FEEM-IEFE Joint Seminar on “Carbon Markets in the Paris Agreement”
12:30 - 14:00
Carbon markets 1.0 were, and still are, closely aligned to the Kyoto Protocol, both in terms of governance, as well as in the way they function. Some of the market components are run by the UNFCCC, and they include the Clean Development Mechanism (CDM), (Art 12 of the KP), Joint Implementation (JI), (Article 6 of the KP), and international emissions trading (Article 17 of the KP).
At a level below, and in some cases in parallel, the domestic markets, such as the EU ETS, intersected and interacted with the UNFCCC level markets.
These two markets had, and still have, different compliance obligations and separate governance. The governance of the UNFCCC carbon market is centralized, with the regulatory bodies, the CDM EB and JISC, under the authority of the CMP. The KP compliance value of units issued by the CMP (CER, ERU and AAUs) is defined by the CMP, and set at 1 ton CO2e. Domestic units, such as EU allowances, have no value for UN compliance, which is why they would need to be shadowed by CMP issued units in case of international transfers for linked domestic markets.
In the case of the principal domestic market, the EU ETS, it started as closely linked to the UN level market, but it slowly started to distance itself from it, weary of the potential politicization of the UN infrastructure.
There was little direct governance interaction between the two levels of governance, which in some cases led to serious problems, especially as it relates to the compliance value of units (CERs) used by the UN, which in some cases are assigned a zero compliance value by the EC for EU ETS compliance.
All in all, Markets 1.0 is a Cartesian world, where there is orderly accounting and governance, with each jurisdiction having the ability to set the compliance value of any units it allowed inside its system. However, for global accounting and compliance with KP obligations, the KP global compliance regime only recognized the units it issued for compliance – any other units had no standing.
The Quebec California link shows that linkages are possible outside the UNFCCC rules, but only if the countries are not part of a “international club” (e.g. KP) which has its own compliance and accounting rules.
Carbon markets are now moving in a Markets 2.0 phase. The fact that serious issues exist is visible from the current symptom: a virtual disappearance of the international component of the carbon market, due to the lack of demand to meet KP 2 and the Cancun Commitments.
However, another cause is the lack of clarity on the governance of markets for the Paris Agreement, including how the PA will interact with domestic markets. In a “normal and clear world” both sovereigns and private sector companies would already hedge their carbon risk using what will be good to be counted towards NDC. However, that is not the case and what we see is a freeze in any international activity, while domestic carbon pricing approaches become broader and deeper.
The lack of clarity in international carbon market and accounting from international transfers can be seen from a number of questions that would need to be answered. Some of the questions may include
- What will be the role and oversight of the CMA under different paragraphs of Article 6 of the PA?
- Who sets the value (compliance value if that name will still be used under the PA, or alternatively accounting value) of any domestically issued units in the PA accounting system?
- Does the CMA have any oversight on the quality of the units that are accounted for?
- What is the definition of “accounting standards” is referred to in Art 6 o the Paris Agreement?
- What governance lessons can be learned form the operation of the KP mechanisms, and what should be retained for the new mechanism being created?
This seminar has been jointly organized by FEEM and IEFE, Bocconi University.