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In less than one week’s time, UN negotiators from more than 180 countries will flock to Madrid, after one of the most tumultuous years in climate politics. If record fires across the Amazon and Borneo, freak storms in Europe, and unprecedented global protests can’t halt a record increase in annual emissions, the negotiations in Madrid this year will be seen as a critical juncture in restoring confidence in the international commitment to combating the climate crisis. 

Key to their success will be the discussions on carbon markets and their regulations. Known as “Article 6” in the UN world of acronyms, this has been one of the hottest contests of recent years, with negotiations delayed, suspended and pushed passed midnight as key players such as Brazil and Norway have failed to find a happy landing ground after years of disagreements. 

Since the late 1980s, the idea of a carbon price or carbon market has been one of the cornerstones of the UN’s efforts on climate change – but getting it right for everyone has always been the tricky part.

The main concept underlying carbon market discussions is that CO2 can be transformed into carbon credits that can be bought and sold to pay for emissions cuts for big countries or companies. Every ton of CO2 (which is about the same amount that a flight between Oslo and Bangkok releases) is equivalent to a carbon credit. 

This can only operate in the context of a country that has agreed to cap its emissions to a certain level each year. When a country does that, there will only be a limited number of credits available for companies to emit. Once carbon credits are allotted, companies that are able to decrease their emissions can sell the excess to other companies that need them.

Under the Paris Agreement, every country has committed to specific emission reductions over the next few years. Using Article 6, countries may be able to invest in carbon credits abroad to achieve their own targets. For example, a country could fund a reforestation project in a different country, and count the carbon credits generated as their own reductions. 

While countries agree that a system such as this is interesting, there are a few sticky points that need to be settled in Madrid to make sure that works and allows to effectively decrease emissions worldwide.

Controversies

During the Kyoto years, a carbon market scheme such as the one outlined here did exist. It was called Clean Development Mechanism, or CDM. However, it is now widely acknowledged that this system had major flaws and failed to deliver the expected outcomes. 

The main issues with the CDM revolved around what is known as “additionality”. In order for projects to receive carbon credits, applicants need to show that the emission reductions brought about by these projects would not have happened if the carbon credit system didn’t exist. This means that these reductions have to be additional, new. 

This is not a minor detail. If reductions are not additional and the project is awarded carbon credits, the holder of these credits will be entitled to release emissions that are not being offsetted elsewhere. This would result in a net increase of greenhouse gas emissions into the atmosphere – exactly the opposite of what the system aims for.

However, a report commissioned by the EU in 2016 estimated that about 85% of the CDM projects had a “low likelihood” of “ensuring that emission reductions are additional and not over-estimated”. According to the report, the main cause for this was the initial lack of clarity in the rules that regulated the assessment of additionality, which is indeed a very challenging problem.

carbon markets

This has prompted several NGOs and climate activists to oppose the implementation of a new system under the Paris Agreement. According to this view, carbon markets will result in less climate ambition and perpetuate global inequalities, allowing rich countries to buy their way out of the climate emergency. A petition issued by Friends of the Earth International and other organizations reads:

Carbon markets do not work. Cap and trade schemes have failed to reduce emissions or deliver real climate action. Under carbon market schemes, global emissions have continued to rise. Intrinsic flaws and loopholes render them unworkable. Offsetting requires scientifically dubious assumptions: mixing credits from different offsetting schemes mean that carbon offsets from different sources are counted as ‘equal’. Burning carbon from fossil fuels in one part of the world cannot be ‘balanced out’ by offsetting carbon from natural land carbon cycles—that’s not how ecosystems work.“

More optimistic observers believe that carbon markets can still be a useful tool to reduce emissions and help channel resources from wealthy countries to the developing world. In any case, the regulation of these markets will likely have a great impact on the future of the Paris Agreement. 

