C’est parti
The United Nations Framework Convention on Climate Change (“UNFCCC”) talks kicked off on Monday at Le Bourget in Paris, France. In his address to one of the largest gatherings of world leaders in history, US President Barack Obama described the summit as a “turning point” and referred to the “sense of urgency” surrounding the talks as efforts began to produce a new global climate agreement under which all countries will commit to take action on climate change. There was a clear recognition that business and investors need certainty that the global economy is on “a firm path for a low carbon future” in order to spur investment.
If consistency in messaging is anything to go by, we can already discern some basic principles which are unlikely to surprise those familiar with the UNFCCC framework. Presentations from Obama to NGO leaders are peppered with references to emission reduction targets which (i) are set by nations (as has already been done by over 180 nations in the form of the Intended Nationally Determined Contributions or “INDCs”) using a “bottom up” approach, (ii) take into account each country’s differentiated position and (iii) are regularly updated going forwards. David Cameron referred to a 5 yearly review and a binding legal mechanism – although exactly which bit will bind is, at this stage, anyone’s guess.
The prevailing sentiment is that COP 21 is not business as usual. In contrast to previous “damp squib” summits, clear commitments are being made by national, sub-national and non-state actors alike. China have come to the table with a commitment to peak their emissions in 2030 and to roll out a nation-wide emissions trading scheme by 2017 which leverages off the seven pilot schemes already in place, thus changing the landscape for those who do business in China in a short timeframe. Canada announced a five-point plan to address climate change which includes a cap on oil sands emissions in Alberta.
Expectations are high, the atmosphere is positive and participants are making strong statements about what can be achieved in the next fortnight. However, experience tells us that getting 200 nations to agree - without agreeing to agree - is not easy…
Yearning for the “Big Fat Carbon Price”
At the Carbon Pricing Leadership Coalition launch event* on the opening day of the COP, OECD Secretary General Angel Gurria referred to the need for a “big fat carbon price”. Whilst it was recognised that each country should find its own way to a low carbon pathway, there was an emphasis on the need to introduce a carbon price in countries which have not yet done so and to sync the carbon prices already in place in those countries, states, cities and provinces that had . One policy move pinpointed by panellists as key to reaching this goal was an end to fossil fuel subsidies as was outlined in the Fossil Fuel Subsidy Reform Communique presented by New Zealand to the Executive Secretary of the UNFCCC yesterday on behalf of 37 nations including the US, UK, Canada, Germany and France. The communique flags that even a partial phase-out of fossil fuel subsidies would contribute 12% of the total abatement needed by 2020 to keep within the scenario of two degrees warming versus pre-industrial temperatures.
The real test will be whether the Paris outcome can effectively facilitate the linking of international, national and sub-national carbon markets so that a single price signal is achieved – fat or not.
* The Carbon Pricing Leadership Coalition is an initiative that aims to bring leaders from government, the private sector and civil society together to share experience and expand the evidence base on the use of carbon pricing.
Rolling out the REDD Carpet
Reducing Emissions from Deforestation and Forest Degradation or “REDD” is a UN program which aims to create financial value in the carbon stored in forests, offering incentives for developing countries to reduce emissions from forested lands and invest in low-carbon pathways to sustainable development. "REDD+" goes beyond deforestation and forest degradation, and integrates conservation, sustainable management of forests and enhancement of forest carbon stocks into the REDD framework.
At Tuesday’s side event entitled “REDD+ as INDC Strategy”, Anne Slaughter Andrew, the former US Ambassador to Costa Rica described one of the key challenges facing investors in REDD+ Projects as the need for rule of law reform. References were made to “carbon cowboys” in the early REDD projects and the limited cultural buy-in to paying taxes in a number of REDD+ host countries. A representative of the International Civil Aviation Organisation (“ICAO”) indicated that REDD+ credits would likely constitute a major source of supply of offsets to the aviation industry as part of the ICAO 2016 agreement on market-based measures for tackling the mitigation of the airline industry’s GHG emissions from 2020. In response, panellists highlighted the fact that REDD+ credits are still a relatively high risk investment but that erudite buyers should look for agreements with Community Forestry Groups and local people prior to investing which have been negotiated in accordance with the principle of free, prior and informed consent (“FPIC”) and facilitate benefit-sharing.
At a side event on Tuesday on REDD+ and Forestry in General as a Mitigation Tool, Kevin Conrad (Executive Director of the Coalition for Rainforest Nations) stated that a number of forested nations are indicating that a market-based mechanism will not be used as part of their INDC implementation on the basis that it is part of an old paradigm which does not take into account the issue of food security in the land sector. He queried how credits could effectively transfer without such a mechanism. The Verified Carbon Standard also argued in favour of the use of markets to realise REDD+ goals as an effective stimulant for demand. In terms of its role in the Paris agreement, the panel ruled out the need for a detailed mechanism on the use of markets but called for a shift from purely principles-based language.
On the implementation of REDD+ projects in countries where regulatory approaches are not customary, the panel emphasised the importance of results-based payments, pre-implementation risk assessments, buffer credits to mop up any leakage, lack of additionality or permanence and de-risking through blacklisting nations that do not resolve corruption issues. The need for an international system of monitoring, reporting and verification (“MRV”) to provide credibility and assurance of performance was also emphasised.
Despite the workload in the in-tray, there is a discernible optimism about the roll-out of REDD+ in the post-Paris environment, with one prediction that REDD+ would feature in the agreement in some form with the knock-on effect of “aggressive” implementation once the rules are in hand.