Expanding Carbon Pricing and Ensuring Environmental Integrity
UN Photo/Kibae Park/Sipa Press
story highlights

UNFCCC negotiations on operationalizing market mechanisms will continue in 2019 focusing on the need to ensure that they safeguard environmental integrity.

Multilateral Development Banks established a joint framework for aligning their activities with the objectives of the Paris Agreement.

The European Bank for Reconstruction and Development presented its shadow carbon pricing methodology.

The EU announced its intention to host an International Carbon Markets Conference and provided updates on the EU ETS.

South Korea held its first allowance auction under its ETS.

January 2019: The year 2018 concluded with the adoption of guidelines for implementation of the Paris Agreement on climate change, however no agreement was reached on operationalizing market mechanisms under the Agreement yet. In December, several Multilateral Development Banks (MDBs) also established a joint framework for aligning their activities with the objectives of the Paris Agreement. The European Bank for Reconstruction and Development (EBRD) presented its shadow carbon pricing methodology to better inform investment decisions. This article discusses these and other developments from the past two months, observing carbon pricing communications in the context of environmental integrity.

Operationalization of Cooperative Approaches Under Paris Agreement Delayed

Negotiations at the Katowice Climate Change Conference in December focused on the guidance for implementing the Paris Agreement. Parties could agree on all but one item of this task, namely operationalizing three types of market and non-market mechanisms under Paris Agreement Article 6. These include:

  • A cooperative mechanism for transfers between countries of internationally transferred mitigation options (ITMOs, Article 6.2);
  • A mechanism for allowing private sector parties to generate and sell emission reduction units in a manner that supports sustainable development (Article 6.4); and
  • A non-market mechanism (Article 6.8).

The market mechanism approach is in part relevant to those actors hoping to use national and regional instruments, such as linked ETSs, to create a common, cross-border carbon market. Progress in Katowice centered clarity in accounting and the delivery of overall mitigation in global emissions. These technical discussions focused on:

  • Requiring corresponding adjustments, including for ITMOs used for purposes other than towards a country’s nationally determined contributions (NDCs);
  • Determining the percentage and applicability of the share of proceeds to be used for the Adaptation Fund;
  • Clarifying the use of pre-2020 units toward NDCs; and
  • Deciding whether, when and under what criteria existing Kyoto Protocol activities or projects could be transitioned to the mechanism under the Paris Agreement.

Parties will continue negotiations in 2019 to ensure that international cooperative approaches, provided for in Paris Agreement Article 6, will safeguard environmental integrity, increase global ambition and serve as a driver for implementation. Discussions on the non-market mechanism will continue to establish governance arrangements and work programme activities. [SDG Knowledge Hub Story: Katowice Climate Change Conference Delivers Outcome to Facilitate Implementation of Paris Agreement][IISD Reporting Services Summary of the Katowice Climate Change Conference]

EBRD Introduces Shadow Carbon Pricing Methodology

Also in Katowice, nine MDBs announced a joint framework for aligning their activities with the objectives of the Paris Agreement on climate change. In their joint statement, the MDBs announced they will support the transition by ensuring through their interventions that policy engagements and financial flows are consistent with a pathway towards low greenhouse gas (GHG) emissions and climate-resilient development.

Being part of the group, the EBRD recognized that the market still externalizes costs of pollution, and that market distortions, such as fossil fuel subsidies, exist in countries where the Bank works. In December, the EBRD, which has formally turned away from financing investments in coal and upstream oil exploitation, presented its shadow carbon pricing methodology as a way to assess the impacts of big power projects and heavy industry plants that the Bank might finance.

The Methodology aims to internalize environmental costs in a broad economic analysis and identify the price of pollution in a transparent manner to inform investment decisions, including in cases of projects which significantly increase GHG emissions. The approach is in line with shifting priorities among businesses, and other MDBs spearheading this practice such as the European Investment Bank and more recently the World Bank.

