The world’s leading energy companies and investors, represented by the World Energy Council, have made it crystal clear they consider carbon pricing essential to generate sufficient investment for a low-carbon future, writes Joan MacNaughton, Chair of the World Energy Trilemma project of the World Energy Council. But according to MacNaughton, it is vital that policymakers in Paris don’t just put a price on carbon, but also allow for market mechanisms as part of any international climate agreement. Preferably, these mechanisms should be linked to each other and allow for forms of offsetting, so that companies can buy credits if they can’t reduce emissions.
As we approach the climate talks known as COP 21 in Paris at the end of the year, we need to focus on how we can drive investment decisions which deliver a more sustainable energy future. A key question is whether market mechanisms will be agreed by the negotiators as part of the agreement architecture, whether they will be linked, and whether offsetting will feature. I believe it is vital that this should be the case. And the option of voluntarily using offsetting needs to extend to businesses to maximise their contribution to emissions reduction.
The sums required to deliver emissions reductions, while also maintaining energy security and moving towards universal access to affordable energy ( the three goals of the Energy Trilemma, as developed by the World Energy Council) are huge – $53 trillion by 2035, according to the IEA. Most of this investment will have to come from the private sector, particularly the energy sector, which is responsible for about 40% of all emissions.
Like others, energy businesses need to reduce their own carbon emissions . But they must also innovate in the way that energy is sourced, supplied and used to enable others to do so. Through its work on the Energy Trilemma, the World Energy Council has been working for the past four years to bring together energy business leaders, policy makers and investors to analyse how to drive the sort of investment decisions which would help meet the trilemma goals. During this dialogue, companies and investors responsible for trillions of dollars, as well as policymakers worldwide, have told us that they consider carbon pricing essential to driving progress towards a more sustainable future.
Pricing certainty
In our recently published report on what needs to happen at COP21, they call for a single emissions reduction target backed by complementary measures which impel action. Some among them favour the pricing certainty provided by carbon taxation, but others stress the advantages of emissions trading, with one commenting that “An ETS [Emission Trading Scheme] provides the private sector with the flexibility required to reduce emissions while stimulating technological innovation “.
The Energy Select Committee of the UK Parliament called in a report published in February 2015 for emissions trading systems to be linked, noting the advantages of linking, which include reduced costs overall which augments the scope for more mitigation action. This linkage would be through offsetting, for which the Clean Development Mechanism (CDM) provides a precedent. As most readers will know, the CDM is an offsetting mechanism under the Kyoto Protocol which allows countries to meet their target by buying emission reduction credits from other countries.
Some companies favour the pricing certainty provided by carbon taxation, but others stress the advantages of emissions trading
It is generally accepted that we are likely to struggle even to reach the goal from Copenhagen of $100bn per annum of climate finance for developing countries – a goal, incidentally, which many, myself included, regard as far from sufficiently ambitious. Yet as of 2012, the CDM had directed more than $215bn into projects in emerging and developing countries (the non-Annex 1 countries in terms of the Kyoto Protocol).
However, the CDM is still far from certain to form part of the governance architecture of any agreement reached at Paris. Despite the contribution it undoubtedly made, it faces two barriers to continued acceptance. First, the concept of a single global market operated under a top down agreement as under the Kyoto Protocol is, politically, highly unlikely to be achievable. Second, the CDM suffered from problems in the way it operated , and not all of these have been convincingly addressed following the recommendations in UN High Level Panel Report (on which I must declare an interest, having served as Vice Chair). It may therefore not commend itself to many of the negotiators.
Bottom-up
That said, there seems to be significant support for the Paris Agreement to cater for market based approaches, albeit these will be bottom up in the first instance. For economic and other reasons it would be sensible to allow for these to be linked. But two provisos apply.
