The far-reaching impacts of the measures implemented worldwide to curb the spread of the COVID-19 virus will have significant implications for the development of international carbon markets, as well as the ongoing UN negotiations under the United Nations Framework Convention on Climate Change (UNFCCC). This update provides a snapshot of the current state of play in relation to carbon markets and climate negotiations more broadly in light of the global response to the pandemic.
Postponement of international negotiations
On 1 April 2020, COP26 was postponed due to COVID-19. The UK Government’s press release stated: “In light of the ongoing, worldwide effects of COVID-19, holding an ambitious, inclusive COP26 in November 2020 is no longer possible. … Rescheduling will ensure all parties can focus on the issues to be discussed at this vital conference and allow more time for the necessary preparations to take place.”1
It has now been announced that COP26 will take place between 1-12 November 2021,2 with the COP26 UK Presidency taking the view that “given the uneven spread of COVID19, this date would present the lowest risk of further postponement, and the best chance of delivering an inclusive and ambitious COP”.3
The intersessional climate negotiations, being the 52nd session of the Subsidiary Body for Scientific and Technological Advice and the Subsidiary Body for Implementation to the UNFCCC (SB52), which were due to take place in June 2020, have also been rescheduled for 4-12 October 2020. However, the feasibility of convening SB52 on the new dates will be reviewed two months in advance.4
These delays in the international climate negotiations will mean that the next opportunity to agree the rules for the implementation of international carbon markets under Article 6 of the Paris Agreement will be delayed by over 12 months. Article 6 provides for the development of a mechanism to allow for emissions trading activities, either between Parties to the Paris Agreement or with the involvement of the private sector (for example, through the sale, purchase or creation of carbon credits).
The negotiations around Article 6 have proven to be highly contentious, as it remains the only article under the Paris Agreement on which the Parties have not yet reached agreement. The Paris Agreement Rulebook was agreed in relation to all of the other aspects of the Paris Agreement at COP24 in Katowice, Poland in 2018.
Our previous updates on the status of the international climate negotiations, including in relation to Article 6, can be accessed below
Calls for extension of timeline to implement CORSIA
Currently, the Paris Agreement does not cover the international aviation sector. The UN’s International Civil Aviation Organization (ICAO) has therefore been working on its own arrangements for implementation of emissions reduction mechanisms.
To this end, the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) framework was adopted by ICAO in 2016.5 The key goal to be facilitated by the CORSIA framework is the stabilisation of net CO2 emissions from the international aviation sector at 2020 levels, with carbon-neutral growth thereafter. This goal is intended to be met through a range of measures, including implementing an emissions trading scheme for the international aviation sector.
2020 is an important year for the CORSIA framework because the baseline emissions level (i.e. the threshold over which airlines will need to purchase carbon credits to offset emissions going forward) is intended to be calculated by reference to the actual emissions from 2019 and 2020. However, the International Air Transport Association (IATA) has estimated that ‘emissions levels in 2020 could fall by half as demand for air travel collapses’.6 Accordingly, if data from 2020 is relied upon, it will significantly reduce the baseline.
In order to avoid this unexpected outcome, IATA has requested a rule change. According to the IATA website, “[i]nstead of using an average level of emissions taken from 2019 and 2020, IATA is calling for ICAO to use only 2019 emissions as the reference. ... If the original methodology is applied, the baseline for the scheme will no longer reflect the target agreed by states at the 2016 Assembly, which IATA fears may lead them to reconsider their support for the scheme. In addition, many airlines may not be able to afford to pay for the substantially higher carbon offsets that would be required’.7
However, if air travel does not bounce back to recent levels by 2023 (when airlines are required to offset their emissions for the first time), a baseline based on 2019 emissions levels alone would mean that airlines are not required to purchase any carbon credits. This could significantly delay the implementation of a functional carbon trading scheme under the CORSIA framework. ICAO is expected to consider the issue at their upcoming June session.
