From the Paris Agreement to a Low-Carbon Bretton Woods : Rationale for the Establishment of a Mitigation Alliance

250 Pages·2017·2.79 MB·English

by  Michele Stua (auth.)

Michele Stua
From the Paris
Agreement to
a Low-Carbon
Bretton Woods
Rationale for the Establishment of a
Mitigation Alliance
From the Paris Agreement to a Low-Carbon
Bretton Woods
Michele Stua
From the Paris Agreement
to a Low-Carbon Bretton
Woods
Rationale for the Establishment
of a Mitigation Alliance
Michele Stua
C+3C Sistemi e Strategie srl
Venezia, Italy
The views expressed in this book are attributable only to the author in a personal capacity,
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ISBN 978-3-319-54698-8 ISBN 978-3-319-54699-5 (eBook)
DOI 10.1007/978-3-319-54699-5
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A Federico
With so much at stake, and with such
enormous difficulties of inducing countries
to surrender their sovereignty to the global
good, surely it pays to look back carefully at
history.
(Maurice David Levi)
Foreword
Twenty short years ago, an American delegation, inspired by the adoption of the
Clean Air Act of 1990 that established an emission trading system for sulphur emis-
sions in the north-eastern states of the USA, had the Clean Development Mechanism
(CDM) inserted in the Kyoto Protocol. Since then, the idea of trading in emission
rights has been prominent in all talks about reduction of GHG emissions – this in
spite of the fact that trading concededly has never had, and was never intended to
have, any emissions reduction outcome (some would even argue to the contrary)
and this also despite the recent demise of the CDM, suffering many ills, but in the
end killed by starvation (in the sense that markets had lost their appetite).
Hardly by design, the Paris Agreement reinvigorated if not the CDM, then the
idea that trading is part of the solution. Although Article 6 is careful to avoid any
reference, the CDM looms large. Although wording on ‘net reduction’ is included,
possibly to comfort those that are convinced of the counterproductivity of trading,
it is nevertheless a basis for a new trading regime at risk of repeating history. ‘Those
who cannot remember the past are condemned to repeat it’. Article 6, however, is
not a likely result of a failing memory. Hopefully it is not the result of a selective
one either. The CDM was immensely successful in some areas – but fatally flawed
in others.
It is worth considering what objective trading serves. The CDM was burdened
with a multitude of objectives, not least technology transfer and cost-efficiency, but
not emissions reduction as any emissions reduction, real or calculated, would be
offset in the buyer’s account. The post-rationale has been that Kyoto’s global target
would have been lower without CDM included. A similar rationale may eventually
emerge for the Article 6 mechanisms even if the Nationally Determined Contributions
(NDCs) were determined long before Article 6 was predicted. Surely there will be
claims that the future updating of NDC will show higher ambition than would have
been the case in the absence of Article 6. Such battles are fruitless. But they do
relate to the most important part of carbon trading, the part that creates the demand
for offsets in the first place, the emissions constraint imposed through the cap in a
cap-and-trade system.
ix
x Foreword
In this regard, the message of this book is important, not so much for its embrace
of Article 6, but for articulating in which context Article 6 could, and probably
should, work. I always claimed that if anyone wanted to see what CDM would look
like at a level playing field, look at JI, not that the JI was flawless, but at least that
the trading was a zero sum game. Allowances sold were intended to reduce the
seller’s emission budget. Only in such a system, and only if the budget restriction is
tangible, can the value of trading be determined. The author addresses this point
excellently, while Article 6 is silent. Among all the possible learnings from CDM,
this is probably the most important: trading must succeed among equal partners,
possibly in an Alliance as proposed in this book, among which emission budgets
have been determined transparently. Ultimately, it is the emission budget that deter-
mines if emissions are reduced, not the trading. If a trading option helps reaching
agreement on the budget, it is of course helpful. Only it must be asked: What is the
expected benefit that lends such importance to trading?
There have been many attempts to document the benefits of CDM. But beyond
its indisputable achievement in bringing the emissions reduction agenda to all cor-
ners of the world, there is no uniform conclusion. If a Mitigation Alliance is estab-
lished among relatively equal partners, then the argument of technology transfer is
likely to become mute. Rather the argument is likely to relate to a cost-efficient
emissions reduction response. There is, however, only limited merit in the cost-
efficiency argument. Throughout the CDM heydays, low-cost industrial gas projects
were developed in parallel to high-cost hydro and wind energy projects with no
particular price differences among resulting CERs. Although price formation theo-
ries may be employed to explain the phenomenon, it is hard to conclude that the
markets were in clear pursuit of cost-efficiency.
This volume points out that the Paris Agreement was the surprise compromise
that brought multilateralism back on track but rightfully questions if that is a good
