COP26 delegates agree a framework for global carbon trading

At the start of the conference, the President of the European Commission, Ursula von der Leyen, announced the EU Carbon Border Adjustment Mechanism plans which are aimed at taxation of EU-importing entities with high carbon footprint, which would level the playing field with the EU industry, already subject to the European Emission Trading System.

President von der Leyen said that the EU was in favour of a global solution that would see the world’s biggest emitters agree on global carbon pricing.

Carbon trading has been considered a crucial component in the race to net zero because it will help to facilitate investment in carbon-reduction technologies.

Green taxation and carbon pricing more generally was not a central issue at the conference, but finding a resolution to the unresolved problems that had prevented the Paris Agreement from being implemented before now were seen as crucial.

The result of the negotiations – which hung in the balance until the final hours of the Glasgow conference – is a framework that will allow nations to trade carbon credits, with each credit equivalent to a tonne of carbon that has been reduced or removed from the atmosphere.

In broad terms, the agreement establishes:

• A centralised system that is open to both the public and private sectors
• A bilateral system allowing countries to trade credits with each other

The deal also aims to avoid the potential for ‘double-counting’ credits (known as ‘corresponding adjustments’) involving the country obtaining the credit and the country supplying it.

It is expected that the agreement will lead to a surge of funds into schemes that generate carbon credits, such as tree planting projects and mechanical carbon capture systems. It has been estimated that the value of these units could reach $1 trillion by the end of this year.

However, some have voiced concern that the agreement will allow millions of ‘old’ carbon credits to be included within the system. It was agreed in Glasgow that a limited number of credits agreed under the Kyoto treaty and created between 2013 and 2020 could be included as part of the proposal.

Carbon Market Watch, a non-profit organisation, has estimated that there are around 300 million metric tonnes of these outdated credits in the system. They voiced concern that their inclusion may suppress, rather than support, climate targets because they do not meet quality, transparency and human rights standards.

But another organisation, the Environmental Defense Fund, estimated that the old credits would amount to a rather more modest 120 million metric tonnes.

The International Emissions Trading Association – while expressing concern over the volume of these credits – said they believed their inclusion would help maintain a flow of finance to developing nations while the new mechanism is implemented.

The centralised public/private scheme will place an obligation on developers to deposit 5 per cent of the credits that they generate – along with a financial contribution – into a fund that will help developing countries to meet their climate goals. An additional 2 per cent of the credits will be automatically cancelled so that the units reduce – rather than balance out – emissions. These rules won’t apply to bilateral agreements.

Reaction

The United Nations Framework Convention on Climate Change (UNFCCC) said that the agreement would “give certainty and predictability to both market and non-market approaches in support of mitigations as well as adaptation”. The International Emissions Trading Association also welcomed the agreement, arguing that it would “provide clear accounting guidance for emissions trades between countries interested in attracting green investment through the global carbon market”.

In contrast, Matt Williams of the Energy and Climate Intelligence Unit warned that the measures “could create a destructive gold rush for using land to absorb carbon instead of making real efforts to cut it”.