Road to COP28: Call on Carbon and Developments in Article 6

Call on Carbon in COP28

Climate Leadership Coalition, Skift Business Climate Leaders and Haga Initiative, together with the International Chamber of Commerce are planning to organize a discussion in COP28 with intergovernmental organizations, IMF, OECD, WTO and World Bank, to further advance the cooperation on carbon pricing globally and support the negotiations on Article 6 about the voluntary carbon markets.

The event is a continuation of the discussions held by the Call on Carbon initiative in COP26 and COP27, and also between the COPs. Each of the international organizations have initiatives to advance carbon pricing mechanisms and with the discussions underneath the Call on Carbon, we have aimed to bring together the business and these organizations to find common ground and objectives to the developments needed in carbon pricing instruments. Finance Minister’s Coalition for Climate Action has been also included over the past year in the exchange of information. Call on Carbon now has over 150 signatories around the world.

Article 6 in the (in)formal agenda of COP28 

The need for regulation and tools for voluntary carbon markets is increasing, as double counting is one of the main challenges within voluntary carbon markets. Offsetting emissions with low quality carbon credits can be a risk for companies who wish to trade credits on the voluntary markets, since it can lead to green washing.

Article 6 of the Paris Agreement allows the countries to voluntarily collaborate with each other to achieve the goals set in their Nationally Determined Contributions, such as using private projects to trade carbon credits. Article 6 has been under a lot of debate over the past years, and in previous COPs the negotiating countries have aimed to finalize the rulebook of Article 6.

In COP26 in Glasgow an agreement on the article’s rulebook was reached, but final details on the voluntary markets underneath the paragraphs 6.2 and 6.4 are still open. The 6.2 is about the credits traded between the countries in bilateral and multilateral agreements and 6.4. focuses on creating a global market for carbon pricing that is overseen by a United Nation’s Supervisory Body.

In COP27, the negotiations on Article 6 drew less attention than the year before, even though clear advancements were also made underneath 6.2 and 6.4. It is expected that in COP28 the discussion on these two paragraphs will continue and possibly the negotiators will reach an agreement on the rulebook for voluntary markets. This would advance the possibility for global carbon markets.

EU to propose that at least 60 percent of global emissions be covered by carbon pricing by 2030

Carbon pricing instruments provide a clear price signal with the aim of reducing greenhouse gas emissions and include emissions trading systems (ETSs), carbon taxes and carbon crediting. However, today only around 23% of global emissions are subject to carbon pricing, according to the World Bank.

On September 20, president Von der Leyen put forward her proposal at the UN Climate Ambition Summit in New York. She pledged to work with the UN Secretary-General and “interested countries” on expanding the role of carbon pricing to cover at least 60 percent of global emissions by 2030. Also, she encouraged attendees to work in the weeks coming up to COP28 to turn her concrete proposal into a reality.

This announcement does not come as a surprise, as the Commission president has repeatedly talked up the potential of carbon pricing as a central tool of climate policy in recent weeks. At the African Climate Summit in Nairobi in early September, she called on African leaders to work with the EU “to bring a proposal for global carbon pricing and true carbon credits at COP28”.

In the EU, around 40% of emissions are currently covered by the EU emissions trading system (ETS), but this share is set to increase sharply following reforms adopted in 2023. Starting from next year, shipping will be phased into the ETS, whereas a separate emissions trading system for road transport and buildings will be established later in the decade. Thus, it is expected that 85% of EU emissions will have a carbon price under the new rules.

Global news from Africa: Closer to global carbon pricing?

On September 6 2023, African leaders adopted the Nairobi Declaration to be the basis for their continent’s common position in the global climate negotiations at COP 28 and beyond. This document calls for the acceleration of on-going initiatives to reform the multilateral financial system, but also proposes a universal tax on fossil fuel trade, aviation, maritime transport, and financial transactions.

Kenya’s president William Ruto presented these ideas again during Climate Week in New York. Ruto called for the establishment of a global Green Bank, financed by carbon taxes and other climate levies, and he indicated that Kenya iswilling to introduce a national carbon price of 25 dollars (per tonne of CO2).

However, it is still unclear how these ambitious ideas would be received by other countries in the COP negotiations.

“I would be surprised to see major steps in the direction of broader pricing of carbon or greenhouse gas emissions at the global level”, senior researcher Asbjørn Torvanger at the CICERO climate research institute in Oslo says.

As Mr. Torvanger points out, many less-developed countries believe that it would be unfair if they were asked to introduce a carbon tax or price on emissions at the level of that of richer countries. On top of this, a global context heavily influenced by Russia’s war in Ukraine and high inflation contribute to a situation where countries might be forced to prioritize other issues above climate policy.

This is why, as recognized by a new UN report on sustainable development, the chances of introducing carbon pricing in more countries would increase if it were tied to more climate financing flowing from rich to poor countries. According to said report: “The recycling of revenues from global carbon pricing would be more than adequate for financing poverty reduction when supplemented by international transfers from developed countries.”

Global news from China: necessary to adjust the Chinese ETS to raise the price of carbon allowances

China’s emissions trading system (ETS) is only playing a limited role in driving emissions reduction so far, Lead carbon analyst Yan Qin at the London Stock Exchange Group observes. “Currently, it is more valuable in terms of building up emissions monitoring system of large emitters”, she says in an email interview.