or a bad thing. It is not difficult to draw up a scenario, in which failure would have
prompted a de facto ‘Mitigation Alliance’, in face of imminent disaster, to take
action. With the Paris Agreement, unfortunately, in spite of the rapid depletion of
the global emission budget, there is still no trace of a global burden sharing agree-
ment. Although the Paris Agreement with 190+ countries involved is a major diplo-
matic accomplishment, the principles upon which such burden sharing should
succeed are never to be agreed as long as there are rents to be earned from disagree-
ment – and as long as the cost of disagreement is poorly understood and to be paid
by the next generation.
Therefore, in the scenario developed here, the Mitigation Alliance still plays a
central role in bringing about substantial emissions reduction. Although the Alliance
is no longer a stand-alone structure and operates under the umbrella of the Paris
Agreement, it does not depend on successful completion of UN-led negotiations
that are to continuously ramp up ambition in updated NDCs in order to close the gap
between current emissions and the 1.5–2-degree boundary. It is to be assumed that
the Mitigation Alliance will constantly outperform the average NDC ambition level,
which may either serve as inspiration for those outside the Alliance or as relief for
those that consider themselves less obligated.
Foreword xi
Possibly, the Achilles heel of such alliance building is its attraction in practice.
As Stua suggests, it depends on a strong governance system to which members
subject themselves, including an objective burden sharing. Subjecting oneself to
these conditions, the Mitigation Alliance concedes to its members’ usage of Article
6. But in face of collective shortage, even individual shortage, who will feel impelled
to trade? If the Alliance is to become net-zero carbon over time, possibly a very
short time, who will give up a part of its budget to serve the needs of a less fortunate
Alliance member? Musketeer oaths are regrettably out of fashion. Trade propensi-
ties in CDM were given as deals were one-sided in terms of hollowing or expanding
emissions budgets, as the seller had an endless budget to sell from. Equally, in JI,
the common seller had excessive budgets of hot air, the selling of which would not
leave the seller constrained in any foreseeable future. But when Alliance members
are to trade over the last tons of certified mitigation outcomes and everybody is in
dire straits, you may have the money to buy, but nobody is selling.
Stua experiments with ways out of this dilemma, including the opportunity to
transform the certified mitigation outcome into a representative currency within the
Alliance. Attributing a value to environmental, economic, financial, social and polit-
ical co-benefits may be a way to overcome trade reluctance. This effectively repack-
ages earlier thoughts of using trade policy as a lever to create tangible consequences
of unabated emissions. But instead of a punishment for inaction is here a reward for
action. The challenge, of course, is if such virtual ‘dollar-shops’1 can be established,
if the goods in the shop are in clear demand and if it can be ensured that either the
exchange rate to monetary currency significantly favours those in possession of the
outcomes or if there is no exchange possible at all.
The Bretton Woods idea presented in this volume addresses this challenge excel-
lently – but it would be a pity to give it all away in a foreword. Read Chap. 8 for
yourself. A commodity-based system – not like the gold standard from current
emissions trading – is one key element in which the real value comes from the finite
supply of CMO: the difference between current and net-zero emissions. No doubt
that is ultimately where we need to go – or at least a very large majority of us –
meaning that to be effective a Mitigation Alliance must include all major emitters.
That is the foremost challenge to any system. No matter the sugar-coating, many
might find that the pill is still a bitter one. For that, Stua’s reward system could well
show the way forward.
For sure the proposed Bretton Woods model could lend more (and needed) cred-
ibility to an international agreement like the Paris Agreement, although those that
have grown sceptical over the past 25 years of climate debate and negotiations
would probably point to the fact that compared to gold, even if we all agree that the
CMO is the basic and finite commodity, it remains intangible. But then read the final
chapters. Although punishment specifically is not the approach, it could be consid-
ered de facto ‘punishment’ not to be part of the Alliance.
1 Dollar-shops is used for shops, in currency-constrained countries, that trade in imported goods
but only accept foreign currency, typically USD, as payment.
xii Foreword
From that perspective, it is not necessarily a given that the forum for creating the
Alliance is a UN body like the UNFCCC. Many had already buried the Convention
as a useful platform, when Paris produced its surprise compromise. With Paris in
place, however, it is wise to embrace it, as Stua does by adopting the CMO, while
not necessarily considering it sufficient. The near future will probably tell. Under all
circumstances, even if our climate change negotiators have precious few successes
to show for themselves, we must remain positive that it can still be done.
UNEP DTU Partnership Søren E. Lütken
Technical University of Denmark
Marmorvej 51, København, Denmark