Katowice Climate Change Conference - November/December 2018

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Update from John Carnegie Head of Climate Change Policy BusinessNZ

COP24 Katowice: The accountability (anti) climactic CoP

The Katowice Rulebook has been agreed! A successful outcome!  The interests of the climate have prevailed over national self-interest!  The UN has already claimed a new era of global climate action has begun.  Governments, the UN claims, have adopted a robust set of guidelines for implementing the landmark 2015 Paris Climate Change Agreement, the implementation of which will benefit people from all walks of life, especially the most vulnerable.

Now the 30,000 negotiators and others like me get back onto their planes and head back to the 196 states represented at the CoP.  It’s worthwhile reflecting on the outcome of the CoP.  Was it a success?  Did it deliver what it set out to?

The CoP came to a crescendo on the last day - turmoil, drama, action…  The kettle had finally started to boil furiously but the only outward manifestation of this was the absence of a final plenary to bring together the decision texts that had been worked on so hard by the negotiators over the previous weeks (in fact the previous three years since Paris). 

Something must’ve gone terribly wrong.  Everyone began to speculate.  The CoP was going to go into the early hours of Sunday.

By 10:30pm on Saturday it was all over.  The gavel had come down on what has since been labelled the ‘Katowice Climate Package’.  It was all rather anti-climactic.  So what happened? The focus has been on the removal of the Article 6 text on carbon markets at the insistence of the Brazilians.  This is only a part of the story but let’s deal with it first.

The move by Brazil to hold up the entire CoP for the whole of Saturday over the text on markets took everyone by surprise.  Many countries had negotiated up to and in some cases beyond their red-lines to capture the gains of an overall package.   For New Zealand that included Article 6. 

The Brazilians have created a strong sense of ill-will by insisting that the decision text be removed, and replaced by a procedural decision to continue negotiations next year.  Given their unwillingness to negotiate, one might speculate that they went into the CoP with the goal getting the markets text – the cumulative effort of over three years – removed.

But markets and the climate are the losers.  The text would have offered guidance on how international markets could be harnessed to enhance ambition.  This included some of the basic building-blocks needed to ensure that the trading has integrity such as the avoidance of double-counting, the tracking of units, and the monitoring of their contribution towards mitigation. 

Instead, negotiations are stalled, missing an opportunity to inspire businesses to accelerate action.  Markets are needed to drive higher mitigation ambition and facilitate climate change finance.  We are all scratching our heads about what was so harmful to Brazil’s national interests that a procedural decision to defer the markets conversation by a year was preferable to the text as it was drafted.  My guess is that it has something to do with the use of the huge hoard of Kyoto Protocol units it holds and its desire to preserve its ability to sell them even if it leaves the Paris Agreement, as promised by the incoming President.

The upshot is that negotiators now go back to the textual drawing board.  Before its last-minute removal from the text, progress was being made by New Zealand’s Climate Change Minister James Shaw in his co-facilitator role.  Article 6.2 - on internationally transferable mitigation outcomes (or carbon units) was fairly well developed, while Article 6.4, the new mechanism, and what was thought to be the source of negotiating tension, was much less developed. 

As I advised our negotiators, if these elements (Article 6.2 and 6.4) were only about government-to-government trading, then this wouldn’t matter so much.  Under Article 6.2, trading needs only be consistent with the high-level principles around environmental and accounting integrity.  This is sufficient for clubs of like-minded countries to join together under Article 6.2 and trade units which they are comfortable with as being real and verifiable.  In the absence of progress, likeminded countries can still move things along - they won’t wait.  And I know that New Zealand is not waiting, with some news to emerge over coming days.

Any progress outside the rules will inform Article 6.2 and will in turn set the standard for units developed under Article 6.4.  The new Article 6.4, however, is where real negotiating effort is still required if the goal is to attract the private sector.  On the face of it, it’s the expectation that the private sector will be project developers, with the activity design section of the text referring to “public or private entities participating in an activity”. 

