The programme will have to ensure that a voluntary carbon market does not become a tool to transfer the burden of emission reductions to developing countries, say experts
The United States announced a voluntary carbon market plan at COP27 with the advertised intention to unlock private sources of finance to help developing countries phase out fossil fuel in their energy systems. This will be done under a global partnership called Just Energy Transition Partnerships (JETP).
The US’ plan, named ‘Energy Transition Accelerator’, although appreciated for its enterprising approach, has irked several experts, who have raised basic questions related to climate finance and carbon markets such as:
- Will the finance mobilised through the programme be in addition to the public money and grants the US already owes to developing countries for adaptation and mitigation?
- Will the finance be on concessional rates, which is needed? If it is at the market rate then it does not really improve the current situation.
- Will the voluntary carbon market structure generate quality offsets that are truly additional and are leading to deep emission cuts?
The success of JETP, experts say, will depend on sufficient grant and concessional finance being mobilised to leverage the hundreds of billions in private finance needed. All the capital that will be mobilised through the carbon market in the ETA programme will have to be additional to the climate finance developed countries owe to their developing counterparts. The programme will also have to ensure that a voluntary carbon market does not become a tool to transfer the burden of emission reductions to developing countries.
The Energy Transition Accelerator proposes, “Scaling up and de-risking private investment in accelerating the clean energy transition in developing countries by inviting climate-leading companies to provide upfront finance commitments in exchange for high-quality carbon credits, with strong guardrails to ensure high environmental integrity in both their generation and their use.”
At COP27, the US introduced the broad provisional framework of the market. It will be created over the coming year in consultation with governments, companies, experts, civil society, and standard-setting organisations.
“Our intention is to put the carbon market to work to deploy capital to speed the transition from dirty to clean power, specifically for two purposes—to retire unabated coal-fired power and accelerate renewables,” John Kerry, US Special Presidential Envoy for Climate, said at the launch event.
“Kerry’s announcement may solve a political narrative problem—telling a story about unlocking finance—but is highly unlikely to actually get sufficient, predictable finance moving,” said Navroz Dubash, professor, Centre for Policy Research and IPCC coordinating lead author on the AR6 WGIII report on mitigation. “At best, the ‘Energy Transition Accelerator’ will lead to limited, unpredictable flows; at worst, it could undermine the Paris machinery.”
“What developing countries need is predictable finance—not offset markets,” said Ulka Kelkar, director, Climate Change Programme, World Resources Institute (India).
The ETA cannot make up for the US’ failure to provide its fair share of climate finance—an estimated $40 billion of the unmet goal of $100 billion a year.
Developed countries committed to mobilising $100 billion per year in climate finance for developing countries between 2020 and 2025, but have so far not met this goal.
Given the size of the GDP of the US and its cumulative greenhouse gas emissions produced relative to other countries, it should contribute between 40% and 47% of the total climate finance effort, a 2021 research by WRI showed. The US has never contributed more than $7 billion per year, which is less than Germany or France.
“With the biggest shortfall between fair share of effort and actual delivery of climate finance, the US bears the greatest responsibility for the failure so far to meet the $100 billion goal,” Joe Thwaites, a climate finance expert wrote for WRI in an April 2022 article.
“The ETA also should not substitute for the deep decarbonisation needed within the US and other industrialised countries,” said Kelkar of WRI.
“The activities described in the ETA are technology driven (read mitigation) and just energy transition requires a mix of adaptation and mitigation finance. So it will be useful to encourage private capital towards more people-centric funding, including reskilling, retraining and environment remediation,” said Swati D’Souza, energy analyst, Institute for Energy Economics and Financial Analysis (IEEFA).
The NDC problem
The design of the carbon market proposed by the US falls under the Paris Agreement’s Article 6.2, which deals with voluntary markets. As per the rules finalised at COP26 last year, for any ‘authorised’ carbon credits that are being used, the host country will be required to apply corresponding adjustments. This means that the authorising country no longer counts the emission reductions to achieve its own NDC and allows others to claim the emission reductions.
