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COP-25 Disappointment Should Not Be Due to Lack of Aspirations for Future Ambition, But to Lack of Support for Global Carbon Markets

On December 18^th, The Conversation (“academic rigor, journalistic flair”) – published my brief essay (“The Madrid climate conference’s real failure was not getting a broad deal on global carbon markets”), and today – in this blog post – I wish to share a slightly edited version with you (without the excellent graphics included in the original article).

The Reality Behind the Press Coverage

Press accounts of the Madrid climate conference that adjourned on Dec. 15 are calling it a failure in the face of inspirational calls from youth activists and others for greater ambition. But based on my 25 years following and analyzing this process together with scholars and government officials from around the world, I believe the reality is more complicated.

True, this round of climate talks did not produce an aspirational statement calling for greater ambition in the next round of national pledges. In my view, that’s not actually very significant in terms of its real effects, even though organizations such as Greenpeace and Extinction Rebellion framed this as the key task for this meeting.

On the other hand, the talks failed to reach one of their key stated goals: writing meaningful rules to help facilitate global carbon markets. As an economist, I see this as a real disappointment – although not the fatal failure some portray it to be.

Tackling the free-rider problem

Here’s some context to explain why international cooperation is essential to tackle climate change. Regardless of where they’re emitted, greenhouse gases mix in the atmosphere. That’s different from other air pollutants, which can affect localities or large areas, but not the entire world.

This means that any jurisdiction that reduces its emissions incurs all of the costs of doing so, but receives only a share of the global benefits. Everyone has an incentive to free-ride, relying on others to cut emissions while taking minimal steps themselves.

Recognizing this problem, nations adopted the United Nations Framework Convention on Climate Change at the Rio Earth Summit in 1992. As with many other international treaties, member countries agreed to hold regular meetings to devise rules for achieving the goals set out in the agreement. That’s how the Conference of Parties, or COP, process was launched.

Why climate change is a wicked problem

If the pace of progress at these meetings seems slow, keep in mind three factors that make their task enormously challenging.

First, every nation has an incentive to exploit the atmosphere and rely on other countries to cut emissions.

Second, making reductions costs money up front – but since carbon dioxide emissions remain in the atmosphere and warm the Earth for up to a century, many of the benefits of cutting emissions accrue much later.

Third, the costs of cutting emissions fall on particular sectors – notably, fossil fuel interests – that have a strong monetary incentive to fight back. But the benefits are broadly distributed across the general public. Some people care passionately about this issue, while others give it little thought.

At the COP-1 meeting in 1995 in Berlin, members decided that some of the wealthiest countries would commit to targets and timetables for emission reductions, but there would be no commitments for other countries. Two years later, nations adopted the Kyoto Protocol, which set quantitative targets only for Annex I (largely wealthy) countries.

That wasn’t a broad enough foundation to solve the climate challenge. Annex I countries alone could not reduce global emissions, since the most significant growth was coming from large emerging economies – China, India, Brazil, Korea, South Africa, Mexico and Indonesia – that were not part of the Annex I group.

Everybody in

At negotiations in 2009 in Copenhagen and 2010 in Cancun, distinctions between wealthy and developing countries began to blur. This culminated in an agreement at Durban, South Africa, in 2011 that all countries would come under the same legal framework in a post-Kyoto agreement, to be completed in 2015 in Paris.

The Paris Agreement provided a promising, fresh approach. It proposed a bottom-up strategy in which all 195 participating countries would specify their own targets, consistent with their national circumstances and domestic political realities.

This convinced many more nations to sign up. Countries that joined the Paris Agreement represented 97% of global greenhouse gas emissions, compared to 14% currently under the Kyoto Protocol. But it also gave every country an incentive to minimize its own actions while benefiting from other nations’ reductions.

Growing carbon markets

Are there ways to persuade nations to increase their commitments over time? One key strategy is linking national policies, so that emitters can buy and sell carbon emissions allowances or credits across borders.