Although the allowance price has recently increased to 75 CNY per tonne (around 9,7 EUR) as companies prepare for the upcoming compliance deadline by the end of this year, “this price is still quite low, compared to more matured carbon markets such as the level of €85/t in the EU ETS”.

Therefore, for the Chinese national carbon market to play a bigger role in incentivizing enterprises to reduce their emission, China’s ETS needs to switch from current intensity-based target to an absolute-Cap, gradually reduce the share of free allocation and increase the share of auctioning of allowances.

Regarding attempts at carbon pricing internationally, Yan Qin points out that China has evidenced its support to carbon pricing by establishing its own ETS, so it can be expected that China will back the set-up of more carbon pricing schemes globally.

“However, I would not think that China is in favor of a uniform global carbon price.  China supports common but differentiated responsibility in global climate actions and will acknowledge the differences in abatement costs across countries due to their different stage of development,” Yan Qin says.

Tailwind for pricing of shipping emissions

The World Bank estimates that a CO2 price on international shipping could raise 40-60 billion dollars per year from 2025 to 2050. Because of this, shipping emissions have been debated at several climate meetings during 2023 and should feature at COP28. In this context, several recent initiatives are worth highlighting.

First, the International Maritime Organization agreed in July on a new and more ambitious strategy for maritime shipping to reach net zero emissions “around 2050”. As one of the different measures to back up said target, a levy is being negotiated.

Although it has been agreed that the revenue generated by the levy will support the transition in the sector (for example by bridging the price gap between fossil fuels and green fuels), there are competing proposals for its exact size and use. The Marshall Islands and the Solomon Islands suggest a levy of 100 dollars per tonne of CO2e to help vulnerable countries adapt to climate change. Alternatively, Japan proposes a levy of 56 dollars/tonne from 2025, rising to 135 dollars from 2030, under which the maritime industry will keep the revenue to invest in zero-emission vessels.

Additionally, shipping will be included in the EU ETS from 2024 after legislation was passed earlier this year. This is the first large-scale example of carbon pricing of shipping, and with the price of emitting one tonne of CO2 in the EU ETS currently between 80 and 90 euros, some big companies will have to pay hundreds of millions of dollars for their emissions.

Lastly, the UK will follow the EU’s lead, as domestic shipping will be included in Britain’s own ETS from 2026.

Bits and pieces: How global carbon pricing instruments are developing

Global emissions trading systems and taxes: 73 carbon pricing instruments are currently implemented worldwide, while more are planned for the near future. Measured in CO2 equivalent, 11,7 gigatonnes of emissions are covered by carbon pricing today, which amounts to 23% of global emissions, according to the World Bank State and Trends of Carbon Pricing 2023 report. Of those, 17% of emissions are covered by an ETS.

The Carbon Pricing Dashboard gives a good overview of implemented and scheduled carbon pricing systems and other initiatives under consideration.

Updated overview and latest news on carbon taxes and emissions trading systems:

• Geography: The overwhelming majority of carbon taxes and emission trading systems are located in Europe and North America. China’s national ETS stands out in Asia. In Africa and the Middle East, there are currently almost no examples of taxes or ETS, but several African countries are exploring options. Although the energy crisis and high inflation posed new challenges, in 2022 new carbon pricing systems were launched, and existing schemes expanded. Also Finance Ministers’ Coalition for Climate Action’s  Helsinki principles highlight the need to work towards measures that result in effective carbon pricing.
• Revenue: Revenues from carbon taxes and ETSs reached 95 billion USD globally in 2022 and grew by more than 10%. 69% of said revenues came from ETSs and 31% from taxes. However, the EU ETS alone generated 42 billion USD.
• Earmarking: 40% of revenues were earmarked for dedicated purposes, in particular green spending. 10% went to vulnerable households and firms as direct transfers, 20% to the general budget, 9% to tax cuts, and 6% to other purposes.
• Opinion: Support for climate policy is higher if revenues are used to fund green infrastructure and low-carbon technologies or redistributed to low-income households, according to OECD research.
• Prices: Carbon tax rates and ETS prices tend to be higher in high-income countries than in middle-income countries.
• Too cheap: Research has shown that carbon prices must reach a level of 61–122 USD per tonne of CO2e by 2030 (adjusted to 2023 prices) to limit global warming to below 2 °C. As of April 1st, 2023, only 5% of global emissions are priced within that range. The EU ETS and Norway’s domestic carbon tax are within said range.
• New sectors: New Zealand is set to become the first country in the world to put a price on emissions from agriculture, with a new mechanism starting in 2025.
• Major emitter: Indonesia launched an ETS for the power sector in February 2023. Initially, it covers 99 coal-fired power plants. Indonesia is 8th on the list of the world’s top 10 greenhouse gas emitters.
• Asian players: Japan has presented plans for a national ETS starting in 2026. Malaysia, Vietnam, and Thailand are all considering ETS options.
• What about Africa? South Africa’s carbon tax is so far the only carbon pricing system operative in Africa. Several countries such as Nigeria, Botswana, Côte d’Ivoire, Gabon, and Morocco have indicated that they are considering taxes or ETSs.

What’s on the agenda this autumn?

9.-15. October: Marrakech: Annual meetings of the World Bank and the IMF.
27. October: Brussel/online: The European Climate Stocktake – EU and global progress towards the goals of the Paris Agreement, European Commission.
1.-2. November: London/online: Climate change 2023, conference, Chatham House.
30. November – 12. December: COP28, Dubai.

Sources: IEA, UN, Clean Energy Wire, GSCC, European Commission.