LONDON: Climate envoys from almost 200 nations have gathered in Madrid for two weeks of talks organised by the United Nations. The ambition at COP25 is to build on the four-year-old Paris Agreement, at which governments pledged to limit fossil-fuel pollution, by reviving a corner of the market in carbon pollution credits.
If that doesn’t sound like stakes commensurate with the ongoing climate crisis, that’s because it isn’t.
Protesters have taken to the streets again and again this year calling for immediate action to cut back on fossil fuels, including thousands of arrests in more than a dozen cities in October alone. The 16-year-old activist Greta Thunburg harangued world leaders for their inaction at the prior UN climate summit. The politics of the masses and the politics of the diplomats have rarely been so mismatched as they are at these Madrid climate talks.
“There is a disconnect between what people are asking for and what we’re seeing, ” Gilles Dufranse, policy officer at Carbon Market Watch, a Brussels-based research group that advises companies on how to put a price on greenhouse-gas emissions. “Multilateral meetings are very difficult, but it’s the only solution we have.”
And billions of US dollars could be in play, which is why thousands of companies and hundreds of financial institutions will be watching COP25 closely. Away from the headlines and grand promises sought by environmental groups, the delegates are quietly building a legal framework to support a wall of money that will guide the world in a greener direction.
Scientific findings this year have given an urgency to the process. Carbon emissions and temperatures have been breaking records, which scientists have linked to the increased frequency of violent storms and wildfires everywhere from Sweden to Japan and California. Global temperature increases since the industrial revolution are on track to push well past the UN target of 1.5°C, according to research from Climate Action Tracker, a group of three consultants examining the issue. While few would notice that amount of warming on a single day, when applied to the world as a whole it would mark the quickest shift in the climate since the end of the last ice age some 10,000 years ago.
Shifting the world away from fossil fuels will require mind-boggling amounts of money. At least US$71 trillion needs to be invested into energy over the next 20 years to reach the nirvana where global warming is held in check and the UN meets its sustainable development goals, according to the International Energy Agency (IEA). That’s about a fifth more than the US$59 trillion that the IEA figures will be spent under a business-as-usual scenario.
Raising that amount of cash requires slow and careful work. Like arms control or trade negotiations, the climate talks deliver milestone treaties only after years of preparation, spending the time in between on fine details undergirding broad arrangements already put in place. The carbon market is one of the most complicated mechanisms envoys have worked on, since it touches so many parts of the economy. The aim is to set up a system that creates credits for work done to reduce emissions. That might include installing wind farms, protecting forests or insulating buildings so they consume less energy. Countries that generate more savings than their target would be able to sell those credits to others that are struggling to reach their goal.
In theory, that will channel money to projects where the biggest savings can be made most cheaply. The difficulty is in defining what kinds of work count, how to measure those savings and what would ensure that countries don’t get credit both for making the savings and generating a credit. And this year, the envoys will talk about how to add the UN sustainable development goals to the market mechanism, adding issues like poverty and water protection to the list of things that might be able to generate a credit.
The long road to Madrid
The meeting in Madrid is part of a series of discussions stretching back three decades. It will bring together energy and environment ministers from the 197 countries that signed the Framework Convention on Climate Change in 1992. About 20,000 people will attend, including press, pressure groups and multinational institutions ranging from Opec to the World Bank.
The 1992 treaty held that global warming was real, rich industrial nations caused it and should therefore help developing countries with aid and technology to support greener solutions. While each one of those ideas is controversial now in Washington, the US ratified the treaty under Republican President George H.W. Bush. President Donald Trump has vowed to pull out of the Paris Agreement but not the convention that made the 1992 treaty possible.
The convention led to the 1997 Kyoto Protocol, which was a landmark because it mandated emissions cuts in 37 industrial nations plus the European Union. That group vowed to cut fossil fuel pollution 5% from 1990 levels by 2012, and later signed up to a second commitment period that will finish next year, when the Paris Agreement kicks in.
Paris marked the first time that all countries, rich and poor alike, agreed to make cuts in their greenhouse gas emissions. That brought China and India into the system. They had no obligations under Kyoto but since then have become two of the worst polluters. The cost of bringing those countries on board was that the Paris commitments are voluntary – every country decides for itself what level of emissions cut it can make and how those will be achieved.
This year’s meeting in Madrid is meant to elaborate on Article 6 of the 27-page Paris Agreement. That section deals with creating market mechanisms that each nation can use to help it meet emissions targets-something companies think they can profit from.
These systems aren’t new. The Clean Development Mechanism came out of Kyoto and has fed at least US$138bil into projects that reduce harmful gases that come from burning fossil fuels. The ambition in Madrid is to create a “Sustainable Development Mechanism” that might go well beyond the work of the CDM, feeding money both to clean-energy programs and to projects that meet the 17 UN sustainable development goals.
Friction over the nature of the rules is threatening this work and prevented a deal on Article 6 last year. Industrial nations led by the European Union want careful record-keeping and verification to make sure aid money actually goes into cutting emissions, which was one of the things the CDM lacked. Developing nations led by Brazil want a more flexible and free-wheeling system where a wider variety of programs qualify. An agreement is crucial to get big money to back the new Sustainable Development Mechanism credits.
“What is critical is the credibility of the system, ” said Gianpiero Nacci, deputy head of climate finance at the European Bank for Reconstruction and Development, a London-based institution that’s helping commercial banks unlock money for green finance. “It could accelerate low-carbon investment.”
About two billion CDM credits each representing one tonne of avoided emissions were issued over the life of the programme. The value of those credits peaked at more than 21 in 2008. They tumbled since and trade at around 17 cents apiece now after the EU, which was the main buyer of the credits, lost faith in CDM bookkeeping and wanted to clear up a glut in its own Emissions Trading System.
The CDM’s demise still rankles developing nations, which are anxious to see the cash infusion they’ve been promised. A decade ago, industrial countries pledged to step up climate-related aid to US$100bil a year by 2020. While they’re on the way to reaching that goal, dishing out US$71.2bil in 2017 according to the OECD, there’s little detail on how that money will flow in the future.
That puts attention on the Article 6 debate. Creating rules around a Sustainable Development Mechanism would also set out a framework for clean-energy developers financiers to work with and unlock money for more emissions-cutting work. Slowly, the financial world is taking note. More than 500 fund managers with US$35 trillion of assets calling on governments to take more action through a London-based group called the Institutional Investors Group on Climate Change.
“Business people want clarity, ” said Jean-Marc Ollagnier, chief executive of Accenture Plc’s resources operating group. “When they get clarity they will find incentives to invest. If they don’t, they will find excuses to delay.” — Bloomberg
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