Perspectives after Paris

On 12. December 2015 at the COP21 climate summit in Paris, all 195 UNFCCC member states plus the EU have adopted a historic document – the “Paris Agreement”. For the first time, all states around the globe have committed to protect the climate under a legally binding universal framework that promotes enhanced international cooperation and is based on the best available knowledge of scientific climate research.

This new global climate pact marks a decisive breakthrough for climate protection that will also define the world’s economy of the 21st century mainly because its Parties

  • declare to keep the global average temperature increase well below 2°C and pursue efforts to hold the increase to 1.5°C above pre-industrial levels,
  • commit to peak and then rapidly reduce their GHG emissions with the goal of achieving net zero global emissions in the second half of this century,
  • agree to reach this GHG emissions trajectory by using national climate plans which are to be revised and improved every five years,
  • demonstrate the collective intent to end the era of fossil fuel driven development by initiating a comprehensive decarbonization of all sectors of the economy, and
  • send out a clear and unequivocal political signal to the market that the transition to a climate-friendly economy is now inevitable, irreversible and irresistible.

The Paris climate accord consists of the COP21 decisions that apply immediately and contain particular provisions for the pre-2020 period and the Paris Agreement in the annex which shall replace the expiring Kyoto Protocol by the end of 2020. The treaty is open for signature by the heads of states between 22. of April 2016 and 21. of April 2017 at the UN headquarters in New York and it shall enter into force, as soon as at least 55 states have ratified it, combining for not less than 55 percent of global GHG emissions. It will remain in vigor until it has met its objectives.

As of May 1, 2016, about 90% of the Parties to the UNFCCC signed the Paris Agreement, and 15 Parties already deposited their instruments of ratification. In addition, 162 „Intended Nationally Determined Contributions” (INDCs), representing 190 Parties, had been submitted to the UNFCCC. These INDCs outline the intended national efforts towards reducing GHG emissions and climate resilient development under the Paris Agreement and will automatically become NDCs after ratification. More than 90 of the submitted INDCs include proposals for emission trading systems, carbon taxes and other carbon pricing initiatives.

How and to what extent, carbon markets can contribute to achieving the Paris climate goals and help closing the wide emissions reduction gap will decisively depend on final design and operationalization of the implementation mechanisms introduced by the Paris Agreement.

Its Article 6 creates the space for market-based mechanisms. These would allow countries to trade „Internationally Transferred Mitigation Outcomes“ (ITMOs) either via „Cooperative Approaches“ or within a new global market mechanism that puts more emphasis on the fulfillment of sustainability criteria and is therefore tentatively being named the “Sustainable Development Mechanism” (SDM).

Unlike the CDM, which was created for developed countries to purchase emissions reductions units from developing ones, the two market-based mechanisms under the Paris Agreement could potentially include any country, and transfers could flow in any direction. Any transfer of emissions reductions among parties must therefore ensure that ITMOs are clearly defined and that each emissions reduction is counted only once.

The Paris market-based mechanisms will go into effect as from 2020 onwards when countries become accountable for their national contributions to the global response to climate change for the first time, but its rules will be debated over the coming years during the next climate summits. In this context, it will be particularly interesting to see

  • how many countries will choose to incorporate carbon offsets from existing market-mechanisms and standards, such as CDM CERs, in their INDCs to achieve their climate targets in the most cost-efficient way, and
  • if and how these already available carbon offsets will be eligible in the new Post-Paris market-based mechanism.

UPM will of course adapt its business approach according to the outcome of the Paris Agreement and is closely monitoring its implementation.