Carbon Market Talks Stumble at COP26 on How to Use the Cash

(Bloomberg) -- Talks at COP26 on international carbon markets are running into an obstacle: a row over how big a share of revenues from trading should be funneled toward countries that need money to adapt to climate change.

Negotiations on carbon trading are the key benchmark of success at the Glasgow climate talks. A deal would help cut emissions, drive investment into low carbon projects, and make what’s potentially a $100 billion offset market more transparent and rigorous. Negotiators have been trying for years to pin one down, and the hope is that they may finally nail it at COP26. 

There are two main tracks of the talks: one is about country-to-country exchanges of carbon credits -- where one nation essentially pays another to cut emissions on its behalf. The other is about offsets trading by public and private players.

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This is the sticking point now: Developing countries want a percentage of the proceeds from trading all types of carbon credits to be channeled to poor nations. But the European Union -- a key player -- only accepts that kind of transaction tax in the case of offsets trading and doesn’t want such a levy to apply to the exchange of carbon credits between countries. 

“We, with other market participants are not prepared to accept any kind of mandatory extension,” said Jacob Werksman, EU negotiator at the talks in Glasgow. “So what we’re trying to provide instead of that mandatory international tax is more reassurances that the EU is committed to scaling up adaptation finance.”

The chances of a deal had been looking up. Brazil -- another crucial player -- had shown some flexibility. And the EU was encouraged. But as negotiators started talking in Glasgow, it quickly became evident that reaching a deal will be no easy task.

“We need to have a clear predictable finance flow for adaptation and this is the only way that we can have it,” Tanguy Gahouma-Bekale, Chair of the African Group of Negotiators on Climate Change, said in an interview. 

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New draft proposals published on Friday showed countries are still far apart on how to use the revenues generated by carbon trading. They also differ on issues such as accounting.

While the 2015 Paris Agreement paved the way for the use of markets in the fight with climate change under Article 6, their launch requires a set of detailed, technical provisions on the functioning of the market.

Talks will move to a higher level next week, when ministers are scheduled to arrive in Glasgow. Heated negotiations are expected to continue until the last day of COP26, due to end on Nov. 12. Previous conferences often ran a day or two longer than planned. 

If an agreement is reached, it could unleash up to $1 trillion of new capital investment toward developing countries, helping reduce emissions and encouraging technological innovation, according to a report by the International Emissions Trading Association and the University of Maryland published last week.

The challenge is to ensure international carbon trading is subject to robust accounting rules -- and oversight -- and brings cuts in emissions instead of greenwash. 

“A deal on Article 6 should allow for the immediate operation of international emissions markets and provide robust accounting guidance to avoid double counting of emission reduction,” said Andrea Bonzanni, international policy director at IETA. 

(Updates with new proposals from the eighth paragraph)

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