The 2015 Paris agreement mandated the creation of an international market for carbon credits but came with precious few details. Now, the signatories to the accord have gathered in Madrid to hash out what such a market will look like.

At the previous annual climate summit in Katowice, Poland, delegates created a rulebook setting out the details and guidelines for every article of the Paris accord but one: Article Six, which calls for a global carbon market. Countries came painstakingly close to settling that issue as well, cutting the number of disagreements in draft documents from 391 on the first day to 132 on the last, according to an analysis by Carbon Brief.

However, by the time countries met for a gathering in June 2019, they had retrenched to their previous positions and started with a document with 672 disagreements. Now everything is once again up for debate, but Climate Change Minister James Shaw wants to see the delegates come away from COP25 with a finalised rulebook for Article Six.

“The rest of the Paris agreement, what they call the Paris rule book, did get agreed last year, which itself was pretty remarkable given how loose a lot of the language was in the Paris agreement,” Shaw said on a call with reporters after his first day of negotiations in Madrid.

“But this one article, Article Six, did not get completed, so that’s what everyone’s really wanting to make sure they get in place before next year, which is the first year of the Paris agreement.”

Worthless credits

Two of the most crucial issues that countries are debating in Madrid are what to do with carbon credits purchased under the system set up by the Kyoto Protocol and how to deal with so-called double counting of credits.

Kyoto set up a carbon market known as the Clean Development Mechanism (CDM), in which countries that exceeded their emissions targets could sell credits to countries behind on their targets in order to offset the latters’ emissions.

Some of these credits – and others sold under similar mechanisms – flooded into New Zealand as ‘hot air’ credits. Russian and Ukrainian units were particularly troublesome because they often didn’t represent actual emissions reductions, instead representing reductions that would have occurred anyway.

They were also bought in high enough quantities that they crashed the price of carbon credits. New Zealand banned the purchase of these credits in 2011 and 2012. CDM credits are currently worth about 30 NZ cents per tonne of CO2 emissions, compared to $24.95 per tonne of CO2 for a unit from New Zealand’s Emissions Trading Scheme.

At the same time, many countries – including Brazil and India – are saddled with vast numbers of these near-worthless Kyoto credits that they want to bring in to the new post-Paris Sustainable Development Mechanism (SDM) market.

The Paris agreement specifies, however, that the new market should deliver an “overall mitigation in global emissions”, beyond what would have occurred naturally. Allowing CDM credits to flood the SDM market might violate this dictate and, more substantively, reduce the ability of the market to actually force meaningful emissions reductions.

“We’ve been through this before, it didn’t work out for us very well under the old Kyoto Protocol system,” Shaw said. “A lot of [people] will remember the hot air scandal where we had a lot of dodgy Russian and Ukrainian units entering our system which crashed the price and didn’t actually represent any true emissions reductions anywhere. That’s why the set of rules around this are so critical, because no one wants to get burnt like they did under the old system.”

Double counting

The second major issue at stake is the double counting of credits. As it stands, a country that has failed to meet its emissions reductions target would be able to purchase SDM credits from a country that has done so in order to offset its emissions.

The issue arises when the seller of the carbon credits also wants to claim credit for its real emissions reduction. If, for example, New Zealand purchases credits from Brazil that represent reforestation in the Amazon, New Zealand then gets to claim credit for those emissions reductions. Brazil, however, then misses out on claiming credit for those reductions and has to make “corresponding adjustments” noting that those reductions do not count towards its own target.

Home to 60 percent of the Amazon rainforest, Brazil is particularly keen on allowing some form of double counting. Its delegates have relied on a passage from the Paris agreement indicating that nations selling credits should receive some benefit.

The SDM market should, the accord states, “contribute to the reduction of emission levels in the host Party, which will benefit from mitigation activities resulting in emission reductions that can also be used by another Party to fulfill its nationally determined contribution”.

Brazil points to this passage as justifying its position, despite the fact that the very next section prohibits double counting. “Emission reductions resulting from the mechanism referred to in paragraph 4 of this Article shall not be used to demonstrate achievement of the host Party’s nationally determined contribution if used by another Party to demonstrate achievement of its nationally determined contribution,” the agreement states.

New Zealand’s climate action criticised

Shaw’s appearance at the climate summit also comes just a week after Climate Action Tracker issued a report excoriating New Zealand’s work on climate change. The international group of scientific analysts found that New Zealand’s response to the crisis continues to be “insufficient”.

It found that New Zealand’s commitments were “not consistent with holding warming below 2 degrees Celsius let alone with the Paris Agreement’s stronger 1.5 degrees Celsius limit. If all government targets were in this range, warming would reach over 2 degrees Celsius and up to 3 degrees Celsius.”

Under current policy projections, the non-profit wrote, New Zealand will fail to meet its self-imposed 2030 unconditional emissions targets, which are already insufficient in the group’s view.

Shaw disputed these findings, saying that while Climate Action Tracker has been consistent in its methodology and criticism of New Zealand’s response to climate change, its model was based on assumptions not present in New Zealand’s own models.

In 2015, while in Opposition, Shaw said the country should cut its net emissions level to 40 megatonnes of CO2 by 2030 but the Government’s current target is closer to 58 megatonnes. Shaw declined to say whether New Zealand would be revising its 2030 targets and said he was taking advice on the issue.

Marc Daalder is a senior political reporter based in Wellington who covers climate change, health, energy and violent extremism. Twitter/Bluesky: @marcdaalder

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