The personal is global. (2)
Updated: Oct 26, 2020
A whistle-stop tour of climate change finance and how it affects us all whether we like it or not (2 of 3)
12. There were several problems with Rio. First, it set no binding targets; second, it left the provision of funding ad hoc; third it did not really consider how private capital should be utilised for carbon mitigation and fourth, it left the majority of the world (ie the non Annex I nations) to develop as they saw fit – provided it was as cleanly as they could manage, but not to mitigate their GHG output. 13. It soon became obvious that this approach was insufficient and so the next step was taken at COP5 Kyoto Protocol in 1999. Again, the full width of Kyoto and its relevance to the growing of teak (ie MPL’s core business in Ghana) for the purpose of either growing ‘clean’ timber for export or for the purpose of carbon sequestration is beyond the scope of this particular blog but for our present purpose, we should note:
Kyoto set up structures to control both aspects of forestry;
imposed specific targets for reduction of GHG on the developed countries (now referred to as Annex B countries); AND
(crucially for the rest of our narrative) created a system of trading in carbon licences which created one enormously important area of climate finance.
14. As this is the first time we have encountered carbon trading within this narrative, it is as well that it is explained at this stage. There are essentially two forms of trading, namely ‘cap and trade’ and ‘baseline and credit’ ‘Cap and Trade’
In this approach, a fixed group of entities are provided with an annual cap upon their emission of GHG (usually expressed in units of 1 tonne CO2 or its equivalent unit) which it may not exceed without penalty. Each entity is given a number of allowances which represent that limit.
The entity, when calculating its actual level of emissions in any particular year, may if it predicts that it will exceed the emissions, trade for value with another entity which has spare allowances;
The number of allowances held and the trades are then recorded in a central registry;
The two critically important features of the system are that fines are more expensive than trades – thus giving the incentive to trade rather than incur the fines; and that the central organising body reduces the number of circulating allowances year-on-year in order to create scarcity and thus render it economically preferable to take steps to reduce actual output of gases rather than to have to trade at all.
Under Kyoto participating countries traded as individual entities but the Accord also allowed groups of countries to trade between themselves within a closed loop and report on total emissions as a group back to the UNFCCC. Relying on that provision, the EU set up its own Emissions Trading System (“EU-ETS”) which accordingly accounted to the UN for the EU accession countries as a whole
‘Baseline and Credit’
In this system an entity in country A (or even country A itself) is permitted to offset the carbon it produces by reference to some activity elsewhere in the world by which entity in country B (or even country B itself) is taking steps to avoid GHG being produced.
Such a system can co-exist with a ‘cap and trade’ model in that the entity in a ‘cap and trade’ can take into account the offset it purchases, before then having to ask itself ‘what is my total net output of emissions even after I have offset and do I now need to seek to trade emissions allowances with a fellow entity?’
This is based on the notion that there is only one global atmosphere and that it does not matter where the emission saving occurs on the planet.
Whereas ‘cap and trade’ relies on the scarcity of spare allowances, ‘baseline and credit’ permits as many offsets as you like PROVIDED that the polluter in country A can show that, but for his offering to buy whatever activity is being undertaken in country B that reduces carbon, country B would not have taken that mitigating step. That is known as proving ‘additionality’. Otherwise Country A simply carries on polluting and B is only taking ‘business as usual steps’ and not taking an additional step to further reduce GHG in the light of being paid by A to do so. ‘Baseline’ means the business as usual level of carbon production in B, and ‘credit’ means where a mitigation step has been undertaken by B because of payment by A, the carbon saved is credited to A.
Let us return to the lack of scarcity in ‘baseline and credit’. We can now see that provided ‘additionality’ (and the other criteria of ‘verification’ and ‘permanence’ which I explain later) can be proven to exist, the whole point of baseline and credit is to encourage as many actors as possible to take carbon mitigating steps and then to sell them as credits to others, in order that the overall global level of GHG production is reduced.
The aviation industry, under the auspices of the International Civil Aviation Authority have set up from 2021 a system of ‘baseline and credit’ in respect of aviation emissions – which I will deal with in rather more detail in subsequent blogs for Mere.
15. Before returning to the narrative of how the treaties have considered the roles of nations, corporates and individuals over time, we must continue for a while longer considering what actions can form ‘credits’ which can then be traded. 16. Most mitigating steps simply reduce the amount of carbon which was otherwise going to be produced. For example, assume that a power station in Tanzania would ‘on a business as usual’ basis produce 1 million tonnes of CO2 next year. However, let it be supposed that the UK sponsors it to install air scrubbers in its chimneys and so will now only produce 800,000 tonnes of CO2. The 200,000 tonnes of CO2 saved become a carbon credit which the UK can deduct from its total emissions before asking itself the question, has it exceeded its national cap of emissions imposed under Kyoto (now Paris)? 14. Mere’s business is different. The growth of tropical timber on land which was registered as degraded forest land (ie it had been historically stripped bare via ad hoc logging and left in that condition) is not simply reducing the amount of carbon which would have been reduced but rather is positively sequestering carbon from the atmosphere as part of the natural process of photosynthesis and accretion of biomass in the tree. 15. As I set out above, in both forms of carbon capture, it is necessary not only to show that the steps being relied upon by the polluting country when it purchases the same, are ‘additional’ ie as set out above, but that also the removal of the carbon has permanence and has occurred lawfully. 16. This is an area of extreme complexity because it sits at the junction between the treaties dealing with carbon finance, the treaties and agreements relating to the lawful growth and logging of timber and the practicalities of dealing with the regulatory superstructures both internationally, and locally to both the grower and the grown. 17. This will be dealt with in a series of blogs in the future. For our present purpose, we simply need to record that in order to render the carbon sequestration transferrable, the whole process must be registered and assessed by a widely recognised verification agency such as Verra. One of the major analytical difficulties encountered by anyone seeking to advise in this area, is the degree to which carbon sequestration created from growing trees is acceptable for carbon offsetting. Under the EU-ETS the answer is ‘only to a limited degree’ whilst under CORSIA the answer is ‘much more easily’. This is not just an administrative question: it is also one of science and forest husbandry: there are trees and trees. There is evidence emerging that boreal (ie trees growing in far northern climes) are, in fact, net emitters of one form of GHG, N2O. Further, much depends on the fate of the cut timber. Most wood will degrade quickly (often by being burned) and the sequestered carbon released to the atmosphere. This can breach the principle of ‘permanence’. Teak on the other hand, lasts a very long time and is not routinely burned owing to its inherent economic value. 18. If got wrong, there can be significant implications for policy. Let me provide an example. The UK Government rightly seeks to deploy public money in encouraging private individuals to plant and husband trees. One aspect of this is the provision of capital grants such as the Woodland Creation Grant. This would be available for the planting of coniferous forests. Unfortunately, there is now data emerging that boreal coniferous forests are nett emitters of GHG in the form of N20. I will return to this in the next separate blog. 19. In the final part of this blog I will finish the narrative regarding the UN’s approach to climate change and how this has involved ever wider categories of actors and what it means for us.
Michael Rawlinson QC
3 June 2020
1. Some other GHGs, such as CH4 are very much more potent in their effect than CO2 and to take this into account an ‘equivalent’ lesser amount is needed of CH4
2. Seasonal Dynamics of stem N20 exchange following the physiological activity of boreal trees” Machacova et al ‘Nature Communications” https://doi.org/10.1038/s41467-019-12976-y Michael Rawlinson QC asserts his moral rights as the author of this piece pursuant to the Copyrights, Designs and Patents Act 1988.