Global CO2 markets after COP26

This week our attention turns to COP26 that ended last weekend in Glasgow. Was there a gulf between the technical jargon used by the conference participants and wider the global climate crisis affecting many parts of the world?

Listen to a discussion on the agreement reached and the implications for carbon markets. How far away are we from a global carbon price?

Guests:

• Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology
• Andrei Marcu, Executive Director of the European Roundtable on Climate Change and Sustainable Transition.

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:05

Hello listeners and welcome to the Montel Weekly podcast, bring You Energy Matters in an informal setting. In today's pod, we will delve into the COP 26 that ended last weekend. Was it the success that global leaders claimed it to be or wasn't a failed last attempt at solving? The climate crisis more blah, blah, blah, as Greta Turnberg said, or were there some elements that could turn the tide in the fight against climate change? And how far are we away from a global carbon price? This week, listeners, we have a slightly different format, so helping me, Richard Sverrisson to discuss these issues are two prominent climate negotiators and experts on carbon markets. We have Lambert Schneider of Germany's Institute for Applied Ecology. Andrei Marcu of the European Roundtable on Climate Change and Sustainable Transition. First of all, I'd like to warmly welcome you Lambert.

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 0:58

Hello. Good morning. Thank you.

Richard Sverrisson, Editor-in-Chief, Montel: 1:00

Cop 26. It was in the news almost every day, but how was it for you? How was it being there Lambert?

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 1:06

For me, it was the busiest cop I ever had. It was my 20th cop. But we were finalizing the rules for international carbon markets on six of the Paris Agreement and. That was a busy time for everybody who was involved.

Richard Sverrisson, Editor-in-Chief, Montel: 1:20

We'll come to that a bit later, but did he walk away from it thinking, this is a good deal, this is a good agreement, or was it a bit of a cop out?

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 1:28

I think it was better than I expected. Of course, an agreement always is a compromise and you never get everything what you want and it could have been more ambitious. But it was much better than I anticipated, just a few days before the end.

Richard Sverrisson, Editor-in-Chief, Montel: 1:44

Excellent. So could you describe some of the negotiate how the negotiations for our listeners, did they go on long into the night? What was required? Buckets of coffee and patience. Can you describe some of the nitty gritty discussions that you had and what form they took?

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 1:58

These negotiations say they really take different forms. Like you have official meetings where you meet with all parties and they are co-facilitated. Maybe there are 100, 200 people sitting in the room. And then you have bilaterals with other parties where you discuss specific topics. And then you have these small circles where you sit together and you try to draft compromises. Also in the eu, we always spend a lot of time within the EU to coordinate ourselves, our positions, and then sometimes you need to draft submissions, something you send to the COP presidency, and you seek support from other parties. And you say we've drafted here something and we have brought support. Please put this in the text.

Richard Sverrisson, Editor-in-Chief, Montel: 2:42

Okay. So you mentioned Article six in terms of discussions on international carbon markets. What did they build on from Paris? What was the progress that you saw there?

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 2:51

Yeah. In Paris anti six was adopted, which includes six two, which is a general framework for engaging carbon markets. What countries need to do, and then is it establishes a new mechanism that Article six four mechanism. The Paris Agreement on that is really short, like it has one page, right? And what we were doing the last six years is finalizing the rule book, so getting all the detailed rules, what this one page in the Paris agreement means on paper. And now we have maybe, I don't know, maybe 30, 50 pages, which really set out the details, what the Paris Agreement means. And this was still lacking like in 2018 in Q. The rule book was last largely finalized on many other matters, and this was the only chapter that was still lacking.

Richard Sverrisson, Editor-in-Chief, Montel: 3:41

And so what were the main sticking points here?

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 3:43

One main sticking point is accounting. That means how you account for the international transfers of mitigation, outcomes for international trading, of carbon credits, for example. And how to avoid double counting and doing that. And one of the main outcomes was that there are really no exemptions. So everything what is internationally transferred needs to be accounted for, whether it's inside or outside, the scope of nationally determined contributions. There are also no exemptions under the Article six four mechanism, which Brazil was demanding for a long time, so that's one of the big achievements.

