Environmental and Social Integrity in the Paris Agreement

02Nov2016
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By Gareth Phillips

The December 2015 Paris Agreement on climate change is a global treaty in which all participating countries agree to do what they can to contribute towards “holding the increase in global warming to well below 2°C above pre-industrial levels and pursuing efforts to limit it to 1.5°C above pre-industrial levels”. Specifically, countries agree to do this through their Nationally Determined Contributions (NDCs) to be submitted every five years to the UN Climate Change Convention. We already know that at the current level of commitments the world will not maintain the 2° target, so not only do we need to do more, but also we cannot afford to take credit for doing things which do not genuinely contribute to the goal. This concern is captured in the concept of environmental integrity, a particularly important concept because the Paris Agreement is voluntary.

Article 6 of the Agreement is designed to promote higher ambition in mitigation and adaptation actions and to promote sustainable development and environmental integrity. It provides for the creation of a mechanism through which mitigation outcomes can be “internationally transferred” between countries and activities can be implemented jointly through “voluntary cooperation”, opening the door for emission rights trading (specifically Articles 6.2 and 6.4). However, the Article also clearly establishes a provision that there can no double counting of units: in other words, if Country A exports units of emission rights to Country B, Country A and Country B cannot both count the units to demonstrate achievement toward their NDCs. To protect the Agreement’s environmental integrity, this provision needs to underlie all international transfers of emission rights.

This fact, and the fact that all countries have commitments, raises some issues which need to be taken into consideration in the design of the Article 6 mechanism.

  1. Paris Agreement compared to Kyoto Protocol: The Kyoto Protocol contained three flexibility mechanisms to help Annex 1 Parties (Developed countries) achieve the quantified commitments (International Emissions Trading, Joint Implementation and the Clean Development Mechanism). Alongside these mechanisms there was a whole compliance regime around accounting, registries, rules relating to carry over of unit and over-selling of units, etc. All of these provisions were there to ensure the environmental integrity of the Protocol and to enable trading and transfer of units. Under the Kyoto Protocol, units were fungible, with targets which were designed to reflect countries’ development status, having been agreed in a top-down process. The commoditization of units had a massive impact on the development and regulation of the market. None of these provisions exist in the Paris Agreement suggesting that it is fundamentally not well-suited to trade and transfer of emission or mitigation units or outcomes.
  2. Measuring a country’s emission reductions: The voluntary nature of the Agreement creates a fundamental weakness in the concept of international trade of emission rights or mitigation outcomes. Economically rational actors will reduce their level of ambition in order to provide headroom to generate emission rights for sale. To effectively address this issue, there must be some measure of whether the host (exporting) country’s target is considered sufficiently ambitious or for a discounting of units – both likely to be challenging to develop and both implying that a tonne of GHG emission or emission reduction in Country A is not the same as a tonne in Country B. This was also an implicit challenge under the Kyoto Protocol where, despite agreeing different targets, some countries found the economic cost of reducing emissions to be too high and dropped out of the Protocol. Furthermore, without any form of a compliance mechanism, there is no way to penalize or discourage countries from over-selling or selling themselves out of compliance with their commitment.
  3. The role of E-policies: Because all Governments must now start implementing policies and measures to achieve their commitments, GHG emitting activities are expected to be subjected to so-called “E- policies” – which the CDM Executive Board defined as policies implemented after 2000 which encourage reductions in GHG emissions. Implementing E- policies reduces baseline emissions and hence reduces the number of emission reduction that a project can generate. The possibility of the introduction of E- policies increases risk for project investors (because their yields of emission reductions will go down) or creates pressure on Governments to delay the introduction of the policies (in order to protect the returns for the investors). The CDM Executive Board ignored E- policies in the determination of baseline emissions but to do so under the Paris Agreement would lead to double counting of emission reductions and thereby damage the environmental integrity of the Paris Agreement.
  4. Shifting additionality under an evolving BAU: The issue of E- policies also impacts upon additionality as new and clean technologies are expected to more rapidly become business as usual (BAU) as countries strive to reduce their emissions. This would suggest that additionality should last significantly less time than under the CDM but quantifying that time is difficult – if it is over-estimated and new technology becomes BAU faster than expected, issued emission reductions would not be additional. In this context, exported units added to a national inventory protect the integrity of the Paris Agreement but at the same time this short-changes the host country economy, because the national inventory will not decrease to the same extent that it is increased to avoid the double-counting of the exported units.
  5. This leads to a different view of additionality which is that it can be totally ignored. Host countries could use the right to export a given number of emission reductions as a subsidy for low carbon technologies or even other social benefits if they wish. Private sector actors may be willing to invest on the basis of expected future value of emission rights. This is one way in which countries can monetize their right to emit GHGs.
  6. Recognizing and regulating emission rights as sovereign assets: If emission rights are regarded as sovereign assets, there is also the question of how to control who gains permission to sell them. There is a risk that some Governments may choose to distribute allowances for international transfer and sale in a non-transparent manner which does not give fair value to the economy, taxpayers or citizens. The CDM addressed this issue via the Host Country Letter of Approval (LoA). This was the instrument which gave private sector the right to take receipt of Certified Emission Reductions delivered by the UNFCCC directly into an offshore account, and in my opinion, it was the jewel in the crown of the CDM. However, it only worked because the emission reductions were of no value to the host country. Under the Paris Agreement, that is no longer the case. Governments may seek to extract a price for the issuance of such a permit and, if existing CDM projects are to have a role post 2020, Governments may seek to renegotiate the terms of the LoA. Transparent accounting of these sovereign assets raises new issues of social equity and integrity which were never discussed under the Kyoto Protocol.
  7. Registries and International Transaction Log (ITL): Some of these considerations will lead to the creation of multiple tiers of emission rights with associated prices and implications for Parties that use them to meet their commitments. Managing and tracking different grades of units will require the installation of sophisticated registries and international transaction logs (ITL) as seen in the EU ETS, for example, which will take time to establish and secure.

