Author: Yezi Lyu

I had the opportunity to talk to Ms. Li from World Wildlife Fund (WWF) last month. Ms. Li works at WWF China’s Climate, Energy, and Green Finance department, where she focuses on low carbon city development. Speaking of COP, Ms. Li told me that the engagement in international climate negotiation is definitely a big part of their work. As an NGO, WWF involves in communicating the agenda and latest negotiation progress to the public, attends=ing side events to catch up the latest trend in the industry and sharing with the public what it has done to promote sustainable development.

There are a variety of issues that WWF has been focusing on that are in high relevance to COP, including climate change and risks, renewable energy, adaptation, forest conservation, and low carbon transition. Recently, WWF has added a focus on carbon market and climate finance, which is also under heated discussion under Article 6. With this range of focuses, WWF intends to serve not only as a campaigner and a communicator, but also as an idea generator, to coordinate and promote the implementation of negotiation results in its region and drive a more ambitious NDC.

To be more specific, public will normally regard NGOs as parties to organize events and call upon people’s awareness to a specific climate issue. This is true. An NGO like WWF will often organize campaigns and workshops to educate and drive public engagement in reducing carbon emissions and paying more attention to the impact that climate change could bring. But there are many other actors that an NGO will collaborate with. Ms. Li told me an example under her group’s focus. The low carbon city team has been working with Chinese local government to show more transparency in GHG emission data disclosure and enhance Chinese city’s presence in carbon reduction, which is certainly a global effort. The way they engage, and advocate is to invite Chinese cities to participate in a global event called One Planet City Challenge (OPCC), which is similar to C40 but is non-governmental. Cities disclose their emission data, show their efforts in low carbon transition and share experiences with each other.

While WWF tries to encourage Chinese cities to disclose and report emission data, it is not only local city government that they need to persuade. They also need to have dialogs with CDP, which is the reporting platform, and thinktanks, to work out a reporting scheme that is localized for Chinese cities. Because in reality, there are many different scenarios that you need to work with. In the case of China, it is very sensitive to disclose some of the emission inventories asked by the organizer (which is a big reason why Chinese cities didn’t join C40). Therefore, specific changes need to be made to increase level of engagement. WWF also works with other IGOs such as C40, to learn from their past experience and leverage on some of the resources to push things forward. This really impressed me. I never thought before that the work of NGOs involves so many actors. From government to private companies, from thinktanks to other NGOs and IGOs, the way we think of the role an NGO can play should not be limited to merely a campaigner or a communicator.

Ms. Li also told me that WWF has been actively joining the side events in every year’s COP. In terms of her team, Ms. Li used to join as an observer. In COP 25, she and her team hosted a workshop and presented their latest progress on building low carbon city pilot project in China, to help the country and the city achieve its goal in carbon neutral and early peaking. In fact, this is also a key focus for them in COP 26. With China’s president Jinping Xi announced China’s ambitious plan to reach carbon peaking by 2030 and carbon neutral by 2060, it is important to see what steps the country can take to achieve this goal. Also, China will roll out its national ETS by the end of 2020, which is also a key issue to be focused on in COP 26. After fully roll-out, the carbon market in China is expected to double the size of EU ETS. Ms. Li and her organization are attentively working on the roadmap that China can take to achieve its emission goals and seeking for possible mechanisms for China’s carbon market development.

The webinar I attended was Pricing Carbon – A Climate Conscious Asset Class, held by IHS Markit during the NYC Climate Week. The webinar mainly touched based on the key issues faced by current carbon trading programs and carbon markets around the globe.

At first, speakers from Hartree Partners and IHS Markit pointed out that data transparency is a key issue when pricing carbon in the trading system. It serves as a building block which could build confidence for the players to interpret the value of position for finance inventories and emission projects. Therefore, on the other hand, transparency is the bottleneck of voluntary carbon market because currently many investors don’t know the true value of investments. And given that the downstream buyers don’t know the best price when making investing decisions, there’s no reference to compare the investments in different carbon market products. In turn, there’s no way to conduct basic analysis for the trading decisions because of the lack of benchmark and thus the transparency for carbon trade in general.

Data transparency is important. In the nest steps, we need to incorporate time series data to help players to reduce trading costs, develop pricing reference data to build benchmark, and eventually make better investment decisions on carbon market products, such as future and swaps etc.

Currently, most carbon markets only have single point of measure as investment tools for the equity, fixed income market. They are not standardized. However, with benchmark and transparency, we could help the carbon market increase efficiency, making billions of increases in ETS swaps and futures, increasing liquidity of assets, and having more instruments to track the trading operations.

Later on, expert from IETA talked about current status of market-based approach for global carbon market development:

In the analysis of Pro-market NDCs in 2015: Countries put up their INDCs. To be more specific, over 100 countries suggested they will use international trading and cooperation mechanisms to reduce emissions. Some countries chose to use lower costs abatement options. However, for nations who are lack of low-cost options, they will choose carbon trade to reach their emission targets. Coming to current status in 2020, more countries have shown their interests to use market-based approach to achieve their NDCs. The speaker also talked about Article 6, which allows countries to work together to increase emission reduction ambitions or enrich their NDCs. In fact, negotiators have been making efforts to reach agreement for the rulebook of article 6 which aims at operationalizing article 6. This will still be an important issue to be discussed during COP 26.

If we analyze the carbon pricing programs under World Bank report which delved into different design elements of carbon trade programs, eg. Different instruments such as tax, ETS, output based grants etc. What’s more, there’s an increasing focus on the emission reduction and market-offset approach for aviation industry. CORSIA, the offsetting system, is under more and more concerns in recent years.

Current carbon markets around the globe are pretty fragmented. There are various kinds of compliances which are government-driven programs. They are differ by distinctive alliances with different rules, regulations, tools. For international organizations and firms, the players need to operate across alliances. Therefore, it’s especially hard for them to operate with different rules they need to comply to. Thus, there’s a need to make the carbon markets involve to be more standardized.

What will be the major compliance market? While COVID has brought economic impacts with decrease in commodities for EUETS, there’s still strong confidence in EUETS trading system because of its stringent plan and its resiliency towards the uncertainty. In fact, carbon price fell for a while, but soon came back.

China is also a huge player. Just last week, the nation announced its goal to reach carbon peak by 2030 and net-zero by 2060, set by President Xi. China’s national ETS is planned to get into power in 2021, building on its current provincial programs. Moreover, there are other evolving alliances in Latin America markets on carbon tax and emission trading.

The major trend is led by EUETS, which focuses more on broadening the scale of carbon reduction, such as bringing in ship, aviation, and transportation. Instead of increasing trading schemes, EUETS aims to increase emission reductions in total. There’s also a foreseen trend in hedging carbon market in terms of climate risks, in terms of ESG, suppressing drivers of inflation, and increasing impact investment, which means investors could buy CO2 today because it is cheaper than investing in costly abatement projects, therefore making the hedging work.