At this moment, the most controversial points regarding the carbon market talks are these: 

Old credits. Countries need to decide if the new system will accept the old carbon credits that were generated during the Kyoto Protocol. This would reward countries that took early-action measures. However, since most of these projects did not result in real emission decreases, if the old credits are incorporated into the new system, the market will be flooded with worthless carbon credits that are not linked to real emission reductions.This is especially worrying in the context of countries such as Australia, which wants to use its old credits to abate around 50% of its emission reduction target for 2030.

Double-counting. A critical issue that needs to be solved is to find ways to avoid the double-counting, which would happen if both countries involved counted those emission reductions as their own. 

Raising ambition. The CDM system did not push countries to increase their emission reduction targets. Depending on how Article 6 is drafted, the new system runs the risk of becoming a mechanism that simply moves emissions from one place to another. 

Brazil’s stand

(We wrote a whole piece about what to expect from Brazil at COP25. You can read it here).

In general, Brazil supports a number of rather unpopular positions around carbon markets, which it sees as a key money-maker for the country in the future.

Brazil is one of the countries that holds more credits from the old Kyoto Protocol carbon market system. In previous UN climate talks , Brazil’s negotiators pushed for these credits to be considered under the Paris Agreement. 

However, the majority of countries oppose this, as most of these credits did not account for real emission cuts. Brazil is aware of the problems involved with using old credits in the new system, but wants to find ways to make sure that their early-action efforts are not dismissed under the new agreement. To try  to find a middle ground, Brazil has suggested during COP24 that the old credits could have their market prices “stabilized”, which would avoid lowering the price of the new credits. 

During the last COP, Brazil was also involved in a controversy regarding double-counting. Newspaper The Guardian and others reported that Brazil supported a drafting of Article 6 that would open the door to double-counting, that is, that emission reductions that a country sells to another one could be counted by both countries.

Brazil’s proposal would allow double-counting by developing countries during the first years of the Paris Agreement, provided that at a later stage, these countries would set the record straight through other emission reduction schemes. Most countries oppose this idea and warn that could create a mirage, making it difficult to track real emission cuts.

But just a few days after COP24, Thiago de Araujo Mendes, a member of the Environment Ministry, wrote in a letter to The Guardian that Brazil’s position had been “misrepresented”, though he didn’t pinpoint where the error was. It should be noted that in the current stage of the negotiations, nobody wants to be accused of supporting “double-counting”, which has become a sort of ‘bad word’.

What’s at stake

Many observers say that a bad agreement on Article 6 would be worse than no agreement at all and could compromise the future of the Paris Agreement. If the new market carbon allows credits that are not tightly linked to real emission reductions, climate targets could become empty statements. 

Article 6, unlike almost anything else in the [UN climate negotiations], has the potential to do actual active harm,” said Felipe de Leon Denegri, one of Costa Rica’s negotiators, according to Climate Home News.

Climate justice also needs to be taken seriously into consideration in Article 6. Under the previous system, rich countries invested in clean energy projects in the developing world as a way of polluting beyond their emissions cap. Without effective safeguards to prevent abuses, these million-dollar projects increased the pressure on local populations, even prompting human-right abuses. That was the case, for example, of the Sasan coal-fired power plant, in India, where communities were displaced, labor standards disregarded and ground water polluted, according to an investigation by Carbon Market Watch.

There’s also a big challenge in creating the right conditions to make carbon markets a tool to effectively decrease total emissions. In the past, projects that did not reduce (and probably increased) emissions were allowed to be monetized in the form of carbon credits. 

These include interventions that increased the efficiency (and hence the lifespan) of highly polluting coal-power plants, and the building of hydroelectric dams, which release high amounts of methane during their construction. Often, these projects were already planned beforehand, meaning that they were not created to replace a more pollutant alternative and hence did not really decrease emissions.

Let’s hope that countries have learned from these past experiences and are able to come up with the best possible deal to the environment.

Ignacio Amigo

About Ignacio Amigo

Spaniard in Brazil. Passionate about science and journalism. Worried about the climate. Hiker, diver, cyclist. Occasional photographer.