International sentiment is positive following COP21. It is now vital that this momentum is maintained if the vision of Paris is to be converted into action on the ground. Rapid deployment of renewables is critical if countries are to achieve their climate targets and strong price signals from major carbon markets are essential to support low carbon investment. International talks must stimulate and guide this climate action.
The last few weeks have seen the first major international talks since parties signed the Paris Agreement in New York on 22 April. Governments met in Bonn for the first UN negotiations after the Paris Agreement and carbon market participants met in Cologne for the Carbon Expo. The opening ceremonies of both talks highlighted the importance of ‘maintaining momentum’ and ‘making the vision a reality’. This will be challenging in 2016 without any imminent international deadlines and will require both leadership and innovation.
Return to Carbon Markets
Carbon price expectations between now and 2020 are not high enough to drive the low carbon investment needed to meet the Paris objectives, according to the results of the International Emissions Trading Association’s (IETA) recent survey. The survey highlights a significant difference between ambition and reality. However, the Paris Agreement paves the way for change with the inclusion of Article 6, which focuses primarily on carbon markets.
IETA launched its annual GHG market sentiment survey on the first day of the Carbon Expo. The survey, conducted by PwC, found that:
- 82% of survey respondents believe that existing carbon markets will expand in scale as a result of COP21.
- National and sub-national emissions trading systems will be the most significant drivers of carbon market expansion. The UNFCCC is seen as the guiding light for these national systems.
- The global carbon price needed to achieve the objectives of the Paris Agreement has risen dramatically from €30 to €40 since last year. This is significantly higher than the 2017-20 price expectations for the major markets.
The survey reinforced the positive outlook for the development of carbon markets following the Paris Agreement. However, IETA members also highlighted the immense challenges that lie ahead.
“This survey sends a clear message that governments need to get serious about carbon pricing or they won’t hit the Paris targets,” says Jonathan Grant, director at PwC, who analysed the survey results. “IETA members have highlighted the yawning gap between current prices and what’s needed to achieve the Paris objectives.”
Overlapping policies, lack of ambition, and inadequate accounting frameworks were highlighted by speakers at the Carbon Expo as being the major drivers of low carbon prices. The International Energy Agency’s (IEA) New Policies Scenario takes into account policy commitments and plans. This scenario sees carbon prices increase, but still falls short of the 2oC scenario. A number of issues must be addressed if price signals are to make a substantial contribution to achieving the Paris objectives.
The Paris Agreement provides a framework for the development of linked and ambitious emissions trading systems. The agreement outlines the use of internationally transferred mitigation outcomes (ITMO) as a way of enhancing cooperation between countries. It also establishes a mechanism to contribute to the mitigation of greenhouse gas emissions. The next phase of carbon market development must focus on implementation.
A Little Less Conversation
Rapid deployment of large scale renewables and a shift away from coal will be essential in the near-term if countries are to achieve their nationally determined decarbonisation targets. Decarbonisation can be achieved at minimum cost if carbon price signals drive low carbon investments. Initiatives such as the Green Climate Fund provide a platform for investment in innovative renewable energy initiatives. There is now international pressure to extend carbon markets into new national and sectoral economies as a means of driving public and private sector investment in low carbon initiatives.
Speakers at the Carbon Expo highlighted the importance of developing carbon offset market activities in order to mitigate against the activities of sectors – such as aviation – that cannot achieve net zero emissions using current technology. REDD+ and Carbon Capture and Storage were advocated as means of achieving this balance. The International Civil Aviation Organization (ICAO) is expected to agree this year upon a market-based measure to tackle emissions from the aviation sector. It is hoped that this will create the necessary demand for offsets.
Major barriers remain. Not least the inadequate carbon price signal from major markets. Moreover, speakers at climate conferences continue to draw attention to the fact that fossil fuel subsidies outweigh the support granted to renewables globally. Until a level platform is established, carbon markets will not operate at maximum efficiency.
Dirk Forrister, president and CEO of IETA, takes a positive outlook: “The inclusion of markets in the [Paris] Agreement has boosted morale and opens the door for further opportunities for business to engage in carbon markets around the world.”
The Paris negotiations delivered both policy frameworks and international enthusiasm. There is now a tide of opportunity for the decarbonisation agenda. Speakers at the Carbon Expo called for Marrakech 2016 to be the ‘COP of implementation’. China and Mexico will be the first emerging economies to fully implement national carbon pricing, whilst ICAO looks set to implement the first sectoral market-based measures. There is still great uncertainty about the future of carbon market, renewables, and offsets, but one message rings clear. The time for rapid and pervasive climate action is now.