Transcriber: Alexis Young Reviewer: Amanda Zhu
Good evening, everyone.
My name is Jonas.
And I’m a current MSc of Energy Banagement student at ESCP.
I believe that energy and environmental policy,
if done correctly,
can greatly enhance the transition towards a greener economy.
And that is why I will try to focus a bit on the hope part of today's theme,
and especially, I want to talk about carbon trading
under the Paris Agreement.
So the Paris Agreement was adopted in 2015
and aims at limiting global warming to well below two degrees Celsius,
compared to pre-industrial levels.
It was adopted at COP21 in Paris,
but funnily enough, final decisions on some parts of it,
and that includes the infamous Article Six,
hadn’t been reached up until recently at COP26 in Glasgow.
Some of you might have heard or read about COP26.
There were some disagreements about terminology -
whether coal should be phased down or phased out.
You might also have heard about some decisions
to mobilise at least 100 billion dollars
in climate change mitigation finance per year.
But I feel that the final decision
on the so-called rulebook of the Paris Agreement
did not get as much attention.
The rulebook sets out guidelines for reporting emissions,
but it also finalises mechanisms and standards
for the two international carbon markets that are part of the Paris Agreement.
Every country that has adopted the Paris Agreement
sets itself a greenhouse gas reduction target.
These are the so-called “nationally determined contributions”,
or NDCs.
Now, let’s have a look at some of these NDCs.
The U.S, as we can see,
has a reduction target of -50 to -52% by 2030,
compared to 2005.
The EU has a target of -55% by 2030,
compared to 1990.
Brazil has a target of minus -
Brazil has a target of -37% by 2025, compared to 2005 levels.
And lastly, Australia has a target of -26 to -28% by 2030,
compared to 2005.
So, this was just to illustrate
that every country decides on its own how ambitious it wants to be
and what reference year it wants to use.
Now, let’s go back to the carbon markets.
Under Article 6.2 of the Paris Agreement,
the first carbon market allows countries
to voluntarily trade greenhouse gas reductions amongst each other.
A country that has overachieved its climate pledge, or its NDC,
can sell the extra emission reduction to another country,
which can then use that overachievement from that other country
to reach its own climate target.
Now, how does it work in practice?
BAU, here on the left,
refers to the “business as usual” scenario,
which assumes that there are no significant changes
in people’s attitudes,
no major changes in technology, economics or politics.
So basically, normal circumstances are expected to continue unchanged.
ITMOs are internationally transferred mitigation outcomes.
And as we can see, country A’s emission target was 80,
which means that, in this example,
its nationally determined contribution was -20%.
However, country A overachieved its target.
It managed to reduce emissions by 50% .
The overachievement, in this case,
the 30-percentage-point difference,
can be sold to country B,
which did not achieve its emission reduction target.
Country B managed to reduce its emissions by 10
but is still lacking 30 to reach its target of 70.
So it can buy country A’s overachievement.
All of this happens under bilateral agreements
with the price of ITMOs being determined in the negotiations between countries.
Currently, Switzerland is the only country that buys ITMOs.
Now, why is all of this a good idea?
Why is trading emission reductions a good idea?
Trading emission reductions
allows for economically efficient greenhouse gas reductions.
Why is that?
That is because emission reductions will occur where the abatement cost,
or the cost of reduction, for one unit of emission
is lowest.
Due to lax environmental laws and regulations,
abating emissions in developing countries
is often cheaper than abating the same amount of emission
in developed countries,
where, thanks to tight regulations,
the easy gains have already been implemented or realised.
So let's take the example of landfills.
The more organic content a landfill has, the more methane it produces.
And methane is a very potent greenhouse gas.
It can be up to 25 times as harmful as CO2.
So sealing a landfill, capturing and then burning the methane,
which prevents it from entering the atmosphere,
is a very cost effective method of reducing greenhouse gas emissions.
Laws and regulations for doing this are in place in most developed nations
but not in many developing countries.
So there are still some easy gains to be realised there.
Said bluntly,
it’s all about investing the dollar
where it has the largest greenhouse gas reduction impact.
Utilising this cost effective mechanism
could either dramatically reduce the cost
of achieving a given emission reduction target,
or alternatively,
we could reach a more ambitious target with the initial cost.
The International Emissions Trading Association, for example,
found that carbon trading under Article Six of the Paris Agreement
could potentially reduce the cost of implementing NDCs
by more than half,
which corresponds to 250 billion dollars annually
in 2030.