For example, California and Quebec have linked their emissions trading systems. On Jan. 1, 2020, the European Union and Switzerland will do likewise.

Note, however, that such linking need not be restricted to pairs of cap-and-trade systems. Rather, heterogeneous linkage among cap-and-trade, carbon taxes and performance standards is perfectly feasible.

Expanding carbon markets in this way lowers costs, enabling countries to be more ambitious. One recent study estimates that linkage could, in theory, reduce compliance costs by 75%.

But for such systems to be meaningful, each country’s steps must be correctly counted toward its national target under the Paris Agreement. This is where Article 6 of the Paris Agreement comes in. Writing the rules for this article was the primary task for negotiators in Madrid (28 other articles were completed at the 2018 COP in Katowice, Poland).

Unfortunately, Brazil, Australia and a few other countries insisted on adopting accounting loopholes that made it impossible to reach agreement in Madrid on Article 6. Negotiators had an opportunity to define clear and consistent guidance for accounting for emissions transfers but failed to close a deal.

But if they had adopted guidance that extended much beyond basic accounting rules, as some countries wanted, the result could have been restrictive requirements that would actually impede effective linkage. This would have made it more expensive, not less, for nations to achieve their Paris targets. As Teresa Ribera, Minister for the Ecological Transition of Spain, observed at COP-25, “No deal is better than a bad deal” on carbon markets and Article 6.

The baton for completing Article 6 has been passed to COP-26 in Glasgow in November 2020. In the meantime, without agreement on an overall set of rules, countries may develop their own rules for international linkages that can foster high-integrity carbon markets, as California, Quebec, the European Union and Switzerland already have. If negotiators can keep their eyes on the prize and resist being diverted by demands from activists and interest groups, I believe real success is still possible.

What Did (and Did Not) Happen at COP-25 Climate Talks in Madrid?

I recently returned from the climate negotiations in Madrid (the twenty-fifth Conference of the Parties – COP-25 – of the United Nations Framework Convention on Climate Change), and as I have done in previous years, I would like to provide you with my brief perspective on the outcome. This year that means commenting both on what did and did not happen.

A Very Quick Overview

The press has characterized the Madrid climate talks in rather stark terms – as a failure, in contrast with the inspirational calls from youth activists and others for greater ambition. For example, Somini Sengupta, writing in The New York Times, characterized COP-25 as “widely denounced as one of the worst outcomes in a quarter-century of climate negotiations …” As usual, reality is somewhat more nuanced.

On the one hand, the inability of the climate negotiations to produce an aspirational statement calling for greater ambition in the next round of national pledges is not terribly significant in terms of its real effects, despite the fact that some members of civil society – ranging from Greenpeace to Extinction Rebellion – have framed this as the key task for COP-25. On the other hand, there was a significant unfulfilled objective of the negotiations, namely writing meaningful rules (for Article 6.2 of the Paris Agreement) that would help facilitate global carbon markets. As I explain below, this was indeed a significant disappointment, but not the fatal failure that some have portrayed it to be.

So, there is good news and bad news. I will begin with the latter.

But before I turn to the substance, I will note for the record that we – the Harvard Project on Climate Agreements – were busy at COP-25, including: five speaking engagements focused on two topics – national and sub-national carbon-pricing policies (carbon taxes and emissions trading), and international linkage and the critical role of Article 6 of the Paris Agreement); and podcasts with key observers and participants in the negotiations (Andrei Marcu on December 8^th and Paul Watkinson on December 11^th).

The Bad News

From my recent essay at this blog just before I departed for Madrid (What to Expect at COP-25 in Madrid, December 5^th), you know that a key task for COP-25 was to complete the so-called Rulebook on Article 6, in particular, Article 6.2, which can potentially facilitate international carbon markets and other forms of cross-border cooperation.

