Michele Stua , C+3C Sistemi e Strategie

From the Paris Agreement to a Low-Carbon Bretton Woods

 Executive summary

Introduction

Limiting global average temperature rise to 2°C, or even 1.5°C, compared to pre-industrial levels by the end of this century requires a paradigm change in the way we value carbon emission (henceforth carbon) mitigation. This book elucidates one pathway to this end by spelling out step-by-step changes stemming from the Paris Agreement (PA) and current international legislation that culminate in a new governance model defined as ‘Low-Carbon Bretton Woods’.

The prerequisites for such a system to work are as follows:

·       Assigning value to carbon mitigations by recognising atmospheric carbon-carrying capacity as a quantifiable, exhaustible natural resource;

·       Establishing a timetable in which this exhaustible natural resource needs to be safeguarded;

·       Creating demand for actions that protect this exhaustible natural resource.

Carbon as natural resource and value of carbon mitigation

Recognising atmospheric carbon carrying capacity as a quantifiable, exhaustible natural resource links in with recent research on the global carbon budget. If we want to maintain a  >66% probability of limiting global average temperature rise to 2°C above pre-industrial levels, according to the IPCC, we may emit no more than 1,000GtCO2 between 2015 and 2100. The PA explicitly binds the signing parties to adopt pathways in line with the IPCC findings. Limiting global average temperature rise to 2°C above pre-industrial levels is thus an objective of the PA and a ‘mechanism’ to pursue this objective is contained within its Article 6. The quantifiable nature of carbon along with the 2°C objective transforms the 1,000Gt of non-emitted carbon into an exhaustible natural resource, any form of carbon emission in its consumption, with carbon mitigation subsequently equating to the conservation of this resource.

Demand for actions to protect the quantifiable, exhaustible natural carbon resource is linked to the establishment of a carbon price. Assigning value to the protection of this quantifiable, exhaustible natural resource equates to recognising carbon as a commodity, where emissions of carbon represent the consumption of the commodity and carbon mitigation its conservation. This enables carbon to be included in the market pricing system and assigned a corresponding price.

With this in mind, it is possible to shift our focus from the cost of reducing carbon to limit the impact on a non-exhaustible source (the atmosphere) to the value of mitigating carbon to protect an exhaustible natural resource (the atmospheric carbon-carrying capacity), or positive carbon pricing.

 

The Mitigation Alliance

The next step for this proposal to work is the creation of an alliance of governments (and eventually other entitled actors) willing to accept all three basic requirements as part of a transformational club with ambitions in line with the 2°C (or even the 1.5°C) objective.

Article 6 of the Paris Agreement provides what is necessary to create such a club or Mitigation Alliance (MA) by introducing a flexibility ‘mechanism’ (the Mitigation Alliance Mechanism – MAM) as a single system to certify carbon mitigation (Certified Mitigation Outcomes – CMOs) envisaged by its application. Voluntary in nature, Article 6 only becomes relevant if a sufficient number of governments/members form a MA and accept both the equitable distribution of mitigation quotas to protect the exhaustible natural resource and the timetable system of the Paris Agreement as expressed by its Article 4. A formula is provided in the book, which enables equitable and efficient distribution of mitigation quotas in line with the PA objective over time towards equal per capita emission rights, according to the principles of Common But Differentiated Responsibilities and Respective Capabilities (CBDR-RC) and to those of contraction and convergence.

Through its mitigation quotas and its timetables, the MA establishes a common (aggregate) system of demand for carbon mitigations. Through its certification system (MAM/CMOs), the MA also establishes a common system of supply. Through the application of the ‘mechanism’, MA members may exchange CMOs using a multiplicity of approaches, including market, non-market and bilateral exchanges, which enables complementarity between these different approaches, autonomy in terms of which approach to pursue, and ultimately implicit convergence. Demand, supply and exchange of certified carbon mitigations are the pillars of the MA. Similar to Bretton Woods, MA governance requires a regulating architecture, (i.e.: a system to govern demand, a CMO Bank for certification and issuance and a CMO Exchange Board to oversee implementation of CMO exchange approaches).

By establishing this MA governance system it is possible to guarantee multiple excludable benefits to MA members. Environmental, economic and social benefits aside from mitigation of carbon include improved investment conditions, stabilisation of the monetary system, verifiable equity in mitigation, diffused capacity building for low-carbon transformations, fiscal revenue increase as well as reduction of soil erosion and desertification and improved natural environment and species conservation, just to mention a few.

 

Evidence from the past as lesson for the future

To establish how such a system might work, it is necessary to retrace the development of carbon supply and exchange. The Kyoto Protocol’s Clean Development Mechanism (CDM), alongside Joint Implementation and REDD+ (Reducing Emissions from Deforestation and Forest Degradation), despite their flaws, provide a wealth of experience in supplying certified carbon reductions. To date, the CDM also remains the most commonly used mechanism for indirect linking of emission trading schemes, such as the EU-ETS. Emission trading schemes, alongside (un)linked carbon markets, carbon taxes and (carbon relevant) quantitative easing, are the main means of exchanging certified carbon reductions. The MA, in turn, takes a holistic/universal approach to offsetting by including virtually any possible approach to mitigation through the establishment of a common system of demand for mitigation outcomes and a single mechanism to certify supply (CMOs).

