Jane: [00:00:01] Welcome to the LSEG Sustainable Growth Podcast. I'm your host, Jane Goodland. And on today's Green Room segment, I have the pleasure of speaking to Lisa Zelljadt, who is analyst and editor on the Refinitiv Carbon research team. In today's episode, we dive into Refinitiv’s latest Cop 27 report looking at what the outcomes of the climate conference mean for carbon trading. So, let's get into it.
Jane: [00:00:25] Lisa, let's get started, shall we? Tell me you've you've you've published a new report on carbon markets and what COP 27 means for that. But first, before we get into the detail, tell me about you and your work.
Lisa: [00:00:36] I've been following the global climate negotiations since probably two and a half decades now. It's the U.N. Framework Convention on Climate Change, the big parent treaty under which the Paris Agreement was agreed, and its predecessor, the Kyoto Protocol. And I was actually a youth delegate back in the early 2000s when a lot of the components that have now led to carbon markets were just being created or adopted. So, I actually joined the company that is now after several mergers and acquisitions, LSEG’s carbon market team back in 2006. And I've been back and forth working at a think tank and teaching courses at a university on energy policy in between. So now I'm a contractor with LSEG and I do policy analysis on these markets like Europe's emissions trading system and the two carbon markets in North America that we follow. Plus, I help with the English language versions of our analyses that are really fast growing, Beijing team is producing now that China has a national emissions trading system in addition to its pilot markets. So, they like me for my institutional knowledge because I've been involved with these analyses for so long. For instance, quick plug for an upcoming report. I'm actually working on our annual carbon market year in review, where we provide an overview of every single compliance carbon market over the year 2022 from the big European emissions trading system that I mentioned before to New Zealand's, which is actually a tiny program to South Korea where the only source for all the traded volumes in these markets and price developments over the years. So that's a good report to keep an eye out for. It'll be coming out in January.
Jane: [00:02:06] Okay, I'll keep my eyes open for that. But so fair to say that you are a deep carbon markets expert. So, tell us about the report that you've just published. What's the key messages and why is it important, do you think?
Lisa: [00:02:16] Well, most of the general media attention about the COP has looked at the overall results that people hear about all over the negotiations. The headline items like that country's managed to establish this facility for compensating countries for loss and damage due to climate change. That was a big news item, but we focused specifically on the part of the Paris Agreement that has to do with carbon markets, the trading of emissions reductions or mitigation outcomes, as they're called in the lingo, like when an emission reduction is achieved in one place, but an entity from another place made that happen or contributed to making it happen. There's a whole article of the Paris Agreement devoted to this that finally got hammered out at the COP in Glasgow, Scotland, last year after the parties went back and forth about it for years because it's controversial and that's called Article six of the Paris Agreement. So, our entire report is basically on the nitty gritty of this Article six.
Jane: [00:03:07] Yeah. So, I have read your report, of course, and it does get quite technical, doesn't it? So, can you perhaps in layman's terms, if that's what all possible take us through what Article six of the Paris Agreement is and be kind Lisa, be kind because it does it very technical.
Lisa: [00:03:25] Article six is the piece of the Paris Agreement that allows parties and I emphasise parties because those are countries, nation states with governments that negotiate at the UN, not companies or corporate entities. It allows countries to cooperate on reducing emissions, basically to get the world the most bang for its buck on emissions reductions because it's cheaper to cut greenhouse gas output in some areas than others. And some countries have more resources like advanced technology that would cut more net emissions if it was applied in fast growing regions that can't afford that kind of technology. So, Article six says that parties that finance mitigation activities in regions outside their own territory, those would be the buyers of these credits, they can count that towards their Paris Agreement targets because every country has set a target for itself under the Paris Agreement. So, if they pay for emissions to be reduced elsewhere, then they can count that emission reduction toward their own national target and the countries where these sponsored activities take place, those would be the sellers, they benefit from all this additional investment that they otherwise couldn't have done. And it helps finance their low carbon development, so they don't even emit so much in the first place because they've gotten the renewables technologies earlier in the game. And it gets tricky when it comes to accounting and attributing credit to avoid double counting because Article six came up with this concept of corresponding adjustments. So, the seller country has to pretend the emission reduction didn't happen when it logs its progress towards its target in its inventory because the buyer country already took credit for it. So, you can't have them both counting that credit. So that's been a really tricky issue and that's why it was taking so long for Article six to really hammer out some rules that parties could agree to.
