On Carbon Credits, and Zombies

    “There is a luxury in self-reproach. When we blame ourselves, we feel that no one else has a right to blame us,” observed Oscar Wilde once upon a time. The ‘Mea Culpa’-speech, delivered by a tearful Alok Sharma on Saturday evening, should, therefore, dissuade critics from rubbing salt in the COP26 president’s open wound. And anyway, most observers seem to agree that the Glasgow summit was not a total flop as the previous one, in Madrid, even though there is hardly any post-COP euphoria to speak of. Beyond all that “blah, blah, blah” noise, commitments were made, and agreements were reached, after all.

    Take, for instance, the famous Article 6 of the Paris Agreement[1]. Well, famous in sustainability circles, anyway. One of the least accessible and complex pieces of the global accord puzzle, Article 6 was not signed until the very last morning of the Paris negotiations in 2015. Its details were left unresolved at all the subsequent COPs. So, it is a considerable achievement that after two sweaty weeks of intensive wheeling-and-dealing in Glasgow, the parties could finally agree on a common framework for trading carbon credits. After the official end of the conference, mind you, keeping the tradition alive.

    Thumbs up, especially for the new framework outlined in Article 6.2. Taking head-on the critical issue of accounting for internationally transferred mitigation outcomes (ITMOs), the rules will, hopefully, help avoid the common problem of double counting those emissions credits, both by the country obtaining them and the country supplying them.

    So far, so good. The carbon markets, at least, were quick to rejoice. To be fair, investors have been rushing into carbon for a while now, anticipating prices to rise with the support of policymakers. Still, the EU carbon dioxide allowances (EUAs) price under the EU Emissions Trading System (ETS) managed to hit a new record of 67,65 a tonne on November 16. Carbon prices are now more than double their level at the beginning of the year. Which is, of course, great news for projects like carbon capture and storage, green hydrogen produced by electrolysis and other green initiatives as higher carbon prices make fossil fuels less competitive.

    The critics, however, are relentless. For one, experts at non-profit organisation Carbon Market Watch call the new Article 6 agreement a “patchy deal that contains omissions through which planet-heating emissions can still continue to seep while giving the impression or illusion of progress on paper”. They suspect that the compromise-riddled final version was the result of massive lobbying activity from fossil fuel corporations.

    Their main issue is with the updated Article 6.4. Allowing millions of certified emission reductions (CERs) produced between 2013 and 2020 under the Kyoto Protocol to stay alive is genuinely disappointing. Converting CERs into ITMOs is quite a compromise, given that these credits are often of poor quality, lack environmental integrity, and most of the projects they financed would have happened anyway without any financial support.

    My sincere apologies for failing to keep the Snap free from confusing sustainability acronyms this time. Let me rephrase it, borrowing a much more evocative quote by Carbon Market Watch Policy Officer Gilles Dufrasne instead. “Sadly, the zombie credits have been given renewed life and could continue to be used for the next decade, cleansing climate targets on paper but spoiling the atmosphere in reality,” he says.

    So, there you have it, both carbon prices and zombie credits on the rise. It’s up to you to judge whether that Glaswegian pint is half-full or half-empty.

    [1] Article 6 has three operative paragraphs, two of which relate to carbon markets:

    • Article 6.2 provides an accounting framework for international cooperation, such as linking the emissions-trading schemes of two or more countries and allows for the international transfer of carbon credits between countries.
    • Article 6.4 establishes a central UN mechanism to trade credits from emissions reductions generated through specific projects.
    Image courtesy of Daniel Jensen on Unsplash
    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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