Kevin Rudd: Pricing Carbon at Marrakech: Moving from Principle to Practice

The Moroccan Presidency of COP22 has stated that it seeks concrete actions in Marrakech. Working to price carbon emissions through markets would be a useful place to start.

The Paris Agreement was a political breakthrough, but its commitments do not go far enough. Negotiators at COP21 overcame the gridlock that has long-defined international climate change diplomacy and imbued the UNFCCC process with newfound optimism. But the national commitments put forth in Paris — if they are all fully achieved — leave us on track for approximately 3 degrees of warming by the end of this century. This is well beyond safe and sustainable limits. There is much work still to do.

Reaching more ambitious outcomes requires setting effective incentives for businesses and institutions to change their behavior. In carbon markets, regulators set a ‘cap’ on greenhouse gas emissions which they can progressively ratchet down to meet lower emissions levels over time. Covered emitters, such as utilities and industrial firms, must stay below their regulated limits or buy allowances for emissions that exceed them. As caps tighten, the price of these allowances will likely rise — incentivizing companies to become sellers rather than buyers and bringing about economy-wide emissions reductions.

Such markets are not simple to operate, but remain popular tools for meeting climate goals. Over the past decade the share of global greenhouse gas emissions covered by a carbon price has increased threefold, and roughly 40 countries and more than 20 cities, states, and regions — including seven out of the world’s 10 largest economies — now price carbon. Ninety-eight countries listed markets as tools for reaching the targets they laid out in Paris, and together these countries account for some 61 percent of global greenhouse gas emissions. In addition to their direct impacts, carbon markets also provide public revenue sources which are often steered toward clean energy investment. In 2015 they raised about US$26 billion in government funds; a 60 percent increase over the previous year.

These modern carbon markets often operate independently and are designed based on the unique circumstances of the areas and industries that they regulate. Market coverage and internationally coordination currently grows primarily through the ‘linking’ of markets on shared platforms rather than through the top down processes of the UNFCCC. Already California and Quebec and Norway and the EU have linked, and discussions are underway in Latin American.

In Northeast Asia, my team at the Asia Society Policy Institute is working to promote carbon market cooperation and linkage between China, Japan, and the Republic of Korea. These countries make up over a quarter of global emissions, and are each at formative phases of their carbon market development. Linking these and other markets can make them more economically efficient and environmentally effective, while also leveling playing fields for trade and cross-border commerce.

So where then do UN-led efforts fit?

COP22 can extend international cooperation that improves the function of existing carbon markets and lowers the barriers for developing new ones. Article 6 of the Paris Agreement took steps in this direction, and provides the basis for new types of market connections. It offers ‘internationally transferred mitigation outcomes’ (ITMOs) as potentially tradeable units, and an Emissions Mitigation Mechanism (EMM) to facilitate emissions trading between countries that choose to use it.

These market provisions were among the last issues finalized in Paris, and faced ideological opposition from countries opposed to markets mechanisms outright while also being bantered around as negotiating chips. That Article 6 emerged with as much substance as it has was positive, but its contentiousness left it vague.

It is up to negotiators in Marrakech to make these market provisions practically relevant. Even as the champagne flowed last year at the conclusion of COP21, few foresaw the Paris Agreement entering into force within a year. With ratification in the rearview, Marrakech must now tackle the tough sledding of implementation.

For carbon markets this means putting meat on the bones of Article 6. Where Paris offered principles and concepts for carbon pricing, negotiators in Marrakech can create robust accounting frameworks that ensure that traded carbon credits are legitimate, verifiable, and contribute additional rather than overlapping impacts. These frameworks may form the foundation for international trading in some cases, and in others provide the architects of subnational, national, and regional markets with model rules and strategies that they may choose to adopt.

Carbon markets must ultimately lead countries to increase their climate change ambition to have a true impact. They can do so by making emissions reductions cheaper, and creating options for progressive changes in behavior that are palatable to both businesses and governments. The goals committed to in Paris require a redoubling of political will and near-term pragmatic action. Marrakech can help this cause by moving the discussion of carbon pricing from principle to practice.

This post is part of a series produced by The Huffington Post, in conjunction with the U.N.’s 22nd Conference of the Parties (COP22) in Morocco (Nov. 7-18), aka the climate-change conference. The series will put a spotlight on climate-change issues and the conference itself. To view the entire series, visit here.