Putting A Price on Carbon: From Lima to Paris 2015

Synopsis

The 20th session of the UNFCCC Conference of Parties in Lima now underway until 12 December 2014 will discuss how to put a price on carbon. The question is how can a carbon price bring us closer to our emission targets?

Commentary

THE 20th SESSION of the United Nations Climate Change Conference (UNFCCC COP20) is underway in Lima. Parties will continue discussions on their Intended Nationally Determined Contributions (INDCs) under the Ad Hoc Working Group of the Durban Platform for Enhanced Action (ADP) in preparation for the post-2020 agreement in Paris next year.

Optimism in the global climate change agreement post-Kyoto rose again before the COP20 when China and the United States reached what has been hailed as a “historic” climate deal. Despite the non-binding nature of the deal, China has made great strides with its pledge for national emissions to peak by 2030 while the US agreed to cut emissions by 26-28% below 2005 levels by 2025. In addition, the European Union has likewise reached an internal deal to cut emissions by 40% compared to 1990 levels by 2030. These are positive signs that countries are acknowledging the urgency to mitigate climate change and address carbon emissions before it is too late.

Can We Reach These Targets?

The recent United Nations Environment Programme’s Emission Gap Report says that carbon emissions should hit net zero between 2055 and 2070 for the world to stay within the 2⁰C target – beyond which there will be dangerous changes to the global climate. Some have argued that concrete actions will only take place when we put a price on carbon. A carbon price is a monetary value attached to a tonne of carbon dioxide that is emitted into the atmosphere. Placing a price on carbon emissions will increase the costs associated with the use of fossil fuels, thus encouraging industries to switch to cleaner fuels and adopt energy efficient practices.

At COP17 in Durban in 2011, Parties agreed to define a New Market Mechanism (NMM), an international framework to put a price on carbon to help countries achieve their targets in the post-2020 world.

However, the collapse of the price of Clean Development Mechanism (CDM) credits – a carbon pricing and crediting instrument under the Kyoto Protocol – raises the question of whether carbon markets are the solution to our environmental woes. The price of a CDM credit, a unit of carbon, is determined by two factors: first, the supply of carbon credits from emission reduction projects in developing countries; second, the demand for these credits from developed country parties which have to meet binding emission reduction targets under the Kyoto Protocol.

Carbon credits can be used to offset emission reductions that countries are unable to achieve. It has been argued very often that the lack of participation of major emitters was the Achilles heel of the CDM credit market.

With the participation of major emitters, especially the US and China, in the 2015 agreement and the pledging of INDCs by all Parties, will an international carbon market founder again? The answer is clear that without the US’ participation, the next climate deal is likely to collapse once again.