There is also a risk that in helping some Parties to raise their ambition, Article 6 transfer activities encourage other Parties to lower their ambition with no net benefit to the global environment or, worse, net cost to the environment. Such transfers may help some Parties claim to have ambitious targets whilst in fact, their additional transfer-based actions are sourced from countries with low, or lowered levels of ambition.

Of course, it is possible for buyers to simply cancel the emission reductions and leave them to be picked up in the national inventory, but as anyone who has either navigated the CDM registration and issuance process, or paid for it will appreciate, this is not a very good use of resources. There are easier ways to create mitigation and sustainable development outcomes for the host country.

Now may also be a good time to mention that the markets for voluntary emission reductions (VERs) and REDD + units which are used in some Corporate Social Responsibility programs to offset emissions, and are the subject of discussion within the international aviation industry, are almost certain to lose any form of environmental integrity post 2020. Unless these projects succeed in getting formal recognition from the host Government, and proof that the units are counted in the national inventory / stock-take, these units will be double counted. Only projects in sectors which are excluded from the scope of the NDC would remain valid, meanwhile Governments are expected to increase the scope of their NDCs over time.

More generally, any move towards the commoditization of the right to emit will once again encourage private investors to maximize profits by investing in specific geographies and technologies where units are cheap to create. Given the complexities described above, this will almost certainly discriminate against Africa in favour of advanced developing countries leading, once again, to the inequitable distribution of market driven investments.

However, it’s not all bad news. These are issues which apply to the international transfer of emission rights, emission reductions and mitigation outcomes. Domestic markets are subject to a very different set of rules which, if managed better than in many existing emission trading schemes, bring significant opportunities to monetize emission rights and leverage investments whilst still maintaining environmental and social integrity. For example, a domestic tax on large point sources of CO2 with linkage to domestic projects could result in private sector investment in waste management, land use and forestry. Furthermore, Article 6 also covers adaptation and, I would propose, existing carbon markets could relatively easily be re-modelled into an adaptation mechanism. 

Categories: Gareth Phillips


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