According to the ERBD setting a “shadow price” follows recommendations by the High-Level Commission on Carbon Prices, which was set up in 2016 as part of international climate change talks to benchmark pollution costs. The Commission recommended that carbon should be priced at USD 40-80/tCO2 in 2020, rising over time to reach a range of USD 50-100/tCO2 by 2030.

The World Resources Institute (WRI) presented a similar methodology to screen mitigation impacts of energy-saving investments in electricity transmission and distribution technologies. Outlined in a paper titled ‘Aligning Electricity Transmission And Distribution Investments With A Paris Agreement Pathway,’ the methodology calls for justification of such investments determined by the inclusion of a robust shadow carbon price and consistency with a country’s long-term decarbonisation plan for the electricity sector. [SDG Knowledge Hub story: MDBs commit to align activities with Paris Agreement][EBRD Press Release on Shadow Carbon Pricing Methodology] [WRI Paper][ SDG Knowledge Hub story: Renewable Energy Investments Increased Five-fold Globally Over Past 15 Years]

EU to Host International Carbon Markets Conference

In his Speech for Post-COP24 High Level Debate, EU Commissioner Miguel Arias Cañete observed that during the Katowice Climate Change Conference a disagreement with Brazil over the markets chapter of the Paris Agreement rulebook delayed adoption of that chapter by one year. Stressing the need to arrive at an understanding that respects the environmental integrity of the international carbon trading system he announced his intention to host an international carbon markets conference in Brussels in early 2019.

Reporting on the modernization of the EU’s ETS, Commissioner Cañete noted:

Commissioner Cañete also presented on other aspects of the EU’s 2030 Climate and Energy Framework, including low-emission mobility and energy objectives. He highlighted the EU budget proposal for 2021-2027, with a spending target of 25% on climate-related objectives amounting to €320 billion; as well as the EU’s long-term strategy and vision for a climate-neutral EU with net-zero-emission economy by 2050. [EU Commissioner Cañete’s Speech for Post-COP24 High Level Debate]

First Auction for ETS Allowances in South Korea

In January, the Republic of Korea held its first auction for allowances under its national ETS. As reported by the International Carbon Action Partnership (ICAP), seven participating companies successfully bid for all available allowances of just over 1 million tons at US$22.53/tCO2. Auctions will continue monthly, with a single bidder limit of 30% of allowances. Auctioning revenue of the Korean ETS will go towards funding emissions-reducing equipment projects and mitigation technology research and development. [ICAP Press Release]

Communicating Benefits of Carbon Price Revenues

Clear communication of positive benefits and visible use of carbon price revenues on projects consistent with environmental goals is important to ensure public support, according to report by the World Bank released in December 2018. An example of such communication was presented by WRI, also in December, reporting country-specific examples of positive benefits. WRI’s report emphasizes how expanding carbon pricing to more places, along with fossil fuel subsidy reform, creates sources of public finance for government investments in critical public priorities like healthcare, education or infrastructure, thus contributing to a just transition.

The World Bank publication entitled ‘Guide to Communicating Carbon Pricing’ suggests that in communications, “narratives that focus on putting a price on carbon and internalizing the social costs of fossil fuels perform poorly outside financial and economic audiences.” And yet, prices and costs matter in considerations of market mechanisms which aim at incentivizing investments where emissions reductions can occur at the lowest cost. As this update shows, prices also continue to be highlighted in the context of ensuring environmental integrity. For carbon markets, this is seen in the conclusions of the High-Level Commission on Carbon Prices, which stated that: “the explicit carbon-price level consistent with achieving the Paris temperature target is at least US$40–80/tCO2 by 2020 and US$50–100/tCO2 by 2030, provided a supportive policy environment is in place.” [World Bank Guide to Communicating Carbon Pricing] [WRI on story on A Carbon Price Can Benefit the Poor While Reducing Emissions]

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The SDG Knowledge Hub publishes monthly climate finance updates, which largely focus on multilateral financing and cover, inter alia, mitigation and adaptation project financing news and lessons, institutional events and news, and latest developments in carbon markets and pricing. Past climate finance updates can be found under the tags: Finance Update: Climate Change; and Finance Update: Sustainable Energy.

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