blockage — effective climate action.

Can global physical trade and emissions trade be unblocked on the same day?

(Updates with Streck. Adds China example of inside/outside NDC progression. I will update this further with additional points of view. Happy to take feedback at

NOTES: Link outlining UN talks:

Excerpt: Discussion Questions, with acronym explainers

The questions below are intended as guides for Heads
of Delegation, who are encouraged to address them in the round in their interventions, focusing on elements of greatest importance to them.

● What are the key issues that require the attention of Heads of Delegations, and what solutions can we consider to overcome the existing divergences on those issues, in light of the compromise options proposed in COP25 (UN climate talks in Madrid hosted by Chile held at end of 2019)?
● How can we work together most effectively as Heads of Delegation this year to make progress on these key issues?
● What decisions (if any) could be needed from the CMP (conference, meeting of the parties — the overarching decision making body of the UNFCCC, including the Kyoto and Paris deals), for example to support any transition between the CDM (Clean Development Mechanism – existing UN carbon market) and Article 6.4 mechanism, and what work could the Presidencies do with Parties in advance of Glasgow to prepare for any such decisions?


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