Under the 1992 United Nations Framework Convention on Climate Change (UNFCCC), most countries are treaty-bound to avoid “dangerous climate change”. Countries who signed and ratified the 2015 Paris Accord then had to produce nationally defined contributions (NDCs) to meet the decarbonisation targets.
As the twenty-fifth annual UN Conference of the Parties (COP) begins in Madrid, attention has been focused on Article 6 of the Paris Accord and how this may shape global carbon markets.
Article 6 of the Paris Accord lays out an opportunity to implement the NDCs through cooperation mechanisms. These mechanisms seek to assist the existing targets and raise the ambition of future targets and forms the legal framework to allow market-based solutions, with an option for a common, cross-border carbon market potentially also linked to existing schemes such as the EU emissions trading system (ETS). This could be de-centralised through bi-lateral cooperation or centralised through an international body designated by COP. And another sub-section in Article 6 leaves the door open for non-market-based approaches although this has yet to be defined. The best way to proceed and enact this Article is to be decided at this year’s COP.
This is in response to the virtual collapse of the previous regime- the clean development mechanism (CDM). This was the world’s only global system for trading carbon which was designed to allow developed countries to achieve compliance through purchasing offsets from CDM projects in developing countries. This collapse was brought about by a myriad of factors coming together, such as the US’ refusal to ratify Kyoto; emerging economies classified as developing, such as China and India, meaning they have no emission reduction targets; and the recession and Eurozone crisis throughout Europe.
Eighty-eight of the countries that have continued to commit to the Paris Accord, representing more than half of global emissions, have stated that they plan to use or are using carbon pricing as a tool.
Now, the question is whether the tool will be fit-for-purpose and be all-encompassing. There is potential to create a sensible international carbon trading market that is fair for all countries- whether their economies are developing or developed. The simplest, transparent and most complete solution is the Climate Income from the Citizens’ Climate Lobby.
The UK is a successful case-study in implementing a carbon price that has the desired effect. The carbon price floor (CPF) policy was initiated to support the ETS in 2013 and since then electricity generation using coal has decreased to almost zero. However, the CPF only covers electricity generation, which is not the largest sector of emissions, and the pound per tonne of carbon dioxide (£/tCO2) was frozen at £18/tCO2 in 2016. Although the CPF worked as designed it could be more ambitious by targeting all sectors equally; using pound per tonne of carbon dioxide equivalent (£/tCO2e) to also capture methane emissions and other greenhouse gases; and not allowing a freeze on the price, instead investing more into the alternatives that mature or returning the revenue collected to the public, such as the Climate Income.
Climate Income works by, through new legislation, charging the businesses that extract or import fossil fuels, according to the amount they burn (£/CO2e). Import fees are levied on products imported from countries without a price on carbon along with rebates to UK industries exporting to those countries, discouraging businesses from relocating where they can emit more greenhouse gases.
So, a global carbon market that encourages participation across all countries, taxes the emitters at source, gives the revenue back to the citizens of the country from which the tax was collected, and accounts for importing or exporting sources of emissions sounds like the way forward and hopefully this will be discussed and realised at COP 25 with a commitment to implement this essential global carbon market.