Richard Sverrisson, Editor-in-Chief, Montel: 4:20

What was Brazil hoping for here and why? Why was that its position?

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 4:23

Yeah. Brazil for a long time argued that if they sell carbon credits, they do not need to account for them. They do not need to make additions or subtractions in their emissions balance. I think my interpretation is that they wanted implicitly to continue the Kyoto type trading, where developing countries did not have targets and could get finance. But of course, Brazil has an economy-wide target, and so if they sell carbon credits, the emission reductions appear in their national inventories, which they use to track progress. And they would also count them towards achieving their own target.

Richard Sverrisson, Editor-in-Chief, Montel: 5:01

And that's the double counting there. So the country that the trading partner tags it as a reduction, but also Brazil at the same time. That was before the previous position of Brazil.

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 5:10

Yeah. They wouldn't call it double counting of course, because double counting is prohibited. But they argued for rules, which ultimately would have led to double counting.

Richard Sverrisson, Editor-in-Chief, Montel: 5:19

Okay. What were the successes and perhaps the disappointments in these negotiations that you were involved in?

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 5:25

Yeah. I think the comprehensive accounting, which we got the price for that was that we have some transition from the clean development mechanism from the Kyoto Protocol to the Paris Agreement. And that means that some of the carbon credits generated under the CDM can be used towards. Achieving nationally determined contributions under the Paris agreements. So there's some form of banking of units, and that all the projects without limitation, which were registered under the CDM could principally transition and continue under the new mechanism of the Paris Agreement.

Richard Sverrisson, Editor-in-Chief, Montel: 5:59

You've described it in a blog. You wrote after Cop 26 that there was a loophole that remained here. Could you describe that for us? Number.

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 6:08

Yeah, I think the issue is that if you use carbon credits from the clean development mechanism to achieve NDCs that undermines the ambition of these NDCs, the national determined contributions by countries, the climate targets, because the emission reductions from these CDM projects, they have occurred anyways in the past. And if you take now a decision and you say, okay, these are emission reductions, which have already occurred, I can use them to achieve future climate targets. That may lead directly to more emissions to the atmosphere.

Richard Sverrisson, Editor-in-Chief, Montel: 6:41

Is this similar to the issue of additionality that we see in other renewables markets, Lambert?

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 6:46

Yeah, it is similar but not exactly the same issue. So maybe some of these credits they were even medicinal. Here. The issue is that the emission reductions have occurred and they have occurred regardless whether you allow these credits to be transitioned to the Paris Agreement and used towards climate targets under the Paris Agreement, right? And so by taking that decision, you will not trigger any further emission reductions, but you will just dilute the climate targets if the credits are used to achieve them.

Richard Sverrisson, Editor-in-Chief, Montel: 7:16

So there already, those emissions reductions have already been achieved. You're not creating any new ones. What's the life look like after the clean Development mechanism? What has replaced it?

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 7:25

Yeah. The decisions also include the establishment of this new mechanism under Articular six four, it's a successor of the CDM, and instead the CDM will be closed. So basically we have a new U UN mechanism, a successor of the CDM. Which is more ambitious than the CDM, so that's also one of the important outcomes. For example, emission baselines, they must be set much more conservatively than under the CDM. And so hopefully the integrity from the new mechanism will be higher than it was from the CDM.

Richard Sverrisson, Editor-in-Chief, Montel: 7:58

Yeah. So what's the role for CRS there? Are they'll just be phased out.

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 8:02

Yeah. I think emission reductions achieved until the end of 2020 can still be issued under the CDM for a while. And any emission reductions generated after 2020 will have to be issued under the new mechanism.

Richard Sverrisson, Editor-in-Chief, Montel: 8:17

So you mentioned the NDCs. Could you describe to a layman what these actually are and why they're important?

