The Rules To Save The World

Beyond the NGO emotion and singing and joyous arm waving, country leaders at COP 26 actually have to achieve stuff this week.

For the smaller nations like ourselves, this is one of the most important trade deals we’ve had to negotiate. All small countries in this world gain in leverage and influence ONLY if every one agrees to work by the same rules. Without them, the world is simply ever-more dominated by the larger and more powerful countries, and ever-larger key corporations.

So for us (and our Pacific cousins) the most important part of COP 26 is whether the post-Paris Agreement rulebook for international emissions trading is truly nailed down.

Most countries don’t have the ability or will to achieve their net-zero annual target without international carbon trades. That’s the reality. Even with the effects of COVID smashing down our total imports and energy use like we’ve not seen before, we’re just not giving up our cars, air conditioning, jeans, or bananas as fast as policymakers and activists want us to.

The rulebook for international emissions trading is how nearly all countries are getting around this. There is of course an industry-led market in emissions trading which is developing outside the United Nations process. It’s not a fun fact, but the total force of government – even the powerful ones – isn’t going to turn climate change around. Capitalism needs to form markets that calibrate and exchange value that assists us all to change the climate. Citizens need the time bought by carbon markets to achieve what is described by Minister Shaw as a ‘just transition’.

But a critical element still up in the air is Article 6 – the section of the agreement that deals with international emissions trading. National delegations to the talks had hoped to finalise this element as early as 2018, but agreement across all has proved elusive for years.

Article 6 matters because it could help slash the global bill for meeting long-term climate projection targets. When it cuts the bill, it cuts the cost to customers. This in turn encourages governments to up their ambition on emissions reductions – in fact that’s exactly how it’s gone in New Zealand just days before the Conference started. We re-upped our bid.

It also helps to engage the private sector and drive the larger powers of the finance and technology sectors that it is in their own commercial and business interests to reach net emissions by 2050. Anyone who works in a non-New Zealand domiciled corporate will be aware of such whole-Group internal carbon-revolution drives. There can’t be any fudging this, or its necessary accounting standards.

So to be specific, we need to get to Article 6.4.

Article 6.4 of the Paris Agreement aims to establish a voluntary mechanism, supervised by the United Nations, which will contribute to the reduction of greenhouse gas emissions by allowing public and private entities to trade emissions reductions. One country overachieving its reduction target can sell surplus credits to a country falling short – helping to meet the overall climate goal at a lower cost than otherwise. VCM: the Voluntary Carbon Market.

Without it, there are only state-to-state and corporate-to-corporate trades, and there are no rules other than market rules – and that doesn’t end well. It doesn’t necessarily all need to be agreed at this COP 26, but the 6.4 rules have dragged on for too long already: Paris actually has to be operationalised for both countries and corporates alike.

Carbon credit prices have increased sharply in 2021 as companies and governments show increasing interest in the market. Our own key public funds have been charged with achieving precisely such market goals for their outcomes. Your NZSuper is now riding on it.

Just as important, without it the polluter doesn’t pay. As Minister Shaw noted as a guiding principle of the emissions reduction plan:

We will ensure market-based approaches like the Emissions Trading Scheme provide the right price signals so the polluter pays – in other words to ensure those who are the source of pollution bear the bulk of the cost for managing it.”

This is particularly important for countries like New Zealand that have signalled they will be net buyers of emission credits for a long time, creating additional demand for credits.

Accounting! Corporations!

None of this is fun. None of this is a Battle for Seattle moment. None of this is easy – and such an awesome trade agreement will go down to the wire as they usually do.

Trying to get the whole world to agree on rules that motivate countries, corporations and customers to change the price they mark of their entire behaviour is exceedingly tough, and promising.

That’s what’s going down at COP 26.