Opinion by Mathew Carr
June 16-17, 2021–LONDON: United Nations envoys have been discussing the past three weeks how to better unleash the power of market forces globally onto the climate crisis, a worldwide problem.
UN negotiators have been trying to do this for more than three decades, during which time worldwide greenhouse gas output and deforestation have escalated dramatically and alarmingly. It’s hugely depressing on multiple levels, yet there are a few hints of light at a still-distant end of a dark tunnel.
The UN envoys have a specific negotiation stream: “Ensuring rapid operationalization” of Article 6 (the carbon market parts of the Paris climate agreement). We might hopefully find out about some areas of convergence during the next few hours/days…fingers crossed. I hope I’m wrong about the “unlikely” thing in the headline.
Consumers are starting to embrace the importance of climate justice, and value it in the companies they buy from, mainly in Europe.
Why is this important to global carbon market deployment? Because one of the big issues holding up agreement on global climate-collaboration rules is how to account for and trade emission-reduction credits.
This topic sounds wonkish, but it needs to become mainstream. Bear with me. Here’s why:
Environmental lobby groups, mainly those in richer countries, are deeply suspicious of carbon trading. This is misguided and also partly understandable.
Misguided because unless the climate solution involves letting people make money from cutting emissions, greenhouse gas output won’t be cut fast enough to limit global warming to 1.5C.
Partly understandable because poor countries were promised carbon market revenue in the past 30 years that never arrived and the creation of carbon credits was probably too loosely regulated in the past.
One of the solutions offered by the environmental lobby groups is to insist that any cross-border trades of carbon credits is accompanied by a “corresponding adjustment” by the selling country (the “host” country, where the emission reduction was created – hopefully a forest-creation or direct-air capture plant in Africa, for instance).
The lobby groups argue the host-country’s target under the Paris climate deal needs to become tighter by the amount of the trade if the buying country is using the carbon credits to help it meet its Paris targets. Otherwise there is “double counting.”
While this makes some sense, it underplays the fact that the buyer of the carbon credit is more likely to be a multinational company during the next few years, rather than a government. That’s because it’s the multinational companies that need to decarbonise and some are adopting ambitious targets, under pressure from customers and the people who own their shares. It’s the huge corporations, including government-owned ones, that cause most of the global warming problem. It’s them that are most in need of the incentives.
Because the carbon market elements of the Paris Agreement are voluntary and all countries want investment from multinational corporations, I predict most countries will ultimately embrace carbon markets.
While some people say rules need to be agreed before capital can be deployed, others says the rules agreed right now are enough to get started because of the voluntary nature of the Paris climate deal.
Multinational brands want to burnish their green credentials, yes. But, it will probably be even better for them if they are seen to solve the problem of climate injustice, as well. That is, the companies (not just multinationals) who invest to embrace climate justice as well as emission cuts will attract millennial customers and boost their profits and market share.
So, corresponding adjustment be gone (at least for a while?)! Allowing poorer-country hosts to keep the emission reduction for accounting purposes will incentivize developing nation investments and ambitious climate pledges under Paris known as Nationally Determined Contributions (NDCs). Those without stringent NDCs won’t attract capital.
“Favor investment in developing countries or your rich-country company might lose increasingly woke customers,” will become the mantra. It’s the merging of the climate and racism crises and the emergence of a type of post-Trump globalization, a socially aware capitalism.
I predict companies, especially big ones, will start to wear their climate-justice investments as a badge of honor, and maybe even soon. They will favor clean investments in (well-governed?), ambitious poorer countries, because such projects will enhance brand loyalty around the world.
Such a strategy will become even more advantageous as the climate crisis worsens.
While I said “soon” above, I still mean not soon enough.
Most of the world’s most successful multinational corporations reside in the U.S. There, as far as I can tell from London, England, climate justice is not a well-understood concept.