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 8:23

Yeah. Under the Paris Agreement, countries need to submit every five years, nationally determined contributions, NDCs. There's a legal obligation for countries to submit the NDCs, but the content, they can determine themselves. So how ambitious the climate targets are. That's all self-determined by the countries.

Richard Sverrisson, Editor-in-Chief, Montel: 8:43

And this is an annual target, or is it do they have a one year that they'll set a target for? For 2030 or 2040? How? How does this work?

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 8:51

Currently, most countries have set targets for 2030 and their NDC implementation period is a 10 year period from 21 to 2030, but the target is for 2030. One of the outcomes from Glasgow was about common timeframes of NDCs, and that means what target, what time period future NDCs should cover. And so what was agreed is that the next NDCs, which are due in 2025, they should address 2035 as the target year, and then the ones which are submitted in 2030. Should address 2040 as a target year.

Richard Sverrisson, Editor-in-Chief, Montel: 9:27

So what happens next? What's the roadmap like for COP 27 number? What are the key issues in the coming year or two?

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 9:35

I think with the rule book that was now adopted in Glasgow, carbon markets can be implemented, countries can. Exchange carbon credits and count these towards their nationally determined contributions. There's also the new mechanism being established. A supervisory board for that mechanism is being elected. So in principle, article six is now operational. There are a number of issues which parties couldn't agree in Glasgow. So a work program was established and the negotiations over the next year and maybe even longer. We'll have to address these issues, which couldn't yet be resolved, so it'll go further in some political matters and in more technical details. But the basic general rules are ready and in place. Excellent.

Richard Sverrisson, Editor-in-Chief, Montel: 10:22

So there'll be some tough talking ahead maybe.

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 10:25

I think, yeah, there will be some tough talking, but I hope that it will be easier because now at least the big picture rules are in place, right? And the big political issues have been resolved.

Richard Sverrisson, Editor-in-Chief, Montel: 10:35

And just finally, Lambert, how far are we from a global carbon price?

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 10:40

I think we will never have one single global carbon price. I think we will have different emission trading systems with different prices. They will not all be linked for political reasons, and also we will have different carbon credit prices depending on their quality, depending what they are, et cetera. I think it's maybe not even the aim to have one single global carbon price,

Richard Sverrisson, Editor-in-Chief, Montel: 11:02

but to have these markets interlink, but also not just the emission trading systems, but also the carbon credit trading. So that seems to be quite a complex picture here.

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 11:11

It is quite a complex picture. I think there will be different types of carbon credits being traded. For example, there are some which will help the country to achieve their NDC. So they are not double counting risk free. And there are some where the country gives away the emission reductions and makes the full accounting under the Paris agreement, and these two will be traded in parallel. And you could have different types of attributes to carbon credits, right? And then these may be exchanged as different contracts. So you will have markets, you will have relatively global markets for certain types of carbon credits, but it'll not be one single market. It'll be different markets where the carbon credits have different attributes.

Richard Sverrisson, Editor-in-Chief, Montel: 11:53

Excellent. Lambert, thank you very much for joining them on our weekly podcast this week.

Lambert Schneider, Research Coordinator for International Climate Policy at Germany’s Institute for Applied Ecology: 11:57

Yeah. Thanks to you

Richard Sverrisson, Editor-in-Chief, Montel: 11:58

continuing our discussion on the aftermath of COP 26, but this time focusing more on the impact for Europe's energy firms and carbon trading is Andrei Marcu, a warm welcome to you, Andrei.

Andrei Marcu, Executive Director of the European Roundtable on Climate Change and Sustainable Transition: 12:09

Thank you for having me here today.

Richard Sverrisson, Editor-in-Chief, Montel: 12:11

It's a pleasure. Let's start off, Andrei, by talking about the COP 26 more generally. What's your view of the agreement reached of the Glasgow Climate Pact?