“If US companies buy emissions from India, then the latter will not be able to account for these in its emission reduction goals,” said Vaibhav Chaturvedi, fellow, Council for Energy Environment and Water (CEEW), an Indian think-tank.
Largely, all the credits generated by a host country, for example, India, and being sold to companies based in the US at the proposed carbon market will have to be beyond India’s own pledged climate actions in their Nationally Determined Contributions (NDCs).
“For developing countries like India, which have been raising their climate ambition, the first priority would be to meet their own targets and not provide offsets for reductions in developed nations through programmes like ETA,” Kelkar said.
“Even if both US and India get 50% each of the carbon mitigation credits generated, that means India has to let go of the 50% emissions mitigation implemented within its boundary. The extent of sharing is where negotiations will happen,” Chaturvedi of CEEW said.
“Depending on a host country’s mitigation targets and national circumstances, countries will need to take a call on how many emissions reduction credits can be shared with the US in exchange for finance, without compromising their own reduction targets,” he added.
“A further risk is that countries may face a disincentive to upgrade their NDC because offsets are likely to only be eligible for actions above and beyond those in the NDCs. The core mechanism of the Paris Agreement risks dilution,” Dubash of CPR said, highlighting another possible bad outcome of the ETA.
“This is a bad deal for developing countries. Instead of public funds that countries can use strategically to crowd in private finance, the Accelerator offers unpredictable finance that varies with the market, with limited ability to steer that finance,” he added.
Vibhuti Garg, South Asia director at Institute for Energy Economics and Financial Analysis (IEEFA), has another observation on why the ETA might not be very helpful.
“The availability of private capital under the ETA will be at market rates that the developing countries can access otherwise also. What developing countries need is concessional capital,” Garg said.
“How the ETA mechanism will ensure the availability of finance at concessional rates is something that needs to be clarified,” she added.
The offsets problem
A few months ago, the US said they would encourage the use of carbon credits by companies, “but not to offset their emissions”. “The initiative announced at COP27 does not seem to fully respect that commitment,” said Jonathan Crook, global carbon markets policy expert at Carbon Market Watch (CMW), adding that the announced mechanism doesn’t close the door to more offsetting.
“While the announcement proposes some improvements to the current carbon market structures—like supporting adaptation and excluding fossil fuel providers—it should not be branded as a climate finance tool if it is used to generate carbon offsets,” Crook said. “Buying emission reductions from developing countries is not the same thing as channelling climate finance,” he added.
“The proposed carbon market by the US does not prevent companies from counting reductions that are already being counted by host countries,” said Gilles Dufrasne, Global Carbon Markets lead, CMW, alluding to the corresponding adjustment knot that we described above.
“There is no useful guidance regarding how companies should use these credits. For example, nothing prevents a company from marketing carbon-neutral products with these credits,” Dufrasne added.
Speaking to CarbonCopy in September 2022, Crook of CMW said that the voluntary carbon market system is unlikely to have any significant impact on a country’s emissions. The carbon price will likely be very low—because carbon credits on the voluntary market are very cheap, and hence is unlikely to incentivise meaningful reductions within companies.
At the same time, there is a real risk that the credits purchased will not represent the full tonne of CO2e [carbon dioxide equivalent] that they are supposed to represent because many voluntary market projects issue credits of low quality (one major problem being the lack of additionality).
For example, voluntary carbon market standards have rejected renewables from their eligible activities because of a lack of additionality. These renewable projects would have been erected nevertheless.
“There should be clarity in terms of which projects can qualify as part of this programme,” Garg of IEEFA said.
There is a history to learn from.
“Clean Development Mechanism [previous UN carbon market regime governed by Kyoto Protocol in the pre-2020 period] experience showed that no number of safeguards can overcome systematic incentives to inflate [emission] baselines against which credits are awarded,” said Dubash. Offset rules will be nationally set, and every country has the incentive to race to the bottom, he added.
“The irony is that this is a ‘market’ based entirely on administrative rules—bureaucratic standards on credits, and credible net-zero plans. And there are incentives all around to weaken these rules,” Dubash said.