Or alternatively, Article Six could facilitate the removal
of an additional 50% of emissions,
which corresponds to five gigatonnes of CO2 per year
at no additional cost.
Five gigatonnes are 5 billion tonnes.
And just to give you a reference,
the UK emitted about 365 million tonnes of CO2-equivalent
in 2019.
Now, that is all for Article 6.2.
Under Article 6.4, the second mechanism creates a carbon market
where emissions reductions from either states or private entities
can be traded
and which will be governed by a UN body.
Under this mechanism, also,
private emission reductions
can be bought by countries to meet their NDCs
as long as these emission reductions are certified.
Yeah, this market has been implemented, but no transactions have yet taken place.
Now, beyond this basic concept of carbon trading,
the Paris Agreement states some conditions
which the two carbon markets have to meet.
The first one is that they must raise ambition in mitigation action
and achieve an overall mitigation effects.
During COP26, parties decided
that 2% of the officially authorised and traded emission reduction credits
will be cancelled.
So for example, if a country buys 100 ITMOs
to be counted against its own reduction target,
it can only claim 98 of those ITMOs.
This will achieve an overall reduction in greenhouse gas emissions,
and not just a shift from one country to another.
The second condition
is that double counting of emission reductions must be avoided.
Double counting occurs
when both the country where the emission reduction takes place,
which is the host country
and the country that buys the reduction certificate,
claim to have reduced greenhouse gas emissions.
COP26 decided that the host country
that generates a credit through carbon emission reductions
will decide whether to authorise it for sale to another country
or count it to their own climate targets.
If the country authorises the selling of a credit,
it will add one unit of CO2-equivalent to its own national carbon emission,
and the buyer country will deduct the same unit of CO2-equivalent.
This process is known as corresponding adjustment
and ensures that emission reductions are only counted once
when traded between countries.
Let’s have another look at the figure.
Country A’s sale of ITMOs will be added back to its own emmission,
which we can see here, as the adjusted admissions.
Of course, this happens only on an accounting basis and not literally.
Country B’s emmission will be reduced by the amount of ITMOs it buys,
again, only on an accounting basis.
The third condition
is that part of the money generated
under the market outlined
under Article 6.4,
which is the market where private entities can participate,
must be channeled to its adaptation funding in developing countries.
This condition has been met with the agreement
that 5% of the proceeds of that market are funneled into the UN Adaptation Fund,
which finances climate change adaptation projects in developing countries.
Now, are there some not so rosy aspects to this carbon market,
or rather, the decisions on it?
Well, unfortunately, yes.
Firstly, some old offset credits
that were generated under the Clean Development Mechanism,
or the CDM,
can be carried over and traded in the new markets.
The CDM was established under the Kyoto Protocol,
and it was one of the first carbon markets ever.
It generated carbon offset credits
that arose from emission reduction projects in developing countries.
However, the quality and environmental integrity of these CDM credits
are very contentious.
A 2016 study questioned
the non-overestimation of emission reductions
of up to 85% of all issued carbon offset credits under the CDM
between 2013 and 2020.
So, in a nutshell,
there are serious doubts
over whether many of these credits have actually ever driven real emission cuts.
Countries that initially said they wanted to use these low quality credits
in the new carbon market
include Australia, Brazil and India.
However, thanks to international criticism,
Australia has abandoned those plans in 2020.
The number of these low quality offset credits
that can be carried over into the new markets
is not known exactly,
but estimates put it anywhere between 120 and 300 million credits,
whereby every credit represents one tonne of CO2-equivalent.
The second issue is that there is a general problem
with ambitious NDCs and emission reduction trading.
Every country, as we've seen earlier,
decides how ambitious it wants to be regarding its NDCs.
Now, if we look at the figure again,
we see that both countries have an incentive
to set themselves unambitious NDCs.
If country A’s emission target was 90 instead of 80,
it could sell 10 more ITMOs.
Similarly, if country B’s emission target was 80 instead of 70,
it would have to buy 10 ITMOs less to reach its target.
So overall, most decisions on Article Six of the Paris Agreement were positive.
And if more countries can be persuaded to not use CDM carryovers,
large amounts of the potential 250 billion dollars in savings per year,
thanks to carbon markets and their economic efficiency,
can still be realised.
Thank you.
(Applause)