UN Carbon Trading System Talks Yield No Results at COP27

Scholars from the University of Pennsylvania are on the ground at COP27 in Sharm El-Sheikh, Egypt. Follow their updates from the climate conference and tune into a special podcast series from Energy Policy Now.

Despite intense negotiations at the twenty-seventh United Nations Climate Change Conference, commonly referred to as COP27, parties failed to reach a consensus on the crucial issue of how to operationalize an international carbon trading system.

As part of the ambitious 2015 Paris Agreement, widely regarded a success, the parties set up a number of new mechanisms to tackle climate change. The carbon trading system, established under Article 6.4 of the Paris Agreement, is intended to enable countries to trade their emissions reductions with other countries.

The carbon trading system would allow, for example, the United Kingdom or a British company to fund the construction of a solar farm in Egypt, and receive credits in return. Those credits represent the greenhouse gas emissions that an equivalent fossil fuel generator would otherwise create. Accordingly, they count toward the emissions reduction targets mandated by the Paris Agreement.

Although the Paris Agreement established the body in charge of the carbon trading system, that body—and the market it creates—will not become operational until its governing guidelines are finalized and adopted. The initial rules for the Article 6.4 market mechanism were agreed to last year at COP26 in Glasgow, Scotland.

Known collectively as the “Article 6 Rulebook,” they create a framework for how the market is supposed to function and identify eligibility requirements for issuing credits. The Rulebook addresses other key issues, including double counting, the transfer of credits from the Kyoto Protocol‘s legacy carbon market, and proceeds diverted to the Adaptation Fund.

The Adaptation Fund is one of the United Nations’ three central climate funds, and the first to derive a share of its funding from carbon markets. The other two—the Global Environmental Facility and the Green Climate Fund—rely heavily on contributions from developed countries. Given the significant gap between the cost of climate action and available funds, and the increasing threat of climate disasters, creating a self-contained system to finance adaptation in developing countries is imperative.

Although hopes were high for COP27, countries failed to make further progress, citing the “complexity of the work and the short time available” to operationalize the mechanism. In its analysis of the breakdown of negotiations, the International Emissions Trading Association, a carbon market trade organization, noted that the countries’ failure to agree was “chiefly due to disagreements over how to operationalize the requirement agreed at COP26 that methodologies should align with Paris Agreement objectives.”

Following negotiations, commentators highlighted three particular points of disagreement. First, how the registry of the mechanism should operate. Second, how legacy credits are transferred to the new system. And third, how issuing countries authorize emission reductions. Some argue that this last issue is the most controversial, as certain countries want the right to revoke or amend the authorization of emission reductions after they are credited.

The work will continue next year when the Supervisory Body—the body in charge of the carbon trading system—must resolve the remaining 65 items required to operationalize the mechanism. The vice-chair of this year’s meeting acknowledged that, although the work had advanced during COP27 and will continue next year, delivering a mechanism that “has the highest level of integrity and reliability, while still being as practical and easy to use as possible” is a complex challenge.

Negotiators for the 198 parties to the United Nations Framework Convention on Climate Change—the international treaty under which the COP negotiations are held—have a busy year ahead. Negotiations will resume at COP28 next November in Dubai.

Johan B. Stagstrup

Dual Degree Student, Carey School of Law and Sciences Po

Johan B. Stagstrup is a dual-degree student at the University of Pennsylvania Carey School of Law and Sciences Po Paris, pursuing a master of laws and a master in international management and sustainability.

Alexan Stulc

Juris Doctor Student, Carey School of Law

Alexan Stulc is a juris doctor student at the University of Pennsylvania Carey School of Law.