The mechanism developed under Article 6.4 is intended to be the Paris Agreement equivalent of the Clean Development Mechanism (CDM) under the Kyoto Protocol.  But there are important differences, meaning you can’t just pick up the CDM methods of operating and transfer them into a Paris Agreement operating environment.  Those developing countries who hosted CDM projects largely wanted to do this, and avoid robust accounting rules in the process.

For New Zealand, this might seem all a bit academic, given we are on board with Article 6.2, but in a higher-ambition world in which New Zealand is a serious net buyer it will need an alternative source of high quality units to supplement its domestic units.  Others we may link to will also be net buyers (e.g. Australia or China) or at least want to use their low cost domestic offsets themselves (e.g.  Colombia).  So access to timely and high quality Article 6.4 units will be important.

I hope I am wrong but unfortunately unless there are future substantial negotiating advances, I do not think the new Article 6.4 mechanism will survive other than on paper.  This is because the private sector will not get involved in the new mechanism if they can’t mitigate and monetise the risks associated with it - at least while there is a risk of double counted units and the potential that no-one will buy them.

Also, private sector originators will look to the experience of the Kyoto Protocol and the CDM where negotiators essentially used it as a plaything with constant (and in some cases capricious) changes such as preventing New Zealand and others from buying them as we wouldn’t (quite sensibly) sign up to a second commitment period.  The fact that Article 6 was the most difficult element to negotiate at Katowice is a warning signal to the private sector of how negotiators cannot sensibly sort this stuff out when it is fairly clear to all what is required.

Unfortunately the list of potential restrictions around the Article 6.4 units outlined in the draft text - restrictions on secondary transfers, use-by-vintage, and carry-over to later NDC periods - are a death knell to private sector participation and to the development of a deep and liquid international offset market.

Unless these and other issues can be sorted out next year or shortly thereafter, all unit traffic will I believe flow through Article 6.2 units.  This will not satisfy countries such as New Zealand who also need international offset units. 

It is possible, of course, that governments might develop the Article 6.4 projects and take on all the downstream risks associated with their use by using the units developed themselves.  But this is problematic and will ultimately disadvantage those countries who think that being cute with accounting and quality is preserving them a useful option.  At best it is only a short-term benefit.  The transparency rules will eventually make their use untenable as others assess the quality of units being used and determine if their use equates to ‘soft’ emissions reduction targets.  And in the medium to longer term it will disadvantage poorer countries as in the absence of a UN-based market mechanism with active private sector involvement, they will struggle to develop their own market infrastructure. Finally it will starve them of a source of climate finance, slowing their own economic and climate transition and ultimately the pace of others’ transition.  So it helps no one.  It will ultimately result in pressure to improve the Article 6.4 rules but who knows how long this will take.  I am not holding my breath.

Is rulebook flexibility good or bad?  Well, it depends

Interestingly, while carbon markets has been the focus of disappointment at the CoP outcome, and certainly helped create an anti-climactic conclusion, in some ways it only overshadowed the main event.  This was around exercise of flexibility.  Negotiations on this points yielded significant improvements that have largely gone unheralded.

The negotiations are always complex.  Our Climate Change Minister was in the media just before the conclusion of the CoP saying how frustrating it is that some countries say they want a permissive set of rules because they're worried about the potential impact on their economic growth, while other countries are saying “this is an existential question for us, and our very survival as a culture and as a people is at stake”. 

This difference lies at the heart of the negotiations and the workability of the Paris Agreement at a domestic level - between flexibility on one hand and rapid climate action on the other.  On the face of it, it’s a straight forward trade-off but many countries seem unwilling to divorce economic consequences from climate ambition.  This applies to New Zealand just as much as other countries - we need to change, but we must continue to grow, or we lose our communities.  Just ask the gilets jaunes in Paris.

However the flexibility inherent in the Paris Agreement and the ability to respond to the threat that exists can - in the right conditions - be complementary and mutually reinforcing, not opposing. 

The problem isn’t the flexibility provisions per se, but the fact that the provisions only work if everyone uses them to achieve all of the emission reductions that they are capable of.  Only if that happens, and only if we can tell that is happening, will the focus shift away from perceived economic disadvantage to actual economic opportunity.  And if that happens internationally across countries then the economic consequences of climate ambition, by way of comparative advantage and trade, should be net positive, not negative. 

