Negotiators to tussle at COP26 in Glasgow over creating an international carbon market

Strict safeguards will be needed to protect environmental integrity and human rights

Environment Minister Jonathan Wilkinson is “cautiously optimistic” that negotiators can reach consensus on how to regulate an international carbon market when they meet in Glasgow next week for the UN climate summit, COP26. Some environmental groups, however, worry such a deal could undermine the goals of the Paris Agreement.

Article 6 of the 2015 accord would set up a carbon market in which countries that have met their emissions-cutting goals could sell credits to nations that failed on their commitments. But since the Paris Agreement was struck, governments have quibbled about the rules that would govern the creation and purchasing of such credits.

The Canadian government and many business groups argue that a well-functioning carbon market would lower the cost for corporations and countries to hit ambitious targets to reduce greenhouse gas emissions. Critics warn such a system would discourage direct emission reductions in favour of more questionable measures and could place an undue burden on citizens of poorer countries as richer nations purchase the right to pollute.

In talks leading up to the Glasgow conference, national negotiators have narrowed their differences over proposed rules, but further concession will be required, Wilkinson told Corporate Knights in a telephone interview. Brazil – one of the leading holdouts – signalled last week that it is willing to compromise to reach an agreement.

“I think we all understand where the issues lie; I think everyone sees there may be landing zones for some of the big issues,” he said.

“It will require everybody to be a little bit flexible in terms of their positions, including Canada. But I’m cautiously optimistic we’ll get there this time with something that Canada can accept.”

However, no Article 6 would be better than a watered-down version that lacks environmental integrity, transparency and equity for people in less-developed nations. Canada will have to be prepared to walk away without an agreement if a proposed compromise undermines Paris Agreement goals.

Prime Minister Justin Trudeau will unveil his post-election cabinet tomorrow, and Wilkinson will find out whether he will be reappointed as Minister of Environment and Climate Change or be shuffled to a different post.

The first order of business for either a reinstalled Wilkinson or his replacement will be to represent Canada at COP26 – though Trudeau is expected to attend in the closing days. Sending a new minister to Glasgow would reduce Canada’s effectiveness in defending the national interest. 

The government also faces a massive challenge in implementing its climate strategy after committing to more ambitious targets and policies over the past year and in the recent election campaign. Wilkinson’s experience and savvy would be major assets in that effort.

Unfinished business

A major agenda item for the summit is to complete the work on Article 6. Canada played a key role in its inclusion in the Paris accord in 2015 when then-neophyte Environment Minister Catherine McKenna led negotiations that nailed down language despite serious opposition from a number of countries led by Brazil.

In the phone interview, Wilkinson said Canada’s own commitment to reduce emissions by at least 40% by 2030 does not depend on the purchase of foreign credits or a functional Article 6.

“Our focus is to ensure we have a plan where we can make the domestic reductions to meet our new target,” he said. “The government sees a path to achieving that target that both reduces emissions and transforms Canada’s domestic economy to prosper in a net-zero-carbon world.”

However, the rules of Article 6 will apply not only to the current Liberal plans but to any future government that may be inclined to purchase foreign credits as an easier route to hitting emission-reduction targets when confronted with political and economic challenges at home. Rigorous standards will be needed to govern its use by other nations, as well as future Canadian governments.

Trading credits

The goal of an international carbon market is to finance the lowest-cost emissions reductions on the path to a net-zero future. 

In a report released last week, the International Emissions Trading Association said an effective Article 6 framework would enable countries to make more ambitious emission-reduction commitments at no additional cost. As such, it would accelerate the transition to a net-zero world, the report concluded.

Quebec is already participating in a cap-and-trade market with California. Completion of Article 6 would allow Canada to claim in its future reports to the United Nations the credits purchased by Quebec entities under the Western Climate Initiative (WCI). In an August auction, the WCI price per tonne of carbon dioxide equivalent was $29.41, while the federal carbon price is $40 per tonne this year. 

Wilkinson said Canada would achieve its targets with or without Quebec’s WCI credits.

Many corporations – including oil and gas companies – have also announced net-zero targets for 2050 that will rely to varying degrees on the purchase of offsets.

That trend worries some environmentalists who argue the focus should be on direct emission reductions and an economy-wide transition off fossil fuels. 

“With a very small global carbon budget to limit global warming to 1.5°C, implementing the Paris Agreement should not rely on mechanisms that let polluters off the hook via offsetting,” Climate Action Network Canada (CAN-C) said in a brief released last week. The network represents more than 100 environmental and civil society organizations across the country. 

It argued that Canada must insist on strong environmental integrity provisions as well as human rights protections to ensure that farmers and other people in the Global South are not pushed off their land as a result of Article 6 transactions involving conservation and reforestation.

The CAN-C briefing noted concern that the oil industry is looking to Article 6 to claim emission credits for the sale of liquified natural gas to Asian markets that currently use a lot of coal for their electricity. 

Wilkinson said such a transaction could be possible but only if the full emissions of natural gas extraction, shipping and use are factored in; if there is a clear and direct link between the sale of gas in replacing coal; and if the foreign utility and national government did not want to use the emission-reduction credits for its targets and UN reporting.

Those are big conditions that would severely limit – if not eliminate – the potential for Canadian producers to claim Article 6 credits.

Many of the issues arising in the discussions around Article 6 echo broader concerns about the market economy that offers efficiency but often at a cost in terms of environmental protection, equity and human rights. 

In the consensus-based decision-making at Glasgow, the Canadian government can insist on a market-based approach that features rigorous safeguards to protect the global public interest. Anything less would be a setback in the battle against climate change.

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