Nuances of REDD + Managing Expectations for Glasgow: Art. 6 of the Paris Agreement and the Voluntary Carbon Market
28 October 2021. In November 2021, the world’s attention will be focused on Glasgow. Expectations are high for the 26e session of the Conference of the Parties to the United Nations Convention on Climate Change (COP-26) to provide the modalities for the implementation of the carbon market mechanisms defined under the Paris Agreement. Many have High hopes that the finalization of the modalities for the implementation of Article 6 of the “carbon market” will open the financial floodgates for unrestricted carbon financing to flow into mitigation projects and programs, which is urgently needed, especially in developing countries. Although unlikely, Glasgow can still send important signals to international carbon markets.
Carbon finance is certainly necessary….
Climate finance needs to be scaled up urgently – more money is needed and the amounts pledged need to be deployed effectively and efficiently. Carbon finance offers a financing modality that channels foreign direct investment to developing countries. Private sector-led carbon markets cannot replace public policy, but they can help realize mitigation potentials in sectors, industries or regions where the scope of public policy is weak – due to ” a lack of political agreement, limited public finances or difficulties in reaching remote areas.
This is particularly relevant in the land sector which offers few bankable investment opportunities and is generally cash-deprived. A newly published article notes that three quarters of cost-effective terrestrial mitigation potentials are found in developing countries (10.7 GtCO2e per year). This represents about a third of the attenuation potential needed to reach the Parisian temperature target of 1.5 ° C. Activities such as reducing deforestation, restoring forest ecosystems, high carbon agriculture, promoting healthy diets have significant environmental, development and health benefits and can be implemented without delay. However, so far only a very small share of climate finance goes in the area.
Carbon markets can help close this huge financing gap. Of course, they are not without problems. With them come the risk of exaggerated emission reduction claims in the name of profit; they only finance part of the available mitigation opportunities; and without safeguards tend to cement existing power structures. However, if backed by strong guarantees and accounting systems, they can quickly deploy finance and channel it to sectors in developing countries that offer mitigation opportunities while producing additional sustainability benefits. . It is therefore understandable that many real and potential market players hope that an agreement on the rules for the implementation of Article 6 of the Paris Agreement can reduce the obstacles to implementation and unleash this potential. ‘mitigation.
… but a carbon market regulated by the UNFCCC can turn out to be a mirage
The question is whether the completion of Article 6 negotiations will effectively mobilize new demand for carbon credits and large-scale carbon finance opportunities. This is certainly the preferred outcome. However, the agreement on carbon trading rules in Glasgow may also prove to be another step towards a mirage of a liquid and internationally regulated carbon market – a mirage that will not die, no matter what. how often he rose into a scintillating air. .
With few exceptions, developed countries have made it clear in their Nationally Determined Contributions (NDCs) that their targets are to be achieved through national mitigation actions. Some countries, like Switzerland and Sweden, have invested in art. 6 pilots, but no country – except Japan – manages a substantial and important program for the purchase of carbon credits. Instead, the development of new drivers has slowed since 2019, as pressure on developed countries increases to refrain from acquiring carbon offsets. Twenty years have passed since the launch of the Clean Development Mechanism (CDM, agreed in Marrakech at COP-7), and although acceptable at the time, public opinion has since withdrawn permission from developed countries to ” use offsets to achieve their climate goals. Even if donors did decide to commit to Article 6, it would most likely be through public trust funds, where the funds are notoriously sit long parked before being deployed. Public finances are therefore unlikely to flow towards Article 6 mitigation upon return from Glasgow.
Companies also remain cautious about a carbon market regulated by the UNFCCC. So far, companies have been largely absent from efforts to develop projects under emerging Article 6 modalities.. This is unlikely to change. Subjecting their efforts to the rules of Article 6.4 of the Paris Agreement – the article which provides for nongovernmental engagement – does not seem an attractive proposition for business buyers.
There is no “compliance push” that pushes corporate buyers towards the “internationally flown mitigation outcomes” endorsed by Section 6, which so far have not been compliance instruments recognized under national carbon pricing programs. Regardless of Glasgow’s outcome, the regulation of carbon trading under Article 6.4 of the Paris Agreement will depend to a large extent on the regulations, oversight and institutions of the host country, such as registries. and government offices ensuring proper accounting and issuing approvals. To be able to issue and track marketable units and make ‘corresponding adjustments, countries will need to have sophisticated institutions and capacities in place. This is different from the CDM, which has benefited from strict international regulation and integration into the cap-and-trade infrastructure of the Kyoto Protocol. The CDM also generated credits that had compliance value under the EU Emissions Trading System. From the point of view of private investors and project developers, engagement with Article 6 amounts to an impending nightmare of bureaucracy, with which it is unlikely to be worth engaging to meet voluntary pledges. enterprises.
On the other hand, the private sector is ready to invest and has shown interest boom in carbon market activities. While investments in decarbonizing their own operations and supply chains should be a priority, companies have shown a strong interest in investing in voluntary carbon markets, including in developing countries, as part of more strategies. broad climate commitments. For many companies, the voluntary carbon market is tested, and the methodologies known and available.
However, the agreement on the rules for the implementation of Article 6 is still relevant today.
Article 6 cannot give rise to significant new investments. However, for a number of reasons, the finalization of the Paris Agreement “market” rules is still relevant:
- Insecurity around Article 6, combined with great confusion around its relationship with the voluntary carbon market, is holding back investment. It is essential to clarify what Article 6 is, can and will be, and what it is not, cannot and will not be. For example, it is important to confirm that the UNFCCC has no jurisdiction over voluntary carbon market transactions governed by private standards. Some clarifications on the market functions, especially in the case of Article 6.4, which will be fulfilled at the UNFCCC level, and what remains to be decided at the country level, can also help unlock funding for mitigation. , especially for developing countries.
- While diversity is good, darkness is bad. Clear and transparent accounting is essential for the proper functioning of any market. COP-26 can help foster a common understanding of when and how activities that generate Article 6 carbon credits and the voluntary carbon market contribute to host country NDCs under the Paris Agreement. . The Glasgow meeting can provide guidance on how countries can report on voluntary activities that contribute to national mitigation, with and without “corresponding adjustments”.
- Governments may also consider developing broader mitigation and development programs under the more flexible Article 6.2 of the Paris Agreement. Such programs may consider sectoral or jurisdictional programs that combine government and private sector engagement in carbon markets. Voluntary carbon standards can guide the development and lending of private projects, while multilateral and bilateral development partners can support policies that lead to sector transformation through grants, loans or payments based on the results. Emerging jurisdictional REDD + programs with their investments in preparedness activities, diversity of funding streams and rules on “nesting” projects learn important lessons in this regard.
A completed Paris Rulebook provides an important piece of the regulatory puzzle. Government engagement in carbon markets has clear advantages: it reduces investment risks and ensures alignment of investments with policies. In contrast, voluntary carbon markets have the advantage of being flexible and independent of government regulations, bureaucracy, and they are less exposed to government challenges such as corruption.
Article 6 can encourage governments to engage more strategically with carbon markets. This includes a decision on how carbon markets can boost mitigation and complement public efforts to reduce greenhouse gas emissions and improve removals. The clarity of Article 6 can shed light on carbon accounting and allow countries to specify where and when they support carbon market transactions, including those related to the voluntary carbon market. At best, Glasgow can ‘settle the case’ with the Article 6 rules and give investors confidence that it is worth investing in nature.