Implementing ITMO buying and selling and the 6.4 mechanism
Whereas Article 6’s ITMOs are already being traded globally, the credit generated beneath its 6.4 mechanism (additionally referred to as A6.4ER) are nonetheless awaiting laws and a centralised registry. The negotiation of those particulars will proceed at COP28.
The 6.4 mechanism additionally requires collaborating international locations to develop a nationwide institutional framework and a delegated nationwide authority to judge and coordinate initiatives. As of 15 November, 65 international locations had put the mandatory framework in place and shared their designated authority with the UNFCCC secretariat.
There are presently 137 pilot ITMO buying and selling initiatives. For instance, Switzerland and Singapore are procuring ITMOs from international locations akin to Ghana, Peru and Thailand. These initiatives vary from climate-smart agriculture to electric-car manufacturing. Ghana has the highest variety of such collaborations underway, whereas Suriname is presently issuing ITMO credit via forestry initiatives.
For a pilot undertaking to start buying and selling, it should be authorised by the host nation, and that requires particular mitigation outcomes to be established. Three pilot initiatives have obtained declarations of authorisation.
In a transfer that would see it grow to be a world carbon buying and selling dealer, Japan established the Joint Crediting Mechanism. That is deliberate for use as a bilateral buying and selling platform for ITMOs, whereby Japan would procure ITMOs from creating international locations after which commerce them on an open market. Japan had engaged with 28 international locations via this platform, together with Vietnam, Sri Lanka and Mexico. In contrast, China and the US have but to take any motion concerning Article 6.2 and ITMOs.
Regardless of the preliminary buying and selling, there are ambiguities that want ironing out at COP28. For instance, Article 6 dictates that ITMOs can solely be used in the direction of present nationwide local weather plans (often known as Nationally Decided Contributions, or NDCs), which can largely expire in 2030. This implies the ITMO provide might dry up and result in low liquidity and pricing bottlenecks within the carbon market.
Different obstacles to the growth of ITMO buying and selling embody the related credit score dangers for private-sector entities concerned in ITMO transactions, reporting and authorisation particulars, and the prolonged bilateral settlement course of outlined by Article 6.2.
COP28 negotiations may remedy a few of these ambiguities however it’s prone to be a while earlier than ITMOs are traded broadly.
Article 6.4’s mechanism faces much more hurdles earlier than its credit might be traded. The fundamental parts have been established, however the technicalities of which actions can generate credit, the requisite methodologies and safeguards, and environmental standards associated to emission avoidance and carbon removing are all but to be finalised.
Linking Article 6 to present carbon markets
ITMOs and the 6.4 mechanism are world platforms for emissions buying and selling, however they don’t seem to be the identical as a unified world carbon market. Till Article 6’s buying and selling mechanisms can realise such a market, the Paris Settlement proposes the inclusion of present Emissions Buying and selling Programs (ETSs) to briefly bridge gaps.
Linking ITMOs to pre-existing ETSs requires quantifiable models. For instance, the unit of an ITMO may very well be outlined as a tonne of carbon dioxide equal. Nevertheless, this is able to imply that every ETS would wish to vary its framework to make sure that accepting ITMOs wouldn’t successfully enhance the general cap on emissions credit.
As a pioneer in ETS capability constructing, the EU shall be exploring how to do that with Switzerland: the 2 have already linked their ETSs, however now Switzerland has begun procuring ITMOs that it additionally desires to commerce. Switzerland’s ITMO procurement opens a brand new frontier in buying and selling ITMOs via ETSs and should problem the laws of the linked market.
With ITMO buying and selling and the 6.4 mechanism nonetheless creating, present ETSs are prone to dominate carbon buying and selling within the short- and medium-term. ETSs are creating quickly: they cowl 17 per cent of world emissions, and jurisdictions with a functioning ETS now account for 55 per cent of world GDP.
