Recent weeks saw a hectic intellectual dynamism for carbon markets in the climate community. The 46th session of the Subsidiary Body for Scientific and Technological Advice convening in Bonn, Germany from May 8 to 18 featured intense discussions on the market provisions of the Paris Agreement, trying to build incremental blocks for the rulebook in 2018. Parties reflected on many thorny issues that highlighted the role of internationally transferred mitigation outcomes (ITMOs) in achieving nationally determined contributions (NDCs) and how to ensure environmental integrity, transparency, and the avoidance of double accounting (article 6.2); the type of governance for a sustainable development mechanism (article 6.4); and developing a work program for non-market approaches (article 6.8).
The Bonn conference was followed by “Innovate4Climate” – a new global dialogue concluded on May 25 in Barcelona, Spain, gathering markets leaders to explore prospective policy instruments. Innovate4Climate featured European stories of using market approaches to move climate action forward. It is true that the European Union, for example, as a pioneer in designing an emissions trading scheme (ETS), delivers rich experience and lessons to the rest of the world for constructing their own initiatives. What seemed missing or inadequately addressed in these discussions, however, is the elaboration on those parallel efforts happening outside Europe. To share some of the spotlight with emerging carbon markets in the Asia-Pacific is pressingly needed and would contribute geographical diversity to the discussion.
The evolution of China’s ETS is a vivid example. The world’s biggest greenhouse gas (GHG) emitter and a non-typical market economy is soon to open a national carbon market covering about 40 percent to 50 percent of its total GHG emissions and replacing the EU ETS as the “largest carbon pricing initiative.” The transition from the current eight pilot schemes to the national emissions trading scheme (NETS) not only shows China’s ascending climate ambitions but also sends out a strong signal to those jurisdictions seeking the linkage of domestic ETSs and encourages more players to participate. Numerous literature indicates that linking carbon markets across boarders would produce environmental and economic benefits. Adding to those benefits, the linkage could enhance transparency on GHG emissions accounting and reporting and facilitate information sharing of climate action.
A closer look at article 6.2 of the Paris Agreement reveals its non-restriction on the type of cooperative approaches that may employ ITMOs toward NDCs. An enhanced and flexible transparency framework was enshrined in article 13, requiring all parties to regularly submit a national GHG inventory and inform of implementation progress (paragraph 7) and to undergo expert and peer review (paragraph 11). Developing domestic ETSs and linking them, different from the centralized market mechanism under the Kyoto Protocol, is a promising approach to holding parties accountable and giving carbon market a full play in realizing transparency.
Again, the Chinese story is encouraging, at least for those without a mature system for measuring, reporting, and verifying GHG emissions. China has been often criticized for being too protective of its emissions data and not fully reporting emissions. China’s transition to the NETS creates a good opportunity for making such data more accessible and provides momentum for higher-level and more united legislation to track compliance and ensure accurate and credible data.
Prior to launching the pilot ETSs, China had neither a national nor regional GHG accounting and reporting system. At present, all the pilots have adopted local rules on GHG emissions, formulated methods and guidelines for accounting emissions from key enterprises, and established reporting platforms. The commitment on disclosing GHG emissions profile has been written into China’s GHG Control Plan during the 13th Five-Year Plan (2016-2020). The ministerial decree and policy prescriptions circulated by the National Development and Reform Commission (NDRC) defined who must report, what to report, and how to report, along with verification guidance and enforcement measures (e.g., liability, a credit management system, and a blacklist for non-compliance). The NDRC has also submitted the Draft NETS Regulations to the State Council for review and discussion.
Linking ETSs is a pathway for peer review of each Party’s GHG emissions and associated regulatory requirements. In the already linked California-Québec market, the two parties signed a Linkage Agreement that includes requirements for transparency. Article 1.2 (f) provides that, “The intended outcome of the harmonization and integration is to enable each party under its own legislative or regulatory authority to… enable the sharing of information to support effective analysis, operation, enforcement, and supervision of the market for compliance instruments.” In the harmonization and integration process, article 3.2 requires that the procedural requirements of each party be respected, “including appropriate and effective openness and transparency of each party’s public consultations.”
It should be, however, observed that the California-Québec market is a subnational partnership. Article 6.3 of the Paris Agreement says the use of ITMOs to achieve NDCs shall be authorized by participating parties; neither California nor Québec is the party to the Agreement — and the United States, thanks to President Trump’s recent announcement, will in fact be withdrawing from the Agreement. The question remains how mitigation outcomes transferred between two subnational entities can be counted toward achieving NDCs, a question complicated by Trump’s decision to drop the Paris commitment.
On a more positive note, Canada has been at the forefront of pricing carbon pollution, which constitutes a core element of the Pan-Canadian Framework on Clean Growth and Climate Change announced on December 9, 2016. The new plan requires all Canadian jurisdictions to have carbon pricing in place by 2018. Canada, during its G7 presidency in 2018, will have a unique chance to seek and generate as much cooperation as possible, including with Asia-Pacific countries.
Meanwhile, South Korea launched the first nationwide ETS in Northeast Asia in 2015. Japan established a subnational ETS in Tokyo in 2010. There are evolving cooperative initiatives between South Korea, Japan, and China, which account for over a quarter of global GHG emissions, in researching, developing, and linking ETSs. For instance, the 2016 High-Level Roundtable on Carbon Market Cooperation in Northeast Asia gathered experts to exchange experience and seek future operation. Their discussions partially contributed to the enlightening report, “Roadmap to a Northeast Asian Carbon Market.”
New Zealand has a relatively mature ETS that has operated since 2008. Following Chinese Premier Li Keqiang’s recent visit to New Zealand in March, the two parties started exploring collaboration opportunities on carbon markets.
Current trends suggest the likelihood of more such partnerships in the Asia-Pacific region. Such agreements should provide inspiration for operationalizing articles 6 and 13 of the Paris Agreement, which serve as a foundation for a future global carbon market as a pathway parties can follow to realize their NDCs in a transparent manner.
Ling Chen is a research associate with the International Law Research Program of the Centre for International Governance Innovation in Waterloo, Canada. He holds an LL.M. from the University of Toronto and an LL.B. and an LL.M. from Beihang University in China.