Independent certification of carbon mitigation and standardised baseline approaches capable of keeping transaction costs to a minimum can also be built on experience gained with the CDM. Article 6 of the Paris Agreement foresees a mix of public and private approaches, similar to the CDM. In fact, evidence from the CDM suggests that Article 6 could be potentially applicable to any certified carbon mitigation approach.

In light of these considerations, the MA resembles a merger of CDM with Joint Implementation and REDD+ (Reducing Emissions from Deforestation and Forest Degradation), the two other Kyoto Protocol mechanisms developed alongside the CDM.

 

Conclusions

For a fully functional Low-Carbon Bretton Woods to emerge, a ‘critical mass’ of countries needs to converge in a MA. Once the value of CMOs has been expressed in terms of positive carbon pricing coupled with a system governing mitigation outcome demand, supply and exchange described in this book, the MA transforms mitigation outcomes into a valuable financial asset. By establishing CMOs as the only recognised mitigation-related asset within its regime and by establishing a floor quantity of CMO demand, CMOs are transformed from an asset into a currency used by its members to acquire specific quantities of mitigations. CMOs would consequently become the representative currency for all MA members, similar to the role once played by the US$ in the Bretton Woods system. Not mentioned in the book, but anticipated in the necessity to ensure maximum inclusion and transparency, is the use of digital currencies or possibly a single digital carbon currency allowing convenient, low-cost international access as well as monitoring, reporting and verification.

 

The following 22 key findings shall be used as reference:

1.             Due to its voluntary nature, A6PA can be adopted to promote experimental climate governance models, such as the one discussed in this book and defined as the MA.

2.             MA members can be parties and/or other entities designated/allowed by their reference parties.

3.             Following the criteria of A6PA and aligning to the ambitious objectives of the Paris Agreement (PA), MA members define an aggregate target corresponding to a Net Zero Carbon (NZC) emission level by the end of the century.

4.             The MA members distribute their NZC target over time according to a set of timetables. To align to A4PA, these timetables will correspond to 5-year periods, while the target’s distribution in each timetable will be either equal to or higher than the previous one.

5.             The aggregate MA target and distribution over time represent the MA’s Plurilaterally Determined Contribution (PDC).

6.             The mitigation burden corresponding to the portion of target distributed in each timetable is assigned in quotas among the MA members through the application of a dynamic formula.

7.             While quotas represent a mandatory mitigation goal for members assigned with them, some members registering per capita emissions below the MA’s aggregate level are exempted from mandatory mitigation in the corresponding timetable.

8.             Exempted members will be eventually entitled to increase their emissions to support their development needs.

9.             The NZC target and the dynamic quotas system guarantee effectiveness, equity, environmental integrity and transparency of the MA, hence demonstrating its alignment with the PA’s principle of Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC).

10.          Members’ quotas and their respective climate strategies and policies represent their Members Determined Contributions (MDCs), which correspond to NDCs when members correspond to parties.

11.          The MA establishes a single mechanism, defined as the Mitigation Alliance Mechanism (MAM), to eventually certify any mitigation within its domain, including reduction, avoidance and sequestration.

12.          The MAM certifies mitigation outcomes throughout the issuance of Certified Mitigation Outcomes (CMO), recognised by the MA members as the only tools to demonstrate their quotas’ meeting/achievement.

13.          Despite the uniqueness of its certification mechanism, the MA recognises multiple approaches to CMO exchange among MA members and/or stakeholders, including market, non-market and hybrid approaches.

14.          The CMO-based system will stimulate a linking process between the different approaches and their convergence towards a single umbrella defined as an Inclusive Offsetting Scheme (IOS).

15.          A multi-level, hybrid model of governance, where overarching authorities similar to those established by Bretton Woods are counterbalanced by high degrees of freedom for MA members and stakeholders, is set up.

16.          The MA recognises carbon as an exhaustible natural resource, the consumption of which produces carbon emissions and the conservation of which constitutes mitigation.

17.          The demand for carbon conservation, represented by the MA target and corresponding quotas, provides carbon with an actual value, making it a commodity.

18.          Carbon conservation in form of CMOs represents the representative currency for the commodity.

19.          Combined with the MA governance model, the identification of a commodity and corresponding representative currency transforms the MA into a Low Carbon Bretton Woods system.

20.          The implementation of the MA ensures multiple benefits for its members and stakeholders that, based upon the PA recognition of the value of voluntary mitigation outcomes, can be organised into three categories: (a) environmental benefits; (b) economic benefits; and (c) social benefits.

21.          The combination of the MA’s multiple benefits achievable through full MA implementation can lead to radical industrial innovation, societal change and environmental transformation, and decoupling human growth and carbon emissions while leading to a deep decarbonisation of the world.

22.          Whatever action will be taken within the MA, its system will collapse with the achievement of its main purpose, the NZC.