Buying and selling since 2005, the EU’s carbon market is the longest-running and most energetic regional ETS, overlaying roughly 38 per cent of the greenhouse fuel emissions of 30 international locations. It additionally units among the many highest costs per tonne of carbon, at round US$80.
Within the US, state-level markets like California’s Cap-and-Commerce Program and the Regional Greenhouse Fuel Initiative within the north-east have emerged within the absence of a nationwide ETS. As a number one instance of internationally linking sub-national ETSs, California’s programme was formally linked to Canada’s Québec Cap-and-Commerce System in 2014.
African international locations have expressed curiosity in carbon markets. In 2017, for instance, UNFCCC delegates fashioned the West African Alliance on Carbon Markets and Local weather Finance, overlaying 16 nations. At COP27 in 2022, the African Carbon Markets Initiative was launched to advertise voluntary carbon markets on the continent.
Latin American international locations akin to Colombia, Chile, and Brazil are additionally experimenting and Mexico began working an ETS pilot in 2020.
China’s nationwide ETS is among the youngest however already the biggest on this planet, overlaying over 40 per cent of Chinese language carbon emissions. Formally launched in 2021 and solely overlaying the power-generation sector, China intends to develop its nationwide ETS to cowl extra sectors. Within the meantime, China has been working eight provincial pilot ETSs overlaying different industries.
Constructing a globe-spanning ETS community
Linking ITMO buying and selling with present regional and nationwide carbon markets is not going to occur quickly – the mechanisms created by Article 6 nonetheless require refinement earlier than they are often linked. The faster path to a unified world carbon market might due to this fact be an ETS community, however creating one with out undermining the steadiness of every particular person ETS could be tough.
China is actively exploring learn how to internationalise its carbon market and two choices have emerged. The primary could be to mutually recognise carbon allowances and permit circulation between markets. This affords probably the most seamless but difficult integration; such a level of market coordination just isn’t doable but as a result of laws and – most significantly – costs distinction sharply. For instance, the EU’s ETS costs carbon at round US$80 per tonne whereas China’s units it at round US$10.
China’s second possibility may very well be to open its nationwide ETS to international capital. A few of its provincial ETSs have already enabled this chance. In October 2022, as an example, the Shenzhen ETS accomplished its first allowance commerce with international traders in Singapore and Hong Kong. Nevertheless, the nationwide ETS remains to be discussing the mandatory laws facilitating international funding.
China is presently exploring such choices via collaborative analysis. For instance, the China–California Carbon Market Joint Analysis Program was launched in September 2021. Many international locations – primarily western – are planning to analysis carbon market linking with China.
But, China nonetheless has to make sure correct nationwide functioning earlier than pursuing too many worldwide hyperlinks. As China’s particular envoy for local weather change Xie Zhenhua advocated in 2018, “we’ve to do an excellent job in our personal nation, to review learn how to set up and learn how to develop the dimensions of this market, after which to advertise this matter globally.” Equally, in 2021, Xie referred to as for extra work on home carbon-market pricing and configuration earlier than going world.
Upfront of COP28, China has been striving for higher coordination between its nationwide ETS and people of different areas. But, rising geopolitical tensions threaten to undermine collaboration. The China–US commerce struggle, growing nationalism, and the struggle in Ukraine have all strained relations between China and the West. Whereas China has been actively partaking with all international locations upfront of the COP, it has clearly centered on vitality transition alliance-building amongst creating international locations within the world south. This south-south strategy typifies China’s common strategy to world negotiations at UN boards.
Consequently, China is unlikely to hunt unified management with the worldwide north’s carbon market leaders at COP28. As a substitute, it’s going to negotiate as a bloc with the worldwide south. This is not going to assist – and should even undermine – efforts to include the market mechanisms of Article 6 with present ETS networks.
Certainly, on the UNFCCC stage there stays no energetic planning between the main gamers in Europe, the US, and China to carry a few unified, world carbon market utilizing Article 6’s toolkit. This doesn’t bode properly for a fruitful COP28, nor for the way forward for world carbon markets.