During negotiations the flexibility provisions have more often than not been used to establish differential requirements between countries where only some countries (mostly developed countries) are required to take real action.

So core requirements around mitigation effort and transparency are not just being applied on a differential basis but not applied at all - and the Kyoto Protocol proved beyond doubt that this simply doesn’t work.  Only with every country doing what they can as soon as they can within a consistent and transparent set of rules will our emissions problem be addressed sufficiently and sufficiently fast.

Katowice did see a quiet breakthrough with regard to China and the block of developing countries.  Over the years, much pressure has been exerted on China to eventually allow a common set of obligations for emission reduction reporting for both developed and developing countries.  This now seems to have happened, with an acceptance of a common set of requirements applied flexibly according to each country’s own capability.

Developed countries, under the leadership of the EU and the US, have convinced China to accept uniform guidelines for tallying those emissions.  Thus stripped of their most powerful voice, other developing countries reluctantly followed suit.  If any cannot meet the standards, they must explain why and present a plan to make amends.

This shift isn’t completely unexpected as one of the interesting implications of the Paris Agreement and its bottom-up focus on national circumstances has been a realignment, not always dramatic but certainly perceptible, of country interests within usually strong blocs (China being a member of the BASIC group: Brazil, South Africa, India and China and the G77+China: the group of 77 less-developed countries plus China).

This is a powerful advance that, consistent with the approach set out in the Paris Agreement, reflects a further blurring of the two-tier system that has governed climate politics since the early 1990s.  The split between developed and developing countries has been shifted to a common set of rules that can be flexed for those who need it.  In light of the importance of this shift, which will have implications for all mitigation activities, including markets, it is quite possible that giving up on the markets text was an easy ‘give’.

In return, the less developed countries won firmer assurances that the developed countries would help pay for their efforts to curb their greenhouse-gas emissions and to adapt to rising sea levels and fiercer floods, droughts, storms and other climate-related problems.

The real test of what comes next is in the real economy

What does the Katowice CoP mean for domestic policy settings and whether they make economic and environmental sense?  This is the acid test of what has been negotiated.  It comes down to specific policy settings, as it is hard to bridge the gulf between the negotiations and the real world in the absence of specific policy proposals that align with the negotiated outcomes.

One thing I know is that businesses want to earn a risk-adjusted rate of return and do their best for the environment.  I have never heard a business say they don’t care about the environment and most, whatever their circumstances, seek to tread as lightly as they can.  They also want to be competitive both domestically and internationally.

While the negotiating progress can be slow, the real progress being made by businesses around the world to respond to the challenges posed by climate change and the economic opportunities being seized to deliver new and innovative solutions, is mind-blowing.  Action is everywhere.  This was evident across the CoP side-events but particularly through the presentations on business day in the first week and Marrakech Partnership Events.  At Business Day we heard from Dr Bertrand Picard, head of the Solar Impulse Foundation and the 1000 profitable solutions for the environment, and Lourdes Sanchez from Creative Disruptors. During the Marrakech Partnership Events there were transport, energy and industry action sessions. The extent of business innovation being unlocked is vast as the urgency becomes clearer.  But greater scale is needed, and while businesses are, in large measure leading, they continue to look to government to help de-risk the capital necessary to achieve a 1.5 degree world.

Businesses and governments need to continue engaging in the international process that has delivered a rule book for the future.  But while international negotiations are trying to find a shared understanding on the role of markets, in the real world markets are already starting to deliver solutions to the challenge of climate change.

While we seem to be progressing internationally, albeit slowly, it’s important to remember that these conferences are not the actual solution to climate change.   The solution is something that’s happening in the real world with growing pace, in response to real world commercial signals, and is the reason why we can have real hope for a better future.

I wish you all a very Merry Christmas and a Happy New Year.

Postscript: Here’s an interview I did as I left Katowice, with RadioNZ

John Carnegie
John Carnegie

BusinessNZ’s John Carnegie is a member of the New Zealand Government's official delegation.

Please note: The views in this update do not reflect the views of the delegation, but are John's personal observations. These updates are for named recipients only and are not for forwarding on, including to the media.