Evolution of international carbon markets: lessons for the Paris Agreement

Abstract

The Paris Agreement will greatly benefit from the past experience with international market mechanisms for greenhouse gas (GHG) emissions reductions and related regulatory systems, which have gone through four periods with specific challenges. The first period 1997–2004 operationalized the mechanisms defined in the Kyoto Protocol, the Clean Development Mechanism (CDM) and Joint Implementation (JI). Pilot activities in different sectors were undertaken by the public sector, and the first baseline and monitoring methodologies officially approved. Between 2005 and 2011, the carbon markets expanded massively. The EU emission trading scheme (EU ETS) was linked to the Kyoto mechanisms, creating demand for carbon credits from the private sector. During this “gold rush” period criticism emerged with regarding the uneven geographical distribution of projects, as well as environmental integrity problems related to baselines and additionality. The next period saw a collapse in carbon prices between 2012 and 2014, limiting the development of new projects. The quantitative limits on the use of offsets in the EU ETS were reached and the failure to agree on a new international regime resulted in a drying up of demand from governments. The 2015–2018 period is characterized by a gradual stabilization of the international climate regime. The Paris Agreement adopted in 2015 increases complexity through global participation in mitigation. Future carbon markets will therefore face both old challenges—supply–demand balance, environmental integrity, transaction costs—and new ones—interactions with other policies and national targets, and sectoral/policy baselines and additionality checks preventing hot air proliferation. This article is categorized under: The Carbon Economy and Climate Mitigation > Policies, Instruments, Lifestyles, Behavior

Do Multilateral Development Bank Trust Funds Allocate Climate Finance Efficiently?

“…They can use the emission credits generated by these investments to fulfill their national emission reduction commitments, and thus their obligations in the framework of the Kyoto Protocol (and expect to use them in the context of the Paris Agreement in the future). There is hence a clear financial incentive for funders to select efficient locations, and the literature suggests that the World Bank at least has taken full advantage of its knowledge in this respect [11,26,41]. In contrast, climate finance through bilateral aid or aid channeled through any of the other MDB trust funds does not generate emission reduction credits.…”

Potential implications of carbon dioxide removal for the sustainable development goals

“…We can make some observations applicable to CDR policy planning overall: policies designed to firmly prioritize one goal over all others can trigger serious and arguably avoidable trade-offs between SDGs (Smith, Adams, et al, 2019). Experience with policy design and implementation in the areas of land-use and landuse change (Dang et al, 2019), CCS in industry (Lipponen et al, 2017), roll-out of alternative energy technologies (including biofuels, in particular) (Breetz, 2020) and international carbon markets (Michaelowa et al, 2019) all offer crucial lessons for the intricacies involved in navigating the specific circumstances in the socio-environmental dimensions named above. While deployment of any one CDR technology at the large scale foreseen in IAMs is unlikely, as the need for a portfolio approach is increasingly recognized, our review shows there may still be potential negative consequences at all scales of application.…”

Delaying decarbonization: Climate governmentalities and sociotechnical strategies from Copenhagen to Paris

“…It remains unclear if and how market governmentalities ( Hajer, 1995 ; Bernstein, 2001 ; Paterson & P-Laberge, 2016 ) are adapting outward from Kyoto's focus on carbon accounting and trading. Michaelowa, Shishlov and Brescia (2019) notes that carbon markets have not, since a 2012–2014 crash due to the financial crisis, excess credits, and low governmental support, recovered in visibility. ‘Ecological modernization’ might be ripe for a new mode that prioritizes low-carbon transitions.…”

“…Carbon offsetting and credit trading was the original manifestation of the cost-effective, market-facing logics of climate governance of the Kyoto period (centrist reviews include Newell and Paterson, 2010 ; Calel, 2016 ; Paterson and P-Laberge, 2016 ; Michaelowa et al., 2019 ). They leave a complicated and unfinished legacy: engaging industry and finance at multiple levels with climate governance, and keeping heavy carbon consuming and extracting states on board with COP ambitions ( Newell and Paterson, 2010 ).…”

“…Offsetting and trading served as significant – though not exclusive – means by which Annex I states attempted to meet their commitments under the Kyoto Protocol, enjoying a ‘gold rush’ period of investment and capital creation between 2006 and 2011 ( Michaelowa et al., 2019 ; Lövbrand et al., 2009 ), but encouraging ‘cheap and easy fixes’ with limited potential for sustained, structural change ( Calel, 2016 ; Carton, 2016 ; Ciplet and Roberts, 2017 ). Both the EU-ETS and CDM lie dormant currently, following a 2012 collapse due to the aftermath of the financial crisis and a fall in US and EU governmental support ( Michaelowa et al., 2019 ). Some fault, tellingly, lies in abuse of the underpinning rationales of market mechanisms: the EU-ETS was flooded by ‘hot air’ credits from Russia and Ukraine (ibid).…”