Rift between Germany, Brazil stalls work on carbon market

Bloomberg

A dispute pitting two groups of nations led respectively by Germany and Brazil is holding up work on creating a global market for trading carbon pollution, one of the pillars of the Paris Agreement on climate change.
After bruising talks at a United Nations climate conference last month, the two groups remain at odds on how to structure the system. New carbon markets could allow developing countries to sell emissions credits generated from programs that cut greenhouse gases. The theory is that richer nations could buy those securities, gaining a cheaper option for reaching their own targets.
Germany along with the European Union and industrial countries say that developing nations may “create too many loopholes” with Brazil’s proposal for the market’s rules. An envoy from the South American nation said its position has been misrepresented. The comments, made in response to questions from Bloomberg, follow a decision at the UN talks involving 200 countries to shelve for at least a year efforts to write the part of the a rulebook that might have expanded carbon trading.
At issue is who would be able to sell carbon credits in the new system, which envoys are hoping will spur emissions cuts before the Paris Agreement comes into force next year. The question is contentious because Europe has been working to clear up a glut in its own carbon market, which is the biggest in of its kind in the world. Adding a new source of credits could undo that effort and depress prices, eroding the value of carbon trading as a tool to aid the environment.
“The biggest question is always who’s going to buy the offsets,” said Trevor Sikorski, head of natural gas, coal and carbon at Energy Aspects Ltd, an industry consultant in London. While countries hold back on tighter emission targets that would generate demand, the current debate about increasing supply doesn’t demonstrate a “great understanding of the use of markets.”
Markets under the Paris deal are one of the policy tools that countries can use to reduce fossil fuel pollution. While the world as a whole will need to reduce those emissions, lawmakers in the US and Europe have sought to guarantee ways to use financial markets to make those cuts in the most efficient way. The UN’s first effort at a global carbon trading system had mixed results. Under the 1997 Kyoto Protocol, the UN built up a Clean Development Mechanism that spurred emissions-reducing projects in exchange for credits that could be sold to places with cap-and-trade systems. Those CDM credits have tracked near zero for six years because countries mostly aren’t using them to meet emission targets any longer — and the EU has declined to extend rules that allowed those participating in the continent’s cap-and-trade system to use CDM credits for compliance through 2020.
The debate at the UN talks is about how to either revive that market or create an alternative, which would be known as the Sustainable Development Mechanism. The new system has vast potential. A report from the UN Environment Program suggests that demand for emission reductions could reach 32 billion tonnes by the year 2030, more than 17 times the total yearly supply in the EU’s existing market. While only part of that might come from the new programs, it indicates why tight rules are needed to govern how credits flow across borders.

BRAZIL’S POSITION
Brazil wants a new system to boost investment in proje-cts that reduce emissions — and to generate revenue from selling credits.
It says the voluntary and “bottom up” nature of the Paris climate deal means not all countries will take on a target that covers their whole economy. In those cases, private industry should be able to sell credits from “additional” projects to those parts of the system that are covered by targets. Germany is resisting that idea, signalling that only countries and companies covered by the targets should be able to participate in trading.
If Brazil had its way, nations or firms could buy credits in one of the new markets that would cover their responsibilities.