Global Carbon Market Cannot Leave LDCs Behind

Ahead of COP26, countries need to provide more clarity on compliance with Article 6 of the Paris Agreement, as well as support they can offer others.

Developed countries need to outline how their carbon markets will support net-zero greenhouse gas (GHG) targets and co-exist with other international frameworks, according to experts speaking at City and Financial’s ‘The Future of Carbon Pricing event’ yesterday.

With the least developed countries (LDCs) still highly reliant on carbon-intensive industries, Dirk Forrister, President and CEO of the International Emissions Trading Association, said more developed countries should work collaboratively to ensure LDCs can “embrace renewables at scale”.

“We have to scale up all national carbon pricing systems, be they voluntary or mandatory, if we want to be able to achieve the level of reductions required to meet net-zero emissions targets,” he said.

Ensuring LDCs are scaling their carbon pricing efforts will make the implementation of a global carbon market easier, panellists said.

Building a global carbon trading framework is a goal outlined in Article 6 of the Paris Agreement. All signatories of the Accord agreed to collaboratively establish a UN-backed mechanism to trade credits from carbon emissions reductions through specific projects.

The involvement of countries at different stages of development is seen as critical. For example, if Country A paid for Country B to build a wind farm instead of a coal plant, its support for the project not only reduces overall emissions, but Country B benefits from clean energy alternatives and Country A is credited for the carbon reduction.

Theoretically, this should mean wealthier countries will be more inclined to foot the bill for aiding LDCs transitioning to renewable energy alternatives.

Wayne Sharpe, Founder and CEO of Global Environmental Markets and the Carbon Trade eXchange (CTX), argued that countries should be going a step further, by updating their nationally determined contributions to include both domestic emission reductions legislation and their extra-territorial initiatives in order to harness the “bigger buy-side pressure of the global marketplace” if carbon pricing is going to work effectively at scale.

The EU has implemented its emissions trading system, which operates in all EU countries as well as Iceland, Liechtenstein and Norway. The scheme covers around 40% of the EU’s GHG emissions. Earlier this year, China also launched its national carbon emissions scheme, in which the country’s power operators are required to purchase emissions permits if their coal plant exceeds carbon intensity benchmarks.

US Treasury Secretary Janet Yellen has called for a carbon price of US$40 per m/t to be introduced, but President Joe Biden has yet to publicly announce his plans in this arena.

In the meantime, long-term investors in LDCs need more clarity on opportunities for businesses in LDCs from the development of a global carbon market, said Dr. Amal-Lee Amin, Climate Change Director at CDC Group, an investor in Sub-Saharan African and South Asian corporates.

“As an impact investor, we’re looking at how we can help catalyse the market and ensure LDCs can benefit from the opportunities that will be presented through voluntary or mandatory carbon markets,” Amin said.

“Sitting on their hands”

At COP25, held in Madrid in 2019, countries attempted to create a global carbon market mechanism in accordance with Article 6, but policymakers failed to reach common consensus.

“Too many countries and businesses are sitting on their hands, waiting to be told what to do rather than getting on and doing it,” Sharpe said.

He called for countries to build their domestic carbon market frameworks and attend COP26 with plans and structures that can then be adjusted and connected to models put forward by other countries.

“There’s already a funnel of funding available to carbon market projects, but getting them actioned domestically is hamstrung by people worrying about [their approach] not being right. It’s always better to do something rather than nothing,” he said.

Collaborations between domestic carbon markets are beginning to take place, which policymakers can leverage during their discussions at COP26, panellists noted.

For example, last year Switzerland and Peru finalised a carbon offsetting agreement which adheres to Article 6 of the Paris Agreement. Peru will receive funding for sustainable development projects, thus lowering carbon emissions, while Switzerland is able to count those emissions cuts against its national targets.

“There are also the ongoing discussions between the UK and Europe around linking their emissions trading schemes,” Forrister said.

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