Carbon Markets Could Be Glasgow's Biggest Legacy

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Climate COP26 Summit
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Negotiations on Article 6 of the Paris Agreement — which covers carbon pricing — finally crossed the finish line and may prove to be one of the most enduring legacies of the Glasgow Climate Pact. The product of a compromise, the Article 6 agreement might be best described as a mixed bag, much like the wider Glasgow outcome. It won’t end the debate about the merits of carbon offsetting, for example, with many still viewing offset credits as necessary while others characterize them as a shortcut. The Article 6 deal resolves some of the more technical criticisms but not the underlying principles of whether offsetting is a good approach or not. Regardless, the deal on Article 6 was hard-fought — resulting from more than six years of talks and some last-minute horse-trading.

Three main texts were agreed in Glasgow: Article 6.2 covers bilateral cooperation, which could see countries link emissions trading schemes; Article 6.4 sets out the terms for a new international carbon market that can be used by the public or private sector around the world; and Article 6.8 tackles non-market approaches to cooperation between countries, such as aid.

Sharply criticized for allowing the “carryover” of some carbon credits generated under the Kyoto Protocol, the deal at least partly addresses some key environmental concerns, notably on double-counting of credits. It excludes use of REDD+ credits generated historically from “avoided deforestation” too, and goes some way to assuage human rights fears, with an independent grievance process proposed. The deal also now sets out a path for adaptation finance to flow from carbon markets. A 5% deduction of credits has been allocated for a “share of proceeds” from the Article 6.4 crediting mechanism for adaptation finance — key ask from developing countries.

'Powerful Boost in Confidence'

The International Emissions Trading Association (IETA) welcomed the Glasgow Climate Pact, which is perhaps unsurprising from a long-term advocate of Article 6. IETA has argued that Article 6 could be an essential enabler of climate ambition while providing the real “net” in “net zero.” It suggests that with the deal reached at COP26, “the environmental integrity fundamentals are now set in stone” at an international level for carbon markets. “The Glasgow decisions on carbon markets offer a powerful boost in confidence to private investors. They now see a clear path for carbon markets to grow stronger as net-zero commitments are implemented,” says IETA CEO Dirk Forrister.

'Half-Baked' and 'Scam'

Others aren’t so sure. Greenpeace dismisses offsetting entirely, labeling it "a scam." Brussels-based Carbon Market Watch (CMW) suggests the rules are “half baked” at best. CMW Policy Officer Gilles Dufrasne argues it’s still a travesty that the compromise agreement will likely allow around 300 million Kyoto-era “zombie credits” to be transferred to the Paris Agreement and thereby dilute ambition.

Still, the main doubling counting trouble has been averted. A first step was taken toward phasing out zero-sum offsetting too — where each credit directly matches an emission, based on the idea that carbon markets should go further than just canceling an emission out but leave a net benefit. To address this, the agreement requires the cancellation of 2% of credits traded under the new centralized Article 6.4 carbon market, which is designed to achieve what's known as an overall mitigation in global emissions (OMGE). The basic idea here is to make offsetting do more and deliver deeper cuts, with the canceled portions providing an extra benefit for the atmosphere.

Not everyone is as pessimistic, given the overall progress and the protections that did pass. Kelley Kizzier, vice president of global climate at the Environmental Defense Fund, suggests the agreement on Article 6 provides the rules necessary for a robust, transparent and accountable carbon market. “The agreed Article 6 rules, while not perfect, give countries the tools they need for environmental integrity, to avoid double counting and ultimately to clear a path to get private capital flowing to developing countries,” she says.

Warnings on Loopholes

Rachel Kyte, dean of Tufts Fletcher School — formerly with the World Bank and a frequent COP participant — suggests caution. While the Glasgow agreement closes down some loopholes, some of the language for this remains unclear. This makes it “even more important that voluntary use of carbon markets is limited, high quality and used in specific circumstances,” Kyte says. It also makes the job of the UN secretary-general’s export group on setting standards for corporate net-zero commitments “all the more important," she adds.

Similar caution came from Lambert Schneider, research coordinator for international climate policy at the Oeko-Institut and part of the EU team in COP negotiations. Although the Glasgow rules include many robust elements, there are still some major loopholes. This means they are not good enough to ensure environmental integrity if used alone. Therefore, "any country or organization engaging in Article 6 will need to do more to deliver integrity and robust accounting.”

What Next?

The UN Framework Convention on Climate Change can now begin work on implementing the new Article 6 crediting system. This includes setting a new Supervisory Body, beginning implementation of improved crediting measures and infrastructure — thus clearing the path for new project registrations and sales of credits to start. It's up to governments as well to set out their own national strategic plans for how to use Article 6 and establish detailed implementation rules, IETA notes.

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