Madrid Climate Conference Failed, but Silver Lining Exists

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This piece was first published in Forbes on December 20, 2019. It is reprinted with their permission.

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The Madrid climate change conference that ended last Sunday has been widely panned as a failure, and it’s true that the nearly 200 countries that participated did not succeed in endorsing critical rules that would govern implementation of the Paris Climate Accord.  There is very real cause for concern that the Paris goal of limiting global warming to 2 degree Celsius is increasingly unattainable.  Yet, it’s worth taking a closer look at what negotiators did, and didn’t, accomplish in Madrid to understand where the global effort to slow global warming in fact stands.

First and foremost participants, and most notably major greenhouse gas emitters such as China, India and the U.S., failed to declare intent to reduce their carbon emissions more aggressively than stated in their initial 2015 Paris targets.  This upping of ambition is critical, because the initial Paris targets point Earth on a trajectory to at least 3 degrees of warming by the end of this century—with disastrous climate consequences as forecast in recent reports from the United Nations and others.  It wouldn’t be a stretch to say that those reports were timed to scare the world into action, seeing as they came out in the weeks before the Madrid COP25 meeting took place.  Regardless, the world didn’t blink, and as a result it looks less likely that countries will deliver pledges of more ambitious targets by the deadline, the 26th Conference of the Parties meeting in Glasgow next November. 

If this singular failure isn’t bad enough—and it surely is—Madrid negotiators also failed to agree on a particular set of rules that are at the heart of many countries’ strategies to lower their carbon footprint.  The Paris agreement is divided into 29 Articles.  The sixth sets the rules by which countries may trade carbon credits, called “Internationally Transferred Mitigation Outcomes” (ITMOs) in diplomatic-speak, across international borders.  

The importance of carbon credits can’t be underestimated as half of the world’s countries intend to use them to fulfill their carbon mitigation goals under Paris.  In theory, carbon credits allow nations to more efficiently lower their net carbon footprint by funding carbon reduction projects, such as replacing coal power with wind, in lower-cost parts of the world.  The climate benefit of those projects flows back to the funding country, allowing it to claim the carbon reductions as its own.  Article 6 would also make it possible for transnational carbon markets, such as California’s cap-and-trade system that extends to the Canadian province of Quebec, to contribute toward national climate goals. 

While carbon credits are a theoretically a good thing, they’ve frequently proven to be a nightmare in practice where they fail to generate verifiable environmental benefits. 

Past offsetting schemes have fallen flat on issues of double counting and additionality.  Double counting refers to cases where two countries take credit for a given carbon reduction, such as a funding country and the country where a climate project takes place, known as the host.  

Additionality concerns arise when an offsetting project delivers carbon reductions that would have occurred anyway, without the benefit of climate capital.  A prime example of this happened under the Kyoto protocol’s offsetting program in China, where foreign capital flowed into natural gas generation projects intended to displace coal-fired powerplants.  Yet China, faced with demands from its population to shutter coal powerplants that made the air in many cities impossible to breathe, already had policies in place that mandated the shift to gas power. In the end, Chinese developers reaped a financial windfall but made a mockery of the Kyoto goal of using offsets to meaningfully lower greenhouse gas emissions.

Article 6 of the Paris accord is designed to ensure that the shortcomings of Kyoto’s offsetting program aren’t repeated, with paragraphs 6.2 and especially 6.4 being the most important and contentious.  

Paragraph 6.2 lays out the rules under which two countries that have partnered to fund and generate carbon credits account for those climate benefits.  In sum, when the host country produces an emissions reduction and then transfers it to the funding country, the host’s overall emissions rise and the funder’s emissions fall.  Per Article 6.2 rules the two countries reconcile their emissions every so often, balance-sheet style, ensuring that no double counting takes place. 

“There’s no overriding ideological conflict when it comes to paragraph 6.2,” says Kelley Kizzier, the Environmental Defense Fund’s lead on global climate action.  

In addition, the paragraph offers a smart method to counter the incentive for a country to generate junk carbon credits that don’t offer the full claimed environmental benefit, a bane of Kyoto’s offset program.  Under Paris, when a host country transfers a carbon credit overseas it must adjust its own carbon footprint upward by an equal amount, and its carbon reduction goals under Paris get tougher to reach.   

Thus, if a country transfers 100 tons of declared carbon reductions that had in reality delivers only 20 tons of benefit, it still has to add the full 100 tons to its own carbon total, and figure out how to mitigate the full complement of those tons on the way to reaching its Paris goal.  (Determining the quality of offsets is addressed in Section 6.4)

Despite the straightforward nature of Paris’ accounting rules, the negotiators in Madrid weren’t able to iron out all details.  Yet—and this is a critical point lost in the most pessimistic assessments of Madrid—the failure to finalize Section 6.2 doesn’t mean that countries can’t pair up to generate carbon credits.  

“By the end of Madrid, 6.2 was a solid and robust accounting framework with good mechanics,” says Kizzier.  “The fundamentals are agreed upon, so countries can in fact go ahead with bilateral cooperation and can do it to a high standard.” 

In contrast, negotiations on 6.4 got nasty and present the major barrier to international carbon markets playing a role within the Paris framework.  The gist of 6.4 is to ensure that carbon credits are in fact additional.  Yet the definition of “additional” seemed open to interpretation with a few countries, most prominently Brazil, pushing the limits.   

Brazil’s Paris targets aren’t based on the volume of greenhouse emissions it produces.  Instead, Brazil has effectively declared its intent to engage in a range of policies and measures to address climate change.  Any carbon dioxide generating activities outside of this range don’t count against its Paris commitment, yet Brazil would nevertheless like to be permitted to generate and market credits from these extra-Paris activities. 

“Brazil straight up wanted to double count,” says Kizzier.

Worse, should Brazil get its way, it and other countries would have a perverse incentive to carve out part of their economies as a source of easy-to-generate carbon credits that it could profit from on the global market.   Such an outcome runs counter to the very purpose of the Paris Accord, which is for each country to have more ambitious carbon reduction goals, which imply that all parts of an economy be taken into account.  It’s worth noting that half of Paris signatory countries’ climate pledges are limited to certain sectors of the economy or gasses such as CO2 (while excluding methane, for example).

Brazil also took issue with efforts to limit the extent to which carbon credits produced under the old Kyoto Clean Development Mechanism can be marketed within the Paris framework.  Some 4 billion of those credits are in stockpiled around the world.  

“A lot of left over CDM units are Brazilian, so they have a vested interest in wanting them to carry over,” says Kizzier.  Yet bringing so many credits, which could date back to 2016 or earlier, would disincentivize new reductions in the future, further undermining already inadequate climate targets.  

Additional differences of opinion persisted around the emissions baselines that countries would measure their offsetting projects against, and how credits from other climate frameworks might be included.

What remains, then, is an ideological divide around carbon credits that is fundamentally driven by economic self-interest.  In the wake of Madrid, countries that are interested in generating and trading have a framework to do so, thanks to the good though unfinished work on Article 6.2.  Yet the rules of what exactly constitutes a quality carbon credit remain to be clarified.  Until these rules can be decided the potential of carbon markets, so crucial to achieving Paris goals, will remain unrealized.