First, there should be some internationally credible method for determining the quantum of offsets which are allowed to be counted against a country’s COP 21 commitments to emissions reductions. That is also needed to address the problems evident in the Joint Implementation Mechanism, the other Kyoto offsettting mechanism, which in contrast to the CDM allowed countries to develop their own methodologies for assessing the additionally of projects. This appears to have done more harm than good. A successor to the CDM, involving a credible and respected methodology for accounting for credits, needs to feature in the Paris Agreement. The current negotiations acknowledge this as an issue, but it is one that is far from being resolved yet.
Offsetting could be a useful tool not only for countries, but for business too. Many companies want to go further than is yet required by regulation
Second, conditions should apply to how markets are linked to ensure the environmental integrity of traded credits. In particular only internationally accepted methodologies should be accepted for credits produced under the aegis of national or regional schemes.
Offsetting could be a useful tool not only for countries, but for business too. Many companies want to go further than is yet required by regulation. The announcement from the UN on ‘Climate Neutral Now’, during the Climate Week which is taking place this week in New York, aims to add to the ranks of those companies who are showing leadership in addressing the climate change issue. For it can be challenging for companies to reduce their emissions, even where there may in fact be early mover or other advantages to doing so. Indeed some may find it impossible to eliminate their climate footprint entirely in the short term. Voluntary carbon offsetting could encourage more of them to commit to climate neutrality and also galvanise additional investment for climate action.
Very real message
And this is not just an issue for big businesses. To be truly carbon neutral, companies must address their supply chains. In the UK it is estimated that 80% of a company’s carbon footprint resides in its supply chain which is likely made up of companies of a variety of different sizes. In fact SME’s constitute 99.9% of the UK business sector.
Offsetting sends a very real message to governments across the globe that business will play its part in tackling this problem, provided the policymakers put in place an ambitious and practical framework: one which enables and incentivises business to act. Voluntary offsetting should be a part of that architecture.The core message from the World Energy Council’s business community is unequivocal – we are ready for an ambitious climate agreement, and it is time for climate negotiators ‘ to get something done’.
Editor’s Note
Joan MacNaughton is Chair of the World Energy Trilemma of the World Energy Council. She is also past President of the London-based Energy Institute. She was Director-General Energy in the UK from 2002 to 2006, Chair of the Governing Board of the International Energy Agency from 2004 to 2006, Senior Vice-President Environmental Policies and Global Advocacy at Alstom from 2007. She is also a Fellow of the International Emissions Trading Association (IETA. This article represents her personal opinion.
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hans says
The CO2 certificate trade and the clean development mechanism have been shown to be very susceptible to fraud. See for example: http://notrickszone.com/2015/08/25/the-emissions-certificates-grand-scam-spiegel-the-money-making-machine-three-quarters-led-to-higher-emissions/#sthash.Uv0CwOzI.3HtEtZfF.dpbs
These schemes have helped western companies not to change anything and made a few swindlers and bankers very rich.
So I say: Paris give us a straightforward carbon tax.
hans says
I just realised that the article I linked to in my previous comment is from a climate denier website. Not really a reliable source of information.
So here are some more serious articles on the issue:
http://www.environmental-expert.com/news/the-clean-development-mechanism-serious-questions-remain-234841
http://www.enn.com/pollution/article/41485
http://www.dailykos.com/story/2011/11/10/1035122/-The-new-China-Syndrome#
Karel Beckman says
Hans, see this shocking report? http://www.sei-international.org/news-and-media/3196
On the fraud of Joint Implementation – the author links to it in the article but you may have overlooked it
hans says
The thing is that MacNaughton says: we just add some more checks and bureaucracy and then everything will be fine. I think this is naive. There are enough companies that are too lazy to change their CO2 spewing ways and rather buy certificates. And there are enough fraudulent individuals, companies and governments who are willing to give them what they want (at least on paper). Combined they will always find a way to trick the paper work. Within the certificate system you would need a kind of “certificate police” that has quite some power and is able to react quickly. Furthermore there should be a system to change the rules quickly if the rules have gaps.
My suspicious mind tells me that if such a certificate police is established at all, that in the very last negotiation round about the new system its powers and budget are sliced and all that is left is a toothless paper tiger. What follows is fraud business as usual.