Andrei Marcu, Executive Director of the European Roundtable on Climate Change and Sustainable Transition: 12:19

It's certainly a an ambitious achievement. I would say probably bit more that than many had expected and there was a crescendo that led to this. As we've seen in some other cops over the last number of years. People tend to pull a rabbit up their head. At the very end, and there's, as read, Spanish used to say, there's exuberance that comes into play and a lot of things that you wouldn't expect would come out. But there have been in the working and it's clear that the process, the Glasgow declaration the Glasgow Pact, what it really does, it sets up a process of ambition and of a process of ensuring that ambition continues from here to the next cup and so on. Through a series of ministerial meeting synthesis reports that, that come up every year, a process that is a draft conclusion or a draft decision that is being prepared by the subsidiary bodies in the review of review at Scharmer Sheik next year to put in place the process of raising ambition. Every year. So that those are very significant things. These are not things that existed so far. So if you look at the declaration to the effect that say that, established the work program to urgently scale our mitigation ambition and recommend the draft decision. So all of a sudden you're gonna be faced with a draft decision that would create a mechanism. That would if you enforce countries to, to raise ambition on a more regular basis right now, that it's pretty much on the pleasure of the countries. They're being invited, they're being correct, they're being, whatever you wanna call it, but there's never been a mechanism in place that makes them do that.

Richard Sverrisson, Editor-in-Chief, Montel: 13:58

In a sense, Andre, it's getting the ball to roll faster. And in a certain sense, a certain clear direction,

Andrei Marcu, Executive Director of the European Roundtable on Climate Change and Sustainable Transition: 14:04

it creates an air or a sentiment of innovative inevitability and discontinued pressure, if you wish. That now is being institutionalized. There are processes that exist. The moca, which is run by the Canadian, the St. Peters Prepared Dialogue, which is run by the Germans. There are a number of the preco, this, that, and the other thing. But these are in some ways things that are being put in place by various government or coalition government that wish to keep this in the public eye and keep under the political pressure. Now we have an institutionalized in the U-N-F-C-C-C process set of activities. That will continue this dialogue, but in a much more formal way. So it does represent, in my opinion, a significant change that will be felt. And again, we have two cops coming out ahead of us that very unusually have two cops in the Arab world or in Egypt and one in the UAE. Even that in its own way, would've thought 10 years ago that you'd have a cop in Egypt and one inua.

Richard Sverrisson, Editor-in-Chief, Montel: 15:05

There was at times a kind of disconnect between the jargon, the terminology, the abbreviations used by the parti participants at the cop and the wider crisis in golfing parts of the world. Or, had Greta Thunberg saying, blah, blah, blah, is the pact that was agreed. Is it consistent with the Paris agreement?

Andrei Marcu, Executive Director of the European Roundtable on Climate Change and Sustainable Transition: 15:23

It certainly bends the curve towards two degrees and maybe a little bit under, but the conversation now has not, it's not about two degrees anymore. I think the conversation has become about 1.5. My sense is that it's also the inevitability that has dawn on industry that now all of a sudden has decided that all of a sudden has decided at some point, there's always an inflection point in life. Almost everything. And now the realization has come is that, there. This new world that you have to live in and business has a way of adapting itself and making the best of what's coming up. So they're looking for no opportunities. I think now they're engaged. The moment you engage in these people, I think the momentum changes dramatically. It's almost like who's leading who here, the business community leading politician and politician pushing from behind. So it really is accelerating.

Richard Sverrisson, Editor-in-Chief, Montel: 16:15

I just wanted to ask you about article six and the firming of rules for offsets from the Paris Agreement agreed in Paris. Does this increase or reduce the risk of corporate greenwashing?

Andrei Marcu, Executive Director of the European Roundtable on Climate Change and Sustainable Transition: 16:27

Look, I'm one that, I have some roots, deep roots in the business community. I've been in the think tank world for the last 10 years, but nevertheless, I still remember where I come from and I try to understand them. So I don't know about greenwashing. I think that, governments will put in place mechanisms that are, that provide flexibility. We still live in a market economy. So the fact that you apply market mechanisms and economic approaches to addressing a scarcity, I don't think there's anything wrong with that. And I think that we should welcome that. So I don't believe that this is represents greenwashing. I think it's the rules are certainly tight. Now, one thing, Richard, is that you have to remember that. There is no nothing certain except death and taxes. So if you want a hundred percent certainty, then you better not get out of bed. Yes. There is always a risk. There's always a risk that there is going to be a little imperfection here and there, but we're not looking at imperfections here. We're looking at a mass movement of gigatons.