As I have said before, there are two necessary conditions for ultimate success of the Paris Agreement. First is adequate scope of participation. This has been achieved, with meaningful participation from countries representing some 98% of global emissions – or some 85% if the U.S. withdraws in November, 2020 (compared with the 14% of global emissions from countries committed to emissions reductions under the current, second commitment period of the Kyoto Protocol).

The other necessary condition is adequate ambition of the individual national contributions. But the very element of the Paris Agreement that fostered such broad scope of participation – namely, that the individual national “pledges” (Nationally Determined Contributions or NDCs) are anchored in national circumstances and domestic political realities – implies that individual contributions may not be sufficient, due to the global commons nature of the climate change problem, and the attendant free-rider issues.

So, the challenge has been to identify ways to enable and facilitate increased ambition over time (not just to issue calls for greater ambition, but to devise ways of actually facilitating it). Linkage of regional, national, and sub-national policies can be an important part of the answer – connections among policy systems that allow emission reduction efforts to be redistributed across systems. Such linkage can bring down costs tremendously (in theory, to as little as 25% of what those costs otherwise would be), and thereby provide the latitude for countries to increase their ambition.

If such bilateral linkages among countries are to be correctly reflected when tallying countries’ emissions relative to their NDCs under the Paris Agreement, then the Agreement needs to include a robust accounting mechanism. The obvious and clear home for this was (and is) Article 6.2, which provides for Internationally Transferred Mitigation Outcomes (ITMOs) and Corresponding Adjustments, which together can function as the international accounting mechanism to correctly reflect a multiplicity of international private-sector exchanges (under various international, intergovernmental linkages). The negotiators needed to outline some brief and simple rules for double-entry bookkeeping.

Unfortunately, due to the insistence by Brazil and a few other countries for accounting loopholes that “would weaken transparency and mask emissions in a way that would undermine the integrity of the accord,” it turned out be impossible to reach agreement on Article 6.2, even after more than two weeks of extensive discussions and intense negotiations, which pushed the COP-25 proceedings 40 hours past their scheduled conclusion.

The Not-So-Bad News

This may sound like a rather technical, albeit unmet objective of COP-25, and that is not an unfair characterization. But the press has focused on something else altogether, namely the demand from some countries – principally the smallest and some of the poorest nations – for an official decision at COP-25 endorsing significantly greater ambition than what is currently codified in the aggregation of the first round of NDCs under the Paris Agreement. Such a consensus decision was not forthcoming, and that has been labeled as the great failure of the Madrid talks.

But how important is such an aspirational (even inspirational) statement of ambition, compared with putting in place sound rules to achieve the ambition to which the parties have already agreed? As Nathaniel Keohane of the Environmental Defense Fund recently wrote, “If merely adding “ambition” to a UN decision made a difference to what nations do, we would have solved the climate crisis long before COP-25. What matters to actual ambition is the operational substance of the decision.”

The very strong press attention to the lack of an official decision regarding increased ambition at COP-25 was no doubt brought about, at least in part, by the forceful youth activists who have focused their energies on the urgency of what is characterized as the climate emergency, rather than on the hard and sometimes technical work of improving public policies, whether at the international, national, or sub-national level. Surely, Swedish high school student Greta Thunberg’s speeches have been inspirational, as were Al Gore’s exhortations not very many years ago, but the primary outputs in Madrid were disruptive protests inside the conference (which led to the expulsion of some of the youth activists, and the temporary barring of all members of civil society), and the dumping of manure outside the conference venue.

The Good News

It is very important to understand that although clear accounting rules under Article 6.2 would be very helpful, they are decidedly not necessary for the successful execution and operation of bilateral international linkages and consequent carbon markets. Let me explain.

There are three distinct but closely related levels of relevant policy action. First, national (or regional) governments can establish emission-reduction policies, including carbon taxes, cap-and-trade systems, and performance standards. Second, these jurisdictions can link their policy instruments through mutual recognition of permits, allowances, or credits via bilateral agreements. This allows trade among private-sector compliance entities of these units across international borders, which facilitates lower-cost achievement of the aggregate target. But such transfers of emission reduction responsibilities and actions ought to be correctly counted toward compliance with respective NDCs under the Paris Agreement. This is where Article 6 comes in!

