Cop26: Countries closer than ever to striking a deal for carbon markets

The technical working groups met during the first week of Cop26 to discuss some of the outstanding issues of the Paris agreement, including carbon markets. Ministers will take over the unresolved topics on the second week. (Credit: IISD/ENB Mike Muzurakis)

Finalising the rulebook on carbon trading has emerged as that which could make or break this Cop26. Negotiators got further than ever before last week as they delved into some of the knitty gritty details of the infamous article 6, pulling out three final draft texts that will be bumped up to ministerial level talks this week.

But countries held to some of their old positions in stingy topics such as double counting of emissions, signalling that there will have to be some tough bargaining before they can shake hands.

What it’s about

State members of the Paris agreement are required to reduce their own carbon emissions to keep the world from heating over 1.5ºC. Thinking that it would be easier said than done, negotiators of the 2015 deal wrote in a fallback plan for countries to unload a part of their carbon emissions reduction requirements onto other countries – for a price.

But discussions on the rules of carbon offsetting have dragged on for over six years now. The argument behind it is that developed countries could finance projects in the developing world that would remove emissions from the atmosphere. It would be a cheaper and politically easier alternative for developed countries and ultimately give developing countries the jumpstart they need to decarbonise their economies – a win-win situation right?

But opposers say that it will enable polluters to stay hooked on their dirty habits. There is also mistrust bequeathed by article 6’s predecessor the Kyoto protocol, which is criticised for swamping the market with empty carbon credits.

This has prompted NGOs to push for a postponement of the decision, warning that ending up with a bad deal is more dangerous than not having one at all. But negotiators last week made significant progress at least on the more technical areas.

“The more ambitious you are on the technical aspects, the more room you have to maneuver during political discussions,” Felipe de León, Costa Rica’s negotiator for Article 6, told Geneva Solutions.

Talks this week will revolve around some of the most thorny issues which were still in brackets in the texts submitted by late night on Saturday, namely the transfer of old carbon credits, the rules of accounting and how to make sure carbon markets actually contribute to climate action.

No double counting

One of redlines that countries have set is that there cannot be double counting. This means that the country transferring part of its emissions reduction to another country should not get to deduct those emissions from their own bill.

Brazil has strongly advocated for double counting to be allowed at least in the first period of nationally determined contributions (NDCs) which refer to each country’s climate plans, revised every five years. But the proposal is unlikely to get traction as it is widely acknowledged that it would only stifle climate action.

“Double counting is a very bright red line for every other country,” Brad Schallert, WWF US deputy director of international climate cooperation, told Geneva Solutions.

Another issue Brazil is pushing for is the carryover of credits from the Kyoto era created through the Clean Development Mechanism (CDM), many of them created under poor standards. According to a 2016 EU report, 85 per cent of the CDM’s carbon credits overestimated the emissions they reduced or had no impact on the environment at all.

“Most countries are against carryover at all because it's a contagion for the Paris agreement and it sucks out the ambition,” said Schallert. While there is agreement that having cheap and poor quality credits flood the market would have a negative effect, the measure still has some support from a number of large developing countries.

De León makes the point that bringing pre-2020 credits over to the post-2020 regime would essentially be double counting. “When you look at the 1.5ºC IPCC and other reports, they all start from 2020 onwards, so pre-2020 credits, however viable and rigorously they are screened, have already been accounted for once,” he said.

Developed countries and some of the most vulnerable countries are not fond of having those credits come across as they would harm the environmental integrity of the system, an adviser to one of the vulnerable countries, who wished to remain anonymous, told Geneva Solutions.

“From a purely technical perspective the amount of CO2 emissions that should be carried over is clearly zero. Anything else is a political compromise to get a deal,” De León noted.

One of the issues negotiators had made notable progress on, he said, was on the inclusion of human rights and indigenous peoples in all the draft texts, something that he and other negotiators and civil society actors had lobbied for in the past years.

NGOs have warned about the dangers of creating carbon markets that could cause human rights violations as other carbon trading schemes have done, such as displacement of communities from their lands or even targeted assassinations of local leaders.

“There should be strong safeguards to protect human rights and there needs to be strong rules requiring local consultation and meaningful participation of communities, women and indigenous peoples, respecting their right to free prior and informed consent,” Erika Lennon from the Center for International Environmental Law explained to Geneva Solutions.

A climate tax and funds for adaptation

Certain proposals have been cause for friction. The Alliance of Small Island States (AOSIS), the Least Developed Countries (LDCs) and the ​​Independent Alliance of Latin America and the Caribbean (AILAC) are pushing, for instance, for a part of the carbon credits to be automatically cancelled for the sake of the atmosphere – almost like a climate tax.

Some are suggesting that it be as high as 30 per cent and mandatory. Observers say that the number is too ambitious and could be haggled down to 10. “There seems to be some agreement that automatic cancellation could be the way forward under Article 6.4, but the question is how much,” said Schallert.

“For the most vulnerable countries, offsetting is not enough. We need to move beyond offsetting to have ambitious action that's going to the very use of the system that's going to lead to a reduction in emissions,” the adviser said.

Another proposal that countries will have to discuss this week is that a part of the proceeds from carbon trading go towards climate adaptation, which vulnerable countries from the G-77 and China group have been strongly advocating for. Developed countries, and particularly the US, are likely to push back on this for legal reasons and there could even be a trade off through other climate finance discussions, observers said.

But vulnerable countries might be too weary to settle for promises as the default of rich countries on the $100bn a year promise has hurt their credibility, the advisor noted.

Finding middle ground

The draft texts submitted on Saturday night still contained brackets around these proposals indicating that their fate was yet to be decided and that countries will have an intense week of negotiating before they can reach a consensus.

“There are levels of compromise that are acceptable or necessary because this is about cost and benefit,” De León observed. “Within what is possible we have to ensure the most positive impact, reduce the risks and avoid the most destructive outcome.”

There is also enormous pressure on countries to close discussions, including from NGOs and the private sector. “The relevance of these negotiations starts to wane over time. Markets are popping up, in spite of the Paris agreement, where it is being interpreted in its own way, so it’s time to set those rules in place now and to get a deal,” Schallert said.

"The texts still have many deficiencies and brackets but they contain the most robust elements I have seen so far," De León said. “I think we have a better chance now [of finalising article 6] than we have had before.”