Presentation from September 2021 CCXG Global Forum

1. Exploring the role of
international carbon markets in
achieving countries’ net- zero
targets
Dr Ian Fry
Solomon Islands
Ian.Fry@anu.edu.au

2. Overview
• Aspects of carbon markets (with focus on Article 6 of Paris
Agreement)
• Complications with Carbon Markets
• What needs to be done to head in right direction

3. Concept of carbon market
• Carbon price: In theory, a uniform price on carbon can channel
private capital flows, and makes clean energy more profitable, allows
energy efficiency to earn a greater return, and makes low-carbon
products more competitive

4. Cap and trade
• The Cap: It sets a limit on total emissions
• Trade: An Emissions Trading System (ETS) imposes a cap on the total
emissions in one or more sectors of the economy
• The regulator issues a number of tradable allowances not exceeding the
level of the cap.
• Each allowance typically corresponds to one ton of emissions.
• Entities covered by the ETS are then allowed to trade these allowances,
resulting in a market price for the allowances.
• The trade can be achieved by exchanging tradeable allowances or buying
offsets/crediting mechanism for mitigation activities (Art 6.2 and Art 6.4)

5. Factors that undermine the economic drivers of carbon markets designed
to reduce emissions
• Trading works on the principle of finding the lowest possible mitigation
cost
• Cheap options are not always the best options for making a significant
impact (e.g bio-sequestration)
• The system does not work within an overall cap
• Parties may over-allocate the number of allowances
• Too many allowances are given away without a price (due to political
considerations)
• Poor reporting and accounting practices lead to mismanagement of the
market
• Fraudulent activity

6. The Cap
Is there a real cap in the Paris Agreement?
• The cumulative pledges associated with NDCs theoretically creates a cap
Complications with NDCs
• Some pledges are not based on absolute emissions reductions, eg.
Relative to GDP -This makes the cap difficult to quantify
• Some NDCs only cover a limited number of sectors
• Some use non-CO2 metrics- (This creates “sub-caps” for different metrics,
making it difficult to find a common metric to measure overall emissions
reductions
• Some are not related to mitigation

7. Complications with Internationally Transferred Mitigation Outcomes (Art 6.2)
• Poor national accounting system with lack of transparency – allows non-
genuine allowances to be traded
• Different target years create issues with apply corresponding adjustment
• Irregular timing of reporting requirements and poor international oversight:
allows system gaming
• Trade in allowances may not achieve overall reduction in emissions
• Trading in non CO2e units undermines the cap
• Over-allocation of allowances undermines the cap

8. Offsetting Complications
• Offsetting outside of NDCs without corresponding adjustment within NDC of
host country- This opens the cap
• Problems with setting genuine baselines to show that activities are additional to
what would have happened anyway – this undermines the cap
• There is pressure to allow units generated under the Kyoto Protocol to be
incorporated into Article 6 – This undermines the cumulative NDC cap
• There are various supra-national entities (e.g. international airlines) subnational
entities (state and municipal governments) and private enterprises that are
involved in offsetting.
• It is unclear whether these entities engaging in the voluntary carbon market are
subject to Article 6 rules - If they are not, then the cap is open

9. Offsetting Complications (Article 6.4)
• Within the voluntary carbon market, there is no clear standard of what
constitutes a carbon offset, and there is no global organization that
defines offsets. – This undermines reporting and accounting procedures.
• Trade in offsets does not necessary drive a reduction in emissions, it can
simply transfers emissions from one Party to another
• Some activities within NDCs are problematic for offsetting, eg. Land sector
activities, due to non-permanence, measurement difficulties, leakage, land
availability, human rights/Indigenous Peoples rights, underestimated cost
over lifetime,
• Land sector offsets are perceived as cheap and easy and can undermine
more critical GHG intensive sectors and create lock-in off high GHG
industries (IEA no offsets from outside the energy sector)

10. Net Target
• In theory emissions plus removals = net
Major Options for Removals:
• Biocarbon removal/sequestration
• Mechanical CO2 removal
• Carbon Capture and Storage
• Bioenergy Carbon Capture and Storage

11. Removal Complications
• Biocarbon removal/sequestration: permanence, measurement, leakage, land
availability, human rights/Indigenous Peoples rights, underestimated cost over
lifetime, perceived as cheap and easy
• Mechanical CO2 removal: Expensive, energy intensive, disposal of captured
carbon
• Carbon Capture and Storage: Expensive, location specific, promotes lock-in of
fossil fuel technologies, groundwater contamination, seepage, bio-
contamination, used to enhance oil recovery
• Bioenergy Carbon Capture and Storage: Same issues for biocarbon removal
and CCS

12. Action Needed to Create Environmental Integrity in the Carbon Market as a
Contribution to Achieving 1.5 deg C
• Apply a percentage forfeit to cover the concept of Overall Mitigation in Global
Emissions in both Art 6.2 and Art 6.4 (Supply Adjustment Measure)
• Trade in units that are CO2e only
• Ensure regular report of corresponding adjustments
• International oversight of ITMO trade
• Create incentives to ensure that NDCs that are based on absolute emission
reduction targets
• Create interim targets and enhanced NDCs to drive market pressure
• Reduce reporting periods (common timeframe issue)
• Limit opportunities for dubious carbon dioxide removal options

13. Action Needed to Create Environmental Integrity in the Carbon Market as a
Contribution to Achieving 1.5 deg C
• Incorporate supra-national, sub-national and private enterprises within the
Article 6 accounting rules
• Do not allow carry over of Kyoto Protocol units
• Ensure genuine baselines for offsetting markets
• Ensure a strong additionality test to offsetting markets
• Ensure that any offsets are permanent and do not lead to leakage
• Remove subsidies for fossil fuels
• Enhance disclosure of fossil fuel investments