Indeed, political leaders and the media appear to be hiding the problem from the electorate — President Trump did it deliberately and transparently and I’m not hearing that much different from the Biden-Harris administration, which continues to pretend China is the climate villain, despite these facts highlighted neatly in article on “The Conversation” website by Oxford University’s Myles Allen about rich-country responsibility (see link below chart):
The chart is particularly stark given the tiny population of the U.S. — 4% of the world vs about 18% for each of China and India. Huge multinational U.S. corporations are unlikely to value climate-justice-infused carbon credits until there’s a massive re-education campaign in the world’s biggest economy — no small feat and it’s unclear whether it’s likely.
Brazil is suggesting an unspecified “transitional period,” where corresponding adjustments are not mandatory. See its recommendation:
“Brazil understands that a time-bound solution is meritorious in this case for providing a pathway
for a common set of rules to be developed and equally applied to all Parties, both during and after
the transition period to be introduced. This, in turn, would avoid perverse incentives for the creation
of parallel system and discrimination within the mechanism by having rules that would apply for
some Parties (that “opt-in”), but not others (that “opt-out”). It also gives reassurance that a full application of corresponding adjustments for emissions reductions and removals covered and not covered by host countries’ nationally determined contributions will eventually occur and be the basis for a more permanent set of regulations of the mechanism.”
Brazil has plenty of other recommendations. See this for the Article 6.4 market being set up, perhaps to be known as the Glasgow carbon market or the Sustainable Development Mechanism?: https://www4.unfccc.int/sites/SubmissionsStaging/Documents/202104012104—BR%20-%20Submission%20-%20Article%206.pdf
The compliance and voluntary carbon markets could merge for one or two decades of the thirty-year transition, or before/after some sort of shorter transition.
Canada is even daring to mention global carbon pricing in black and white; ledger-based technology and improved transparency on emissions output is also helping:
“Canada supports gradual progress toward alignment and harmonization of international
carbon market standards and instruments, where appropriate, starting with a global
minimum price on carbon pollution. While common data standards and electronic
‘linking’ can sometimes be conducive toward this objective, there is no immediate need
for every carbon asset to be fully fungible in every cooperative approach, nor centrally
tracked in a single global registry. At this stage, the more immediate priority is to ensure
that each participating Party applies corresponding adjustments to a national emissions
[I include the sentence on corresponding adjustments to show there’s still a wide range of opinions.]
Carbon border adjustments are becoming a thing, combining trade (the real economy) with environmental policy.
The EU has proposed a mechanism for about 2023. Countries wanting to export to Europe will need to have carbon pricing or equivalent climate policies. That pushes other nations toward the carbon pricing model, probably even the U.S., according to some of my well-placed sources.
What Countries Can do to Prepare
Countries failing to put in place better climate policies such as carbon pricing — “laggards” — will miss out on trillions of dollars, investors managing $41 trillion said earlier this month (see investor link below).
Rich countries are already getting started.
In Australia, low-carbon hydrogen could become a US$50 billion to US$90 billion export industry by 2050, says consultancy Wood Mackenzie. The nation is also planning expansion in green LNG exports.
“Countries wanting to attract capital need to set up approval systems now, which will let investors know what to expect and how to engage,” said Zubair Zakir, founder of Anthropocene.io.
After three weeks of talks this month, UN envoys are still at loggerheads on global carbon markets. While it would be helpful to have clearer rules at the global level, there will always be the risk of new rules or changed rules, Zakir said by email and phone.
“As I see it, some very simple conditions are already present — conditions which, while perhaps not ideal for all, are indisputable,” he said.
“That is, the UNFCCC has no mandate to regulate voluntary participation of private sector — countries have a choice over how they account for voluntary actions. All market participation of countries under Paris is voluntary and not mandated (irrespective of whether a party incorporates such actions in domestic regulation),” he said.
(Adds what countries can do to prepare; comments my way at email@example.com; More hints and context to come, plus warnings.)
Corresponding adjustment context: https://carrzee.org/2021/01/16/western-environmental-lobby-groups-are-slowing-climate-action/
June 13 summary of UNFCCC issues related to article 6: https://unfccc.int/sites/default/files/resource/IN.SBSTA2021.i15a.1_i15b.1_i15c.1.pdf
View of one of the best climate lawyers…exclusive: https://carrzee.org/2021/03/29/the-voluntary-carbon-market-is-putting-pressure-on-un-climate-envoys/