On Saturday, December 12 delegates from nearly 200 countries adopted a new global climate change agreement. The agreement, which was forged over two weeks of negations in Paris, calls upon nations to contribute to ambitious goals to address global warming. When implemented, the Paris Agreement will drive global investment in clean energy and establish a new mechanism for international carbon trading.
Delegates in Paris agreed to a long-term goal of holding the increase in global average temperature to below 2 oC, while pursuing further efforts to keep this increase below 1.5oC. The Agreement also calls for emissions neutrality in the second half of the century. Importantly, the Agreement commits all nations, developed and developing, to work toward this goal.
180 National Plans
Under the previous Kyoto Protocol, developing nations were given a pass on emissions reductions. The Paris Agreement notes all nations now have “common but differentiated responsibilities” for controlling greenhouse gas emissions. This means developed nation ambitions should be greater than those of developing economies, but the latter must contribute for the first time.
Countries must create nationally determined contributions (NDCs) towards climate goals, which will be reviewed every five years beginning in 2020. Leading up the Paris conference, more than 180 nations submitted initial NDCs. Many of these plans incorporated market mechanisms, such as clean energy investment, emissions trading, or other carbon price schemes.
For example, the U.S. NDC includes the Obama Administration’s Clean Power Plan, the Chinese have proposed a national emissions trading scheme to start in 2017, the E.U. is putting in place tougher emissions reduction mandates, and Canada anticipates additional provinces will join existing carbon trading schemes.
New Market Mechanism
The Paris Agreement provides the initial framework for nations to voluntarily pursue cooperative approaches to reduce GHG emissions. These cooperative approaches can use internationally transferred mitigation outcomes to mitigate GHG emissions and promote sustainable development. These “outcomes” or ITMOs can be used by nations toward their NDC climate goals.
Importantly, all nations will have access to this new crediting mechanism, whereas only developing nations could host emissions reductions projects under the Kyoto Protocol. Also, the mechanism will have a common set of robust accounting measures to avoid double counting among nations. The mechanism will be supervised by the Conference of Parties, which will seek to craft the rules around the program in upcoming technical meetings.
This new market mechanism can be seen as the next generation to the original cooperative approaches under Kyoto Protocol, the Clean Development Mechanism and Joint Implementation. While the Kyoto Protocol regime ends in 2020 in favor the Paris Agreement framework, the futures of the CDM and JI programs is yet to be determined. In any case, the new cooperative approach under Paris can be seen as the consolidation of CDM and JI in one mechanism.
Other Paris Agreement-Inspired Initiatives
++++++++++++++
The Paris Agreement will be open for ratification starting in April 2016. It will enter into force when 55 nations representing at least 55% of the world GHG emissions ratify the Agreement. As with the Kyoto Protocol, the U.S. is unlikely to seek ratification, although it has submitted an initial NDC and the current administration anticipates working under the new climate regime.
Evolution Markets sees the Paris Agreement providing continued momentum toward subnational, national, and regional emissions trading schemes. We are also encouraged by the creation of a new crediting mechanism with a focus on robust accounting. This new mechanism, while still far from development and implementation, could provide a vehicle for mobilizing cross-border investments in carbon emissions reductions and sustainability projects.
For more information on the Paris Agreement and its impact on carbon trading markets, contact our carbon markets groups in London and the United States.