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Policy

COP26: Carbon Pricing Rising on the Agenda

Copyright © 2021 Energy Intelligence Group
Outside illustrations of Glasgow during the COP26 - Glasgow

Carbon pricing has emerged as a top theme at COP26 — a discussion with far-reaching implications for the energy industry. At the landmark talks, some high-level leaders are calling for a global carbon price, or carbon price floor, to send a stronger energy transition signal across industries and society. If these calls eventually prove fruitful and result in more widespread carbon pricing — not necessarily a fully global price, which is unlikely of course — oil companies and other traditional energy players would face a much firmer signal to decarbonize. They may also gain new tools for making that decarbonization shift if the discussions lead to greater trading options in the form of carbon credits or offsets.

Global Price, Not Border Price

Speaking at the opening of the two-week conference, EU Commission President Ursula von der Leyen is among those who urged countries to “put a price on carbon." Likewise, she urged negotiators to “agree on a robust framework of rules to make global carbon markets a reality." Then, at a high-level roundtable specifically examining carbon pricing, von der Leyen pointed to the success of the EU emissions trading system in helping to curb the bloc’s emissions. She said the EU has learned from “some mistakes” with the market early on. With the EU looking now to extend emissions trading to maritime shipping, road transport and building heating, the commission president said she would like to see a “price on carbon for everybody and everything globally.” That would be preferable, she said, to the carbon border adjustment mechanism Europe has proposed as an alternative to prevent "carbon leakage."

At the same roundtable, Canadian Prime Minister Justin Trudeau agreed that carbon pricing is the right path forward and “the most efficient way to lower emissions.” It sends “clear, predictable signals to the private sector for the investments they need to make,” he suggested. International Monetary Fund Managing Director Kristalina Georgieva spoke too of the importance of setting a minimum global carbon price.

And World Trade Organization (WTO) Director-General Ngozi Okonjo-Iweala agreed this would also be less of a headache than carbon border levies, which are feared, in particular, by developing countries. It is critical, the WTO head added, that developed countries better involve those developing countries in conversations about any proposed border adjustments. Okonjo-Iweala offered to provide a forum at the WTO “where we can initiate this dialogue” to ensure “transparency and fairness and alleviate the fears.”

All Eyes on Article 6

Article 6 of the Paris Agreement could provide a framework for carbon pricing cooperation, along with carbon market linkages and a new international offsetting mechanism. But the details for implementing this key section of the accord have not been finalized or agreed upon. With the opening segment of COP26 among top leaders now concluded, technical negotiations are now in full swing, with Article 6 leading the agenda.

This has proved one of the most difficult details of the Paris Agreement to get over the finishing line, although negotiators came close to an agreement at COP25 in Madrid in 2019. There are some early signs of optimism this time around, with a new draft Article 6 text already released. This has deferred some tricky decisions until next year, allowing negotiators to focus on areas where they can make progress now. Observers note that the text still, however, contains many different options that need to be whinnied down before political decisions can be taken next week.

Contentions

One of the most contentious items under Article 6 is the fate of old credits and projects generated and registered under the Kyoto protocol’s carbon markets, in particular the Clean Development Mechanism. Campaign group Carbon Market Watch (CMW) warns against letting billions of old credits enter the new market and having a negative impact on climate action, market activity, and the market’s reputation.

Trading of emission reduction offsets is however already well established, with most activity today concentrated in the private sector — especially with more companies pursuing net-zero and climate-neutrality targets. And it will probably continue regardless of whether there is a deal on Article 6 at COP26 or not, CMW concedes. Nevertheless, “an agreement at COP could still impact private-sector activity by sending a political signal for what is or is not acceptable," the group says.

Tricky Decision

Discussions about Article 6 have dragged on for years and can often seem arcane and confusing. Advocates argue that Article 6 offers a means to vastly boost finance flows to developing countries and increase ambition, while critics contend that badly structured and regulated markets could have the opposite effect. Finalizing this last and most contentious detail of the Paris Agreement will not be easy, but it will also be held as a key measure of success or failure for COP26.

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