–The clever thing that the Biden-Harris administration has done is not that it has given the United Nations an ULTIMATUM but that it’s given an OPPORTUNITY
ANALYSIS: By Mathew Carr
April 25-30, 2021 –LONDON: The U.S. earlier this month made its initial choice from markets available to help the country meet its new target for a 50-52% emissions cut in the 25 years through 2030.
The world’s richest economy is bypassing — at least for now — markets potentially being set up specifically under the Paris climate deal.
Instead, it’ll apparently use the existing voluntary carbon markets. The USA’s latest Paris plan published April 21 — its nationally determined contribution (NDC) — doesn’t say it QUITE that bluntly, because that might be construed as a little undiplomatic.
The U.S. does not want to rub its plan in the face of the United Nations (and China). But make no mistake, the U.S. is firmly taking charge of its ability to meet its own target, which seems ambitious on the surface given its multi-decade failure to clean up its economy, but really isn’t very ambitious at all.
What the country does say in its NDC (see the link in the chart below) is that it “intends to make corresponding adjustments for any internationally transferred mitigation outcomes that the United States Government authorizes for use towards NDCs, and for mitigation outcomes that the United States authorizes for other international mitigation purposes.”
That’s a mouthful. To me, it’s an important one.
I think it means the U.S. will use the existing voluntary carbon markets, which are already ramping up this year, because post-coronavirus millennial consumers and huge, global companies seeking to make their brands “greener” are already buying more credits.
The U.S.’s choice is perhaps not surprising. Unlike his predecessor, President Joe Biden seems keen to protect the climate, and sooner rather than later. The Biden-Harris administration seems much more aggressive on cutting emission, something that’s music to the ears of developing countries.
Doing it this way means the U.S. can use any carbon credit it authorizes to meet the target, making the limit much easier to achieve with little financial or reputational risk.
But, the U.S. isn’t going rogue, here.
It will authorise credits only if they are “consistent with Articles 4 and 6 of the Paris Agreement and any applicable guidance, in tracking progress towards and accounting for the NDC.” (These unfinished articles cover accounting and market rules.)
America also isn’t ruling out using Paris-specific markets in the future. It’s merely saying it “does not intend” to use them, right now at least. It can change its mind should they become a good option.
As I said, the Article 4 and 6 guidance is still being negotiated, and the U.S.’s plan earlier this month will add to the pressure that’s already piling on UN envoys to agree that guidance (see story in notes below).
Even the Paris deal’s own markets (under articles 6.2 and 6.4) will be voluntary, because each country gets to decide whether or not it wants to use them when they exist. The U.S. even makes this point in last week’s NDC.
One key upshot of the U.S. move is that it will increase the price of carbon credits likely to win U.S. approval. It will also do something extremely important – turn on investment-flow taps that could amount to billions, or even trillions, of dollars around the world in the next few years.
See this from investment bank Morgan Stanley:
Another critique of the offset market is that the current prices aren’t high enough to incentivise change. The IMF has estimated that to keep emission levels in line with a 2˚C target, a global average cost of carbon of $75/tonne is necessary (IMF). Further, a recent academic study estimates the price necessary to achieve net zero by 2050 is $50/tonne by 2025, increasing to $100/tonne by 2030 (Nature). In contrast, Ecosystems Marketplace estimated that the average voluntary carbon offset prices was just under $3/tonne in 2019.
EU carbon prices reached 48 euros a ton this month.
The reason why the money might start flowing is because investors will now WANT to push money into projects that will cut emissions in an “additional” way — ie in a way that uses new technology that needs an uplift from carbon credits.
I imagine the U.S. will have high standards and these will be projects that would not otherwise have been built (otherwise they are not additional, right?).
One of the clever things about Biden’s NDC move, though, is that it takes advantage of an existing incentive — the voluntary carbon markets, which are pretty small right now.
That incentive will continue to exist even if UN envoys continue to disagree on the final Article 4 and 6 guidance, or, as explained above, even if they agree.
If they can’t agree UN-level rules at Glasgow talks in November — or, even better, set up UN-level markets — it will be much easier for the U.S. regulators to say during the next 10 years that an emissions project is “additional,” whether that’s domestically or in Kenya or even China or Brazil.
If UN rules ARE set up, on the other hand, it will be more difficult for the U.S. to confidently say a project would not have been incentivized anyway under those UN rules. (This is where the U.S. may change its mind and join the UN system, afterall.)
On the downside for the climate, a continued vacuum of UN rules will mean that countries with potentially laxer standards than the U.S. will also start issuing emission credits, potentially boosting supply and eroding prices in the existing voluntary markets, and therefore cutting the incentive to reduce emissions around the world.
Whether it’s the existing voluntary markets or voluntary UN markets that start providing the market incentive is not necessarily the most important thing, said Renat Heuberger, CEO and co-founder of South Pole, a company that provides climate-protection services.
The key is to have SOME SORT of system, whatever that is.
“Whatever the decisions bring, somebody has to start moving,” he said, before the U.S.’s new NDC was published.
Some developing countries have added increased tax breaks for coal mining because of the coronarvirus pandemic, he said.
So some countries are implementing laws that are against their own NDC. A Kyoto-credit-type market, which exists today, might even be better, he said.
The Kyoto credit market was underpinned by the Clean Development Mechanism (CDM), one of the most influential climate markets ever created in the 1990s, because it allowed emerging countries to make money by cutting emissions.
It’s in the emerging markets where incentives to cut emissions are most important.
South Pole is preparing for a world where the voluntary markets are on fire.
“Frankly if I’m wrong I’m very, very happy to be wrong. If you give me two choices and I have to sign; one is a system with the voluntary market, the other is no voluntary market, but a clean-development-style mechanism system, a global system,” under UN rules.
(I would choose the UN system over the voluntary system, he said.)
“My fear is we are ending in something that is in between. Governments say neither do we have a functioning corresponding-adjustment style CDM system, nor do we allow” a private-market voluntary system.
“We are doing nothing. We are trying to figure it out (in the) next year. This (debate) could happen for the next 10 years until we are in a 5C world. I can live with any decision. The one thing I cannot live with is no decision. And that is my fear.”
(Smoothed some of the language near the end on April 30, tweaked some of the time elements to remove ‘last week’ from headline etc; Updated previously with Morgan Stanley additionality snip, South Pole)
EXCLUSIVE INTERVIEW with one of the world’s best climate lawyers: http://carrzee.org/2021/03/29/the-voluntary-carbon-market-is-putting-pressure-on-un-climate-envoys/
The voluntary-carbon-market blueprint is a bit sh!t;