The recent UN climate summit in Glasgow has fired a starting gun for the development of a new global carbon market to succeed the systems created under the Kyoto Protocol. This market is likely to be considerably larger than its predecessor as it will face enormous demand from both compliance and voluntary buyers.
Article 6 of the 2015 Paris Agreement establishes two systems: an accounting system for country-to-country transfers of emissions reductions (Article 6.2) and a project-based market that enables clean-technology projects to generate tradable emissions reductions.
Countries and private companies may invest in emissions reductions in any country to earn reductions, which they may apply towards their own respective targets; a country may retire a reduction against its own reduction target (known as Nationally Determined Contributions – NDCs), while a company may transfer the reduction to a voluntary registry and retire it to achieve carbon neutrality.
The Glasgow decisions also set rigorous accounting rules that require both buying and selling parties to correspondingly adjust their emissions balances, thereby ensuring that no emission reduction is counted twice.
This has been a particularly important issue for the voluntary carbon market because it has never had to participate in a global accounting system. Until now, emissions reductions have not needed to be accounted for by sellers; only by the buyers that retire them in order to achieve net zero.
And while the Glasgow summit completed this important practical work to enable the start of international carbon trading, it also highlighted that climate ambition remains firmly on the global agenda.
Under the Paris Agreement, countries were required to submit enhanced Nationally Determined Contributions by last year. The year’s delay due to the Covid pandemic gave many the time to complete their work, and by the time COP26 started, 140 countries had submitted new or updated NDCs, covering nearly 57% of global emissions, according to the World Resources Institute. Since then, that share has risen to more than 81% of global greenhouse gases.
Worryingly, the UNFCCC itself estimated that these updated NDCs would still lead to emissions rising to 58% more than 1990 levels by 2025, while UNEP calculated that these emissions would lead to temperatures rising by 2.7 degrees Celsius above pre-industrial levels by the end of this century.
So it was clear, even as the negotiations began, that there is still much to do in terms to ratcheting up collective action on climate.
The first week of COP26 was particularly notable for the number of far-reaching commitments and initiatives that countries unveiled. Typically, countries have used the occasion of COPs to announce national pledges or policies, but in Glasgow the announcements demonstrated a more collective intention to raise ambition.
The Glasgow Leaders’ Declaration on Forests and Land Use; the Global Methane Pledge; the Beyond Oil and Gas Alliance; the First Movers Coalition; and the Just Energy Transition Partnership were just five of the major pledges announced during the COP, and they brought together hundreds of countries and businesses in collective efforts to go above and beyond Nationally Determined Contributions.
Clearly ambition is still there. While post-COP analysis has shown that these many undertakings are still not sufficient to keep global temperature increases to 1.5 degrees Celsius, there is a growing trend of steadily increasing action and intent.
And the new Article 6 markets may be where much of this activity takes place. While many of the policy initiatives announced at COP are backed by some public funding, the private sector will bring forward the lion’s share of funding in emissions abatement.
Market mechanisms have been shown to generate significant emissions reductions: a 2018 report by the UNFCCC estimated that more than $303 billion had been invested in projects around the developing world under the Clean Development Mechanism – the predecessor to the new Article 6 system – and had generated nearly 2 billion tonnes of carbon dioxide reductions.
The detailed guidelines of the new Article 6 markets will be developed into rules and institutions over the coming two or three years, but already there will be companies and countries looking to implement clean technology projects that will be eligible to generate new carbon offsets that will find a home either in other countries’ NDCs, or in corporate accounts in voluntary registries.
The Glasgow COP has demonstrated that strong levels of investment are available to help increase climate ambition; now it’s up to governments to raise their game – again.