The 2019 Annual Meetings of the African Development Bank Group will be held from 11-14 June 2019, in Malabo, Republic of Equatorial Guinea. Find out more
Looking back at the Kyoto Protocol (KP), we were amazingly naïve but we have learnt a huge amount in 15 years of working with carbon markets.
The KP created an environmental asset, the Assigned Amount Unit (AAU), and distributed it to Annex 1 nations (OECD countries and Economies in Transition) based on rudimentary negotiations. Non-Annex 1 nations believed they were getting off lightly because their status implied no responsibilities for emissions. Meanwhile some Annex 1 Governments monetized these assets. Over-issuance, exacerbated by the US refusal to ratify the KP, resulted in a glut and price collapse but not before Annex 1 consumers had been charged for the privilege of living in a Kyoto Protocol world and EU Governments had handed out billions of Euro's worth of sovereign assets to polluting industries.
Non-Annex 1 countries were offered the Clean Development Mechanism (CDM) which came with a relatively transparent, though not perfect, allocation system - CDM projects could create assets called Certified Emission Reductions (CERs) if they could meet criteria including an additionality test to confirm that the project activities would not have taken place without the KP.
Joint Implementation (JI) allowed projects to be undertaken between Annex 1 Parties but did not rely on an additionality test because emission reductions transferred between countries were matched by the transfer of AAUs in a zero-sum transaction. Removing the requirement of the additionality test was consistent with the design of JI but suffered from two major problems - host Governments were allowed to apply their own "eligibility criteria" i.e. there was no specific requirement for a transparent process of allocating sovereign assets to private companies; and due to the surplus of AAUs in certain countries, host Governments did not particularly need to ensure projects were real or additional.
What have we learnt from the Kyoto Protocol and what does it mean for a market mechanism in a post 2020 climate regime?
a. Rating carbon assets, recognizing that units arising from countries with lower levels of ambition are simply worth less (in environmental and hence financial terms); and
b. Moving rapidly to an auction mechanism where countries buy what they need and the revenues are recycled to finance low and zero carbon development.
Developing countries must realize that the INDC process is leading to the commoditization of the remaining 2°C atmospheric space. This space is finite. It is a valuable asset, without which countries will be forced onto alternative development pathways. For many developing countries, a once in a lifetime opportunity exists to negotiate their rights to a fossil fueled development pathway and then sell those rights to finance a renewable energy pathway.