Richard Sverrisson, Editor-in-Chief, Montel: 17:26

I hear you very clearly, Andre. And that's very reassuring. I'd also like to touch on what Article six then means for the ETS in particular and for European energy firms. Does it, for example, does it change the level of ambition that we can go from say, to 61% carbon reduction by 2030 or 63% even?

Andrei Marcu, Executive Director of the European Roundtable on Climate Change and Sustainable Transition: 17:44

Look, I just finished before this discussion, I just had an interview with Lina Badra, who's the acting director for international in the commission. I had on my list of questions to ask her that because frankly, the article six is about international cooperation. The two parts are really, that are of interest to most people that you talk to that we shouldn't be putting out. Article six, down Article six eight, but six two and six four are the ones creating the framework for markets. They are in a way relevant and not relevant to the eu. They're not necessarily relevant. They're not relevant in the sense that the EU will not accept credit international credits that can be used as offsets in the ES, that same way that we use this CS during the Cure protocol. That's quite clear. I think that we repeated ad nauseum from the vice president. 10 months down to the head of unit in the in dig klima. So from that point of view, in terms of imports of credits, that would act as a cost containment mechanism. That, and that would allow an increase in ambition doesn't seem to be in the card in the eu. What it does, it regularizes, if you went from a Paris agreement point of view, the linking of emission training schemes such as the one that we have of the Swiss. And any other emission trading link, any other linking of emission training scheme that may come in the future. So it does create the international framework for the exchange of credit between emissions training schemes. What will happen is now that I think the EU may find itself, actually business community eu, in my own opinion, may find itself in the odd position where some of their competition. Whether in Japan or the United States or some other countries that will accept in their NDCs, they've made a statement they accept international. International transfers may benefit for a more economic point of view. They would benefit for. A cost containments through international credit, which probably would cost less than what is doing done domestic. EU business will not benefit for that 'cause we are not allowing international credit eu. So I would argue, I could argue depending who's going to accept them and to what level of amplitude they'll accept it, that it is possible that. U business may find itself a certain disadvantage

Richard Sverrisson, Editor-in-Chief, Montel: 20:07

as compared to the its competitors out there in the US or Japan. Absolutely. A final question really, Andrei, with the climate Pact grid in Glasgow, would that add pressure on Germany or Poland, for example, to accelerate coal closures?

Andrei Marcu, Executive Director of the European Roundtable on Climate Change and Sustainable Transition: 20:19

I think that is not, this is not for Germany and Poland was not written for Germany and Poland. This was written for the South Africans and the Chinese and the Indians. Germany and Poland are part of European Union which has fairly ambition target. I think that there is obviously gonna be internal before there's the external pressure of the U-N-F-C-C-C statement. That always acts as a backdrop. That always acts as backdrop for EU policy because we are part of the Paris agreement. But the primary pressure will continue to come, I believe, through from domestic EU policy and politics with the backdrop of the Paris Agreement and this renewed call for PHA down pha out facing down coal. I think that both Germany and Poland do understand that there is a facing down and a facing out, and at this point I think it's a matter of the speed with which is happening. And I think that there is a, will be increasing pressure as we move forward. With these ratchet income mechanisms, which we can expect that EU may, you know what one can expect, Richard, is that with this annual review and the stake stock day coming up 23, 28, 55% may not be the last call.

Richard Sverrisson, Editor-in-Chief, Montel: 21:35

Absolutely. Let's let's let's hope so Andrei and thank you very much for joining on our weekly podcast this week.

Andrei Marcu, Executive Director of the European Roundtable on Climate Change and Sustainable Transition: 21:40

Thank you for having me.

Richard Sverrisson, Editor-in-Chief, Montel: 21:41

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