The Paris Climate Agreement & Carbon Markets

There’s a lot to unpack in the Paris Agreement, a landmark environmental accord that was adopted by over 195 nations in 2016. The deal aims to substantially reduce global greenhouse gas emissions in an effort to limit potentially catastrophic global temperature increases — with a target of keeping temperature rise below 2 degrees Celsius (based on pre-industrial levels).

For the Offsetra team, the signing of the Paris Agreement was a landmark occasion. It demonstrated the ability of the world to come together to combat climate change — and it showed that carbon markets will have an important role to play in doing so!

Carbon Trading in a Nutshell

Since the 1990s, with the introduction of sulphur dioxide trading instruments in the United States, so-called ‘cap & trade’ emissions trading systems have provided an economic means to reduce negative environmental emissions efficiently and effectively.

Essentially, carbon trading, which is a specific form of emissions trading dealing with units of carbon dioxide or carbon dioxide equivalents, is a market-based tool to limit greenhouse gas emissions. In economic theory, a cap & trade scheme can be cost-effective, meaning the aggregate costs of pollution reduction are minimised. In a cap & trade scheme each company, or individual facility, has flexibility in choosing which actions will be most cost-effective in helping them achieve their environmental compliance. By either reducing emissions or purchasing allowances to cover its emissions, investment flows to where it is least costly to have a positive emissions impact. In economic terms, “the marginal cost of pollution abatement becomes equalised across all regulated entities, and, in aggregate, the mandated environmental target is achieved at lowest cost”. [1]

Paris Agreement — Creating a Global Carbon Market

Article 6 provisions within the Paris Agreement outline a number of frameworks and actions related to carbon markets. An overarching goal of Article 6 is to create a global homogenized carbon trading system. Three key articles are summarized below: [2]

Article 6.2 governs bilateral cooperation via “internationally traded mitigation outcomes” (so-called ITMOs), which could include emissions cuts measured in tonnes of CO2 or kilowatt hours of renewable electricity.

Article 6.4 would create a new international carbon market for the trade of emissions cuts, created by the public or private sector anywhere in the world.

Article 6.8 offers a formal framework for climate cooperation between countries, where no trade is involved, such as development aid.

Open Questions:

As one of the major goals of the Paris Agreement is for countries to set and track targets for their emissions reduction goals, it’s important that carbon trading between them is properly accounted for. This is known as ‘Corresponding Adjustments’ and means that when Parties transfer mitigation outcomes internationally to fulfill another party’s mitigation pledge, the mitigation outcome must be ‘un-counted’ by the Party that agreed to transfer it. Questions around how and when a corresponding adjustment should be applied remain quite contentious and will likely be worked out at future United Nations Climate Change Conferences.

Is the Paris Agreement in Jeopardy?

In June 2017, United States President Donald Trump — a climate denier who has claimed climate change is a ‘hoax’ perpetrated by China — announced his intent to withdraw the United States from the Paris Agreement. Thankfully, there’s still a chance for the United States to stay involved — which is important considering it’s still the world leader in historical emissions! The process of withdrawing requires that the agreement be in force for three years before any country can formally announce its intention to drop out — then it needs to wait a year before actually leaving the pact. Thus, the United States can only officially exit from November 4, 2020 onwards, which is one day after the presidential election. If Trump decides to formally exit, there will still be a chance in the future for a different administration to support the Paris Agreement.

Moving Forward:
The International Panel on Climate Change (IPCC) notes that climate change will only be limited by “substantial and sustained reductions in greenhouse gas emissions.” [3] The general scientific view holds that any significant rise in global temperatures of more than 2 degrees Celsius would pose an unprecedented risk — potentially resulting in a greater frequency of severe droughts and hurricanes, and species lost on a massive scale.

Environmental markets, whether the sulfur dioxide markets first initiated in the 1990s or the carbon markets in place today, present a powerful market-based opportunity to spur emitters toward innovation and emission reductions. While certain tenets of the Paris Agreement, in regards to carbon markets, are still being worked out, there will undoubtedly be a role to play by voluntary carbon markets in the years to come. As individuals and businesses, we all have a role to play in steering humanity towards a more sustainable future. Carbon offsetting is one mechanism by which you, right now, can help fund projects which avoid or reduce greenhouse gasses in our atmosphere.

The Rise of B Corporations
So far, over 500 B Corporations have committed to being net zero by 2030, which is 20 years ahead of the Paris Agreement. [4] This announcement debuted last year at the 2019 United Nations Climate Change Conference, also known as COP25. Shortly after the announcement, hundreds more B Corps around the world pledged their commitment towards a significant reduction of carbon emissions to reach a net zero future by 2030.

Drawing from the B Corp Climate Collective: B Corps sign a Declaration of Interdependence stating the belief, “That all business ought to be conducted as if people and place mattered […] and thus we are responsible for each other and future generations.” All B Corps make a legal commitment to conduct business with consideration for the environment and all stakeholders, not just shareholders. [5]

To encourage early action, B Corps are urged to implement net zero plans and climate emergency playbooks for their businesses. To aid in this process, Offsetra will be hosting an introductory webinar on carbon markets and carbon offsetting strategies for B Corps on July 14, 2020. Here’s a link to register.

Interested in learning about specific carbon offsetting projects? View our portfolio of selected projects here: https://offsetra.com/#projects.

Sources:

1) https://voxeu.org/article/lessons-climate-policy-us-sulphur-dioxide-cap-and-trade-programme

2) https://www.nrdc.org/stories/paris-climate-agreement-everything-you-need-know#:~:text=The%20deal%20aims%20to%20substantially,the%20increase%20to%201.5%20degrees.

3) https://unfccc.int/files/meetings/paris_nov_2015/application/pdf/paris_agreement_english_.pdf

4) https://ar5-syr.ipcc.ch/topic_futurechanges.php#node21

5) https://bcorporation.net/news/500-b-corps-commit-net-zero-2030