In other words, the ITMOs of Article 6.2 would potentially be units of accounting for Corresponding Adjustments, not a medium of exchange for government-government purchase and sale. Thus, international linkages among heterogeneous policies in different countries can continue to be executed, as they already have, and international carbon markets can and will proceed to grow!

It is surely unfortunate that the Madrid negotiators did not capitalize on their opportunity to define clear and consistent guidance for accounting for emissions transfers under Article 6.2, because such a robust accounting framework would increase confidence in successful linkages of climate policies across jurisdictions. But if the guidance had extended much beyond basic accounting rules – such as implicit taxes on cooperation via what have been termed “share of proceeds” and “net global emission reduction” – then restrictive requirements would actually impede effective linkage, and thereby drive up compliance costs.

As Teresa Ribera, Minister for the Ecological Transition of Spain, observed at COP-25, “no deal is better than a bad deal” on carbon markets and Article 6. Countries can now proceed to develop their own rules for international linkages that can foster high-integrity carbon markets.

New Podcast on Carbon Markets & International Cooperation, Direct from UN Climate Change Conference in Madrid

In my previous posting as this blog, What to Expect at COP-25 in Madrid, I wrote about the “Rulebook” for the Paris Agreement, which puts flesh on the bones of the skeletal 13-page Agreement. It was completed last year at COP-24 in Katowice, Poland, with the exception of one very important part of the Agreement, namely Article 6, which potentially facilitates international carbon markets and other forms of cross-border cooperation.

In the latest episode of our podcast, “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program,” our focus is on precisely this topic in an interview with an individual who has had tremendous experience in this realm, Andrei Marcu, the founder and executive director of the European Roundtable on Climate Change and Sustainable Transition. You can listen to the interview here.

In hosting these podcast episodes, I interview interesting and accomplished people who are working at the intersection of economics and environmental policy. Our first episode featured my interview with Gina McCarthy, former Administrator of the U.S. Environmental Protection Agency (who is leaving Harvard to become President of the Natural Resources Defense Council). Our second episode featured Nick Stern of the London School of Economics discussing his career, British politics, and efforts to combat climate change.

In this third episode – recorded here in Madrid at COP-25 – Andrei Marcu provides an overview of the opportunities and challenges facing the negotiators, with particular attention to the important work now being done on carbon markets and international cooperation via Article 6 of the Paris Agreement. By the way, you can read about the other activities of the Harvard Project on Climate Agreements at COP-25 in Madrid here.

Marcu has long been engaged in multilateral negotiating processes and subsequent implementation action, both at the global and sectoral levels. In various capacities, he has acted as negotiator for developing countries, coordinator for the G-77 and China, and as representative of the international business community. He previously served as Manager of Private Sector Cooperation in the United Nations Development Programme; and founder, president and CEO of the International Emissions Trading Association (IETA).

Marcu attended the first week of negotiations at COP-25, during which time lower-level discussions were held among representatives of many of the 200 countries which signed the Paris Climate Agreement of 2016. Marcu characterizes the Agreement as a “decentralized pledge and review type of approach” to the global emissions problem, one that brings countries to the table, but also one that “creates headaches” in the market.

In the interview, Marcu says that what happens in Madrid during the coming week will be very important. “Presumably you will see three decisions – one for Article 6.2, one for 6.4 and one for 6.8,” he explained, naming three of the key sections of the Paris Agreement that are being negotiated at COP-24. Marcu also remarked that some of the most difficult decisions may be “punted” to future talks.

In general, Marcu said he is “optimistic that we are moving in the right direction” on addressing climate change, while also expressing concern about the pace of change. “To be fair, it is not an easy change. It’s quite a radical change as people are just coming to terms with what carbon neutrality means.” he stated. “It is not an incremental change. It is a radical change.”