Report: Paris Agreement sends 'positive signal' for carbon markets

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Report: Paris Agreement sends 'positive signal' for carbon markets

Nearly half of the Paris signatories are considering using carbon markets to achieve climate goals, says International Carbon Action Partnership

The Paris Agreement "provides a new impetus for a dynamic global carbon market", according to a new study released yesterday by the International Carbon Action Partnership (ICAP) that predicts the next few years will bring a proliferation of new policies that seek to put a price on carbon emissions.

The campaign group's latest annual report predicts that thanks to the Paris Agreement and its specific commitment to support expanding carbon markets enthusiasm for market-based mechanisms for tackling emissions is rising around the world, with a number of countries trialling new pricing systems.

Writing in the foreword to the report, co-chair of ICAP Jean-Yves Benoit said the Paris Agreement sends a "highly welcome, positive signal" about the future of carbon markets. 

"Each country will need to decide on the best way to meet their target, and the next few years will see a proliferation of domestic climate measures, including those that put a price on emissions," said Benoit. "Emissions Trading Systems (ETS) are already the central element of climate policy in a number of national and subnational jurisdictions and this number will grow further in the years to come."

Benoit added that the treaty endorses the transferring of mitigation allowances from one country to another and highlights the need for a UNFCCC-governed mechanism to support mitigation and sustainable development.

Currently, cap-and-trade markets cover just under nine per cent of global greenhouse gas emissions and 40 per cent of global GDP. But ICAP predicts that by 2017 carbon market coverage will jump to 16 per cent of emissions and 49 per cent of GDP, following the launch of China's nationwide carbon market and Ontario's new trading system that year.

The new markets will bring the total number of distinct systems operating around the world to 12.

More are expected to follow as countries embark on fulfilling pledges made in the intended nationally determined contributions (INDCs), the system of national climate action plans submitted as part of the Paris Agreement. Some 64 countries said they planned to use carbon markets as part of their INDCs, with a further 25 saying they would consider implementing a carbon trading system.

Last month BusinessGreen revealed that the UK government is working in close partnership with the Chinese to help them develop a cap-and-trade system that is compatible with the EU's, with the eventual aim of linking the two systems up to create one large carbon market next decade.

Moreover, hopes are growing that the aviation and shipping sectors will this year make progress towards introducing their own international market-based mechanisms for tackling emissions through the auspices of the International Civil Aviation Organisation (ICAO) and the International Maritime Organisation (IMO).

The ICAO is scheduled to have a major meeting to finalise plans for a market-based mechanism this September. Speaking to BusinessGreen, Derek Walker of the Environmental Defense Fund campaign group said there was mounting optimism that a combination of the Paris Agreement, the EU's threat to reimpose carbon pricing on all flights in and out of the bloc if a new international mechanism is introduced, growing support for a market-based approach from influential airlines, and a realisation amongst many developing nations that an aviation carbon market could drive demand for carbon offset schemes would prompt ICAO to end years of foot-dragging and deliver an international scheme.

ICAP's bullish outlook for the global carbon market echoes the recent annual Carbon Market Monitor report from the Point Carbon team of analysts at Thomson Reuters, which detailed how the global carbon market grew nine per cent last year to €48.4bn and is now tipped to grow by a quarter in 2016 as trading volumes and prices rise in the wake of the Paris Agreement. 

It may have taken longer than participants in the market hoped, but the prospects of a global carbon market capable of delivering cost-effective emission reductions have never looked stronger.

This article is part of BusinessGreen's Road to Paris hub, hosted in association with PwC.

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