The uncertainty around the future of the emissions trading scheme under CORSIA comes even as ICAO has taken significant steps towards its implementation, having approved carbon credits from six eligible emissions reduction standards for use in the 2021-2023 compliance cycle in April 2020.8 Eligible credits are those issued in accordance with the following standards (with some exclusions):
- The American Carbon Registry
- The China GHG Voluntary Emission Reduction Program
- The Clean Development Mechanism
- The Climate Action Reserve
- The Gold Standard
- The Verified Carbon Standard Program
Two standards were approved as conditionally eligible, being:
- The Forest Carbon Partnership Facility
- The Global Carbon Council
ICAO also invited the following programs to reapply after making certain changes:
- British Columbia Offset Program
- Thailand Voluntary Emission Reduction Program
ICAO has now also published the list of emissions reduction standards under consideration for the second round of assessments, which are as follows:
- Architecture for REDD+ Transactions
- BioCarbon Fund Initiative for Sustainable Forest Landscapes
- Compte CO2
- Joint Crediting Mechanism between Japan and Mongolia
- Olkaria IV Geothermal Project
- Perform, Achieve, and Trade Scheme
- Regional Greenhouse Gas Initiative
All eligible credits must have been issued in relation to activities that started their first crediting period on or after 1 January 2016 and emissions reductions that occurred through 31 December 2020.
Impact on existing carbon markets and regulatory requirements
The full repercussions of COVID-19 on the international effort to curb greenhouse gas emissions will not be known for some time. However, following the global financial crisis in 2009, efforts to implement international carbon markets were severely impacted and it has taken over a decade to recover the momentum lost during that period. Considerable volatility in carbon prices in major carbon markets such as those in the EU and California over the past few months suggest that the same scenario could well play out again in 2020.9
In part, the price volatility is reflective of the fact that, from a practical perspective, supply of carbon credits could saturate compliance markets if there is a long-term shutdown of industrial sectors, with the result that the actual GHG emissions for 2020 are materially lower than would have been the case under a business as usual scenario. Analysis undertaken by Carbon Brief, has concluded that the pandemic could trigger the largest ever annual fall in CO2 emissions.10 The projected fall in emissions is in the region of 2,000 million tonnes of CO2, which is equivalent to approximately 5.5 per cent of global emissions in 2019.
In addition, as countries grapple with the economic consequences of the shutdown and look to kick-start their industrial sectors again, they may seek to ease GHG reporting and offsetting requirements in compliance carbon markets. For example, in the US, the Environmental Protection Agency has eased its enforcement policy on environmental non-compliances, including GHG reporting obligations, and in Alberta, Canada, environmental reporting requirements have been temporarily suspended.
Opportunities to direct economic stimulus towards climate action
What may set the response to the COVID-19 pandemic apart from the 2009 global financial crisis is the fact that, this time around, there is strong support for the idea that investment in climate mitigation efforts should be prioritised as part of the economic recovery packages implemented by governments. Speaking to this point, UN Climate Change Executive Secretary Patricia Espinosa said: “Soon, economies will restart. This is a chance for nations to recover better, to include the most vulnerable in those plans, and a chance to shape the 21st century economy in ways that are clean, green, healthy, just, safe and more resilient.”11
Significantly, on 17 April 2020, members of the European Parliament voted in favour of a resolution that requires the European Green Deal12 to be at the core of the bloc’s coronavirus recovery measures13 and the Austrian government announced that any state aid provided to support Austrian Airlines should be tied to climate conditions, such as reducing short-haul flights, cooperating with rail companies, and using eco-friendly fuels. The African Union has also agreed to work with the International Renewable Energy Agency to deploy renewable energy as part of Africa’s response to COVID-19.
In its recent letter to observer organisations, the COP26 UK Presidency lent strong support to the idea of a green recovery, stating: “As we work to protect our citizens and repair our economies, we must also act on climate change meet these two joint challenges together. As the UN Secretary-General and UK President have made clear, the COVID19 economic recovery is an opportunity to build more sustainable and inclusive economies and societies, and a more resilient and prosperous world, and we will put this at the centre of our Presidency”.
The private sector is also rallying behind the initiative, with more than 60 companies in Germany signing on to a letter calling for economic policy measures to overcome both the climate crisis and the coronavirus crisis and the Australian Industry Group publicly backing a call from the Investor Group on Climate Change for a sustainable recovery from COVID-19 in Australia.
If these calls to tie the coronavirus recovery to action on climate change are heeded by governments, the race to decarbonise the global economy by 2050 could be positively impacted by COVID-19. As part of such a response, governments could look to accelerate the implementation of green finance initiatives and prioritise the use of public funds to back sustainable infrastructure projects and projects to preserve or restore ecosystems. From a political perspective, it is also possible that the crisis will strengthen international cooperation on key threats — including climate change — going forward.
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