A new, more credible, era of carbon markets is almost here as Climate Warehouse forges linkages (2)

–IETA to Take Charge of World Bank’s Carbon Warehouse
–UNFCCC Testing its Registries

By Mathew Carr

June 23-27, 2022 –Why should you care about the onset of better carbon markets?

Most importantly, these new programs under the Paris climate deal struck in 2015, as well as existing voluntary markets, are being seen by important developing countries as a way of plugging the shortfall in rich-to-poor funding that’s been slowing climate negotiations for three decades.

The climate negotiations have reached implementation stage. And not before time.

The market infrastructure is almost complete.

The number of climate-related disasters is, sadly, on the rise. The world is already commonly demonstrating temperature gains of 2C above pre-industrial times.

All that increases the chance of global or near-global collaboration that actually uses existing systems to lower the rate of the world’s greenhouse-gas production, which is set to reach yet another record this year.

Not only will collaborative markets provide a portion of the extra $1 trillion a year needed for the climate transition, they will permanently change existing markets that currently allocate capital around the global economy.

The fundamental economic structure of the world is finally going to be sending signals that prefer investments in clean energy over fossil fuels, despite the fraught geopolitical context.

Some remain skeptical, and this is understandable. See this from an analyst at Shell, who says he’s “heard this before.”.

Back from “intersessional” climate talks in Bonn last week that didn’t go so well, let me present some slightly optimistic evidence from people who really know what’s going on.

Mr El Hadji Mbaye M. Diagne

Mr Diagne is not just a representative of Senegal, the west African nation.

He’s negotiating on behalf of the Least Developed Countries negotiation group.

How did I come to  speak with him?

I was referred to him in Bonn by the Group of 77 nations and China (the biggest negotiation group of about 134 countries).

He was also named three days ago as a representative on the new supervisory body of the new UN market being created under article 6.4 of the Paris climate deal.

(There’s also a market under Article 6.2, where two nations strike a bilateral deal or deals such as that made by Switzerland and Chile.)

I asked Mr Diagne can the new carbon markets under Paris (and the existing voluntary ones) help the least-developed countries transition to a cleaner economy, instead of following the rich countries down their dirty path?

The Article 6 markets “can be helpful for the LDCs as well as other developing countries to transition,” Mr Diagne said. (Senegal also has an agreement with Switzerland under Article 6.2)

The timing of the 6.4 market is still somewhat uncertain, with most saying rulemaking may take another two years. The appointment of the supervisory body is an important step.

Are the Paris markets and voluntary markets coming together / merging?

“Some projects are moving from the compliance market (Kyoto Agreement / Paris Agreement) to the voluntary market,” Mr Diagne said. (The Kyoto accord was struck in the 1990s and required emission cuts by developed nations. The U.S. and Canada didn’t implement / reneged on that deal.)

“But at the same time, the voluntary market also has seen that it can’t evolve without meeting Article 6 rules,” Mr Diagne said.

“It’s why main systems under the voluntary market, meaning the Gold Standard, Verra (carbon credit standard-setting firms), are aligning themselves with the Article 6 rules.

“That can take some time. But at the end of the day, we think that there will be an alignment.”

In Senegal, “because now we have our Nationally Determined Contribution, our commitment, and all the transactions within the carbon market, whether it be in the compliance market (Article 6, Kyoto) or in the voluntary market, will impact our ability to meet our commitments.”

So Senegal is “really looking to set up these institutional frameworks to address both the voluntary and the compliance market.

“We consider that we can’t at this point distinguish and address differently the voluntary market and the compliance market.”

One key issue is when do projects need to make a corresponding adjustment – ie a corresponding adjustment is when a carbon trade prompts the selling nation to tighten its carbon target by the same amount as the trade. Otherwise the carbon credit is potentially counted (used) twice in the system of national GHG accounting — by the seller and the buyer.

Countries will know that “at the end of the day all credits can’t be double used,” Mr Diagne said.

If credits are used by both the selling and buying country, that will damage the credibility of carbon markets. The complicating factor is credits can be used for compliance with country targets, as well as corporate targets.

I’ll let Mr Diagne explain because there is some misunderstanding about how the process might work:

“To avoid that (double counting by two nations), they (envoys and countries) are looking how to align the rules to be able to differentiate units with corresponding adjustments and units without corresponding adjustments.

“The Article 6 rules are very clear. If units (carbon credits) are authorized by the host country (the country where the project is located) for international transfer, there will be a corresponding adjustment. If not, there will not need to be a corresponding adjustment.

“And in Senegal, we are looking for having the same institutional framework addressing both. We have to report on all transactions.

“We need to know what’s going on,” he said.

CarrZee comment: the upshot is the Paris markets and the voluntary markets seem to be coming together over the next several years.

The global carbon market for airlines (CORSIA mentioned above that’s covering more than half the world’s countries) has a pilot phase through 2023, so my tip is this alignment happens as soon as 2024.

Countries are incentivised to have ambitious targets, otherwise they will miss out on capital. A large corporation (or country) won’t want to be seen financing projects in nations (or carbon trading with nations) that are not ambitious on climate.

Corporations can either trade the carbon credit or let the project contribute to the host country’s NDC under Paris (in which case there is no need for a “corresponding adjustment.”)

NOTE: CORSIA stands for Carbon Offsetting and Reduction Scheme for International Aviation.

Mr Chandra Shekhar Sinha

I spoke with Chandra Shekhar Sinha, an adviser in the Office of the Director of the Climate Change Group at the World Bank, about the Climate Warehouse, a key piece of market infrastructure that may link the various carbon markets.

It’s built on blockchain for transparency and to help prevent fraud and theft, bad behavior that has eroded the credibility of carbon markets so far.

A testing phase of the warehouse runs through August.

“The idea is to complete the tests in the next two months and then hand it over to the entity which will be responsible for the operational climate warehouse in September or early October,” Mr Sinha said.

The Swiss-based International Emissions Trading Association (IETA) will serve as the interim secretariat for the operational Climate Warehouse. IETA is an industry group in favour of carbon markets.

The markets are designed to boost collaboration between nations and cut the cost of the global energy transition, potentially by $250 million per year by 2030, according to the bank.

Two organisations are finalizing the funding arrangments for the first two years and details will be announced soon, Mr Sinha said.

The warehouse will capture about 40 data points for each carbon-credit project across the CORSIA-eligible independent carbon standards — some five or 10 markets. These will include the project’s location, emission methodology, crediting period/s.

Only public data is included and commercially sensitive or confidential data (such as price or ownership of credits) is not part of the information that will be disclosed in the Climate Warehouse.  National regulators may specify data that will be required under their jurisdiction and any updated requirements will be incorporated in the information in the Climate Warehouse.

Blockchain Linked Carbon Markets: Video

World Bank video

The warehouse does not “pass judgement on the quality of the credits, but you at least know what is in the market. Because this is intended to be a meta-data layer, it’s intended to capture all the data on all-market activity,” Mr Sinha said.

“The UNFCCC Clean Development Mechanism registry team is also participating as an observer. They are uploading data, testing the connection and how it works.”

That mechanism, known as the CDM, was one of the first UN carbon markets and it’s been tapped by the EU through 2020.

The warehouse has the ability to handle older emission credits, depending on decisions made by climate negotiators, Mr Sinha said. At least some of the pre-2020 credits may be used for compliance of initial NDCs under certain conditions still being thrashed out for the Paris agreement.

(Adds earlier comment from Shell; more to come)

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