Why the failure of the climate negotiations in Madrid could be a good thing

by Jörg Haas (Heinrich Böll Foundation)*

The climate conference in Madrid had to be extended longer than any climate conference to date. Negotiations lasted until Sunday morning. And yet only a weak final document was agreed which postponed almost all essential questions until next year. A failure, even a catastrophe for the efforts to save the planet? I believe that among the foreseeable possible outcomes of the conference, this failure is a good thing in one respect – namely emissions trading.

In order to understand this assessment, one has to look at what actually was on the agenda in Madrid. Notably lacking were the things, that actually would be necessary in view of the alarm signals from so many regions of the planet: An immediate increase of ambition, a decision to immediately and massively step up their emission reduction efforts, and to help the world’s poorest and most vulnerable countries to cope with the climate damage that is already happening.

Instead, the agenda focused primarily on the „rules of the game“ of international emissions trading – the „small print“ for Article 6 of the Paris Climate Agreement. A coalition of Latin American states and the EU succeeded to fend off an attempt to agree rules that would have made this emissions trading a giant scam, a betrayal of the international public. But the events also showed why international emissions trading is a bad idea. Therefore, the failure of the Article 6 negotiations is perhaps the best one could expect from the climate negotiations on this issue.

International emissions trading deals with a special good: emission reductions in one country that can be credited to the respective targets of another country. So they allow the buyer country to emit more than it actually promised internationally.

Economists like to praise this trade as an opportunity to achieve climate targets more cheaply – and because it is cheaper, they argue, states will be more willing to set more ambitious targets. But this argumentation is based on wishful thinking, on preconditions that cannot be found in reality.

Emission reductions are measured against the targets that states have set themselves under the Paris Agreement. These are voluntary commitments: Nationally Determined Contributions (NDCs) is the name of these goals in the jargon of the agreement. So far, collectively they are far from sufficient to achieve the global temperature targets of the Paris Accord – to limit the rise of global mean temperature to well below 2°C, hopefully as low as 1.5°C.

According to the Emissions Gap Report published in November by the United Nations Environment Programme, if implemented these commitments add up to Greenhouse gas emissions of about 55 gigatonnes of CO2 equivalent in 2020. This would be more than double the 25 gigatonnes the world could emit under a 1.5°C scenario, and still around 50% more than what would be required for a 1.8°C pathway.

To take an analogy from pole vaulting: The states set themselves the bar in form of their NDCs. And they do that every few years, again and again. And now emissions trading under Article 6 would make it possible for states to turn the difference between the bar and their actual leap into money. What incentive does such a system provide for the height of the bar? Of course, to hang this bar as low as possible so that the bar can be jumped as easily as possible. A perverse incentive in a situation in which the states collectively would have to set their bars more than twice as high as they currently do. This is a system that cannot work.

But Madrid also showed a second effect of international emissions trading, which must appear abstruse to the unbiased observer: The tradable emission reductions, which are recognised elsewhere as emission rights, are mutating into an asset traded on financial markets. And everyone who has an asset fights to ensure that it retains its value. So that the emission rights once created will continue to be recognised as such.

This was one of the controversial points in Madrid: according to the ideas of some states (China, India and Brazil), emission reductions from emissions trading under the Kyoto Protocol (CDM) should also be counted under the Paris Agreement. And this despite the fact that experts now say that a very large proportion of these CDM credits do not represent real emission reductions, but were the result of all sorts of lazy tricks. But this is an effect of the political economy of international emissions trading: the emission right that has been converted into an asset finds advocates among those states that are fighting for its continued validity. And this all the while the total of emission rights must be drastically reduced, even halved.

Last, but not least, Madrid has cast the spotlight on another dark spot in international emissions trading. Under the previous CDM, industrialised countries could use such credits from developing countries to reduce nominally their emissions in their emissions accounting, while the selling countries would not have to adjust their emissions accounts to include the corresponding higher emissions in the industrialised countries.

Global emissions accounting thus had a black hole in which emissions disappeared for accounting purposes. And Brazil – transformed into a climate rogue state under President Bolsonaro – fought hard in Madrid to keep this hole open. In other words, it wanted to sell emission reductions to other countries and yet continue to credit them to its own climate efforts. One tonne of emission reductions would suddenly turn into two. The lure of big money can tempt people to make all kinds of acrobatic tricks. But the earth’s atmosphere does not forgive real CO2 emissions – it warms up, completely unimpressed by the accounting tricks of the states.

Under a system of nationally determined voluntary commitments, as decided in Paris, international emissions trading provides massive perverse incentives, and this not just once, but over the long term due to the iterative process of voluntary commitments. And, as Thomas Spencer has argued, it is actually not necessary for achieving our global climate goals, as there is no space for offsets if we are serious about achieving 1.5°C or even only “well below 2°C”.

The negotiations on Article 6 should therefore be discontinued, or parked in a special working group in order not to damage the more important agenda of the next COP26 in Glasgow, namely the collective raising of climate ambition. Climate negotiations are not always about protecting the climate. Under the given circumstances, therefore, the failure of the Madrid negotiations on Article 6 was a good thing.

*This article was first published in German. However, due to concrete requests we decided to also publish it in English.