Jane: [00:05:07] But Lisa, can I just ask, why is it so difficult? Because really, I think that that seems like a sensible principle effectively, the notion of not double counting the emission reductions, that seems quite straightforward. What's been so difficult in terms of that negotiation? Why is it so hard for countries to agree on that methodology?
Lisa: [00:05:27] The principle is clear. Everybody wants to avoid double counting, and this idea of corresponding adjustment is just fine with everybody. But how to actually do it logistically is very tricky because countries have set their targets in different ways. One country will have we want to reduce our emissions from 1990 levels by 20% in the year 2030. So that's how they would set their target. And that's how they would account for it in these emissions that they purchase toward that target. But another country may have set an emissions target that isn't expressed in the same way as absolute reductions by a certain year. For instance, a couple of countries have intensity targets. They want to reduce their emissions per unit of output or per unit of GDP in a certain year, and it's not the same year as other countries. So, this whole accounting thing is great in theory, but how do you actually apply it and where do you take the emissions reductions and which years do you even attribute them to? So, the concept is not so hard, but the how to actually do it is tricky.
Jane: [00:06:25] Yeah, So, so that's really, really critical because I suppose effectively what we're saying is, is that we're not trading the same currency, right? We don't have the same carbon currency being used across different countries and therefore swapping that is really hard.
Lisa: [00:06:39] And then you factor in companies in this. I mean, this is all just between parties, actual countries that are members of the United Nations Framework Convention. Then you get companies wanting to be involved and it's even more tricky.
Jane: [00:06:50] So let's go to the company side of things then. So, what could this mean for companies who have set out their own carbon neutral or net zero ambitions. Or other reduction targets for that matter?
Lisa: [00:07:03] A lot of folks that are probably listening to this podcast are more interested from a corporate perspective, and it doesn't really matter what countries are agreeing to what can people involved in ESG and other green business solutions? Why do they care what this dispute among countries is all about? Well, the thing is that these emission reduction units that countries are then buying and selling to each other are essentially offsets. So, the corporate world is using carbon offsets more and more as firms are taking on their own targets that mirror what countries are doing. You know, a country will say we want to reduce our emissions from this year by this amount, by this year, and countries are mimicking that by setting a carbon neutral target or some sort of emission reduction goal that they then are advertising to their customers and shareholders and trying to stick to. And they're trying to achieve those by buying such units usually called offsets or carbon credits. And everybody wants to have the most high-quality offsets to make sure that they're not double counted or from a project that might have happened anyway, in which case you can't really call it an offset. So, they're looking for U.N. sanctioned offsets and then they care about what's negotiated at the UN, because these units are essentially offsets. So, companies really want to buy those credits and achieve their carbon targets for their company. But that's where it gets tricky with the corresponding adjustments and the whole deal to ensure that only one country takes credit. Well, if a company is buying the credits from a project that took place in another country and that country is doing the corresponding adjusting, where does the company come in? Because they can't come and claim that they've actually offset their emissions at a corporate level because it's the country that's taking the credit for that with the corresponding adjustment. So maybe an example is good. So, if I'm Microsoft and I'm sponsoring or financing a big solar project in India and that prevents India from emitting so much because they're able to generate more electricity from solar than from coal, so it helps them achieve their national target of reducing emissions by converting to greener technologies, who is able to count that credit? Is the company? Is Microsoft able to say we have actually offset our emissions or are they able to say we have helped India to achieve its emissions because India hasn't correspondingly adjusted those credits? So, you get into this complicated mess of what claims can be made and what corporates can legitimately say about what they've invested in without greenwashing. And the big development on that front with the Article six negotiations was that negotiators actually created a new category called a mitigation contribution. So that does not involve a corresponding adjustment, but it's called a contribution because you can't really claim it as a reduction. What you're claiming, if you buy one, is that you've contributed to the host country, that hosted that project, generating those credits to achieving its target.
Jane: [00:09:49] So can we just explore that a little bit. Are we talking about you're buying a credit, but it's just the way that you represent that, so you can't call it an offset?
Lisa: [00:10:00] It would be disingenuous to call it an actual offset or an emission reduction and to have the company, in this example, Microsoft, say we've reduced our emissions because we sponsored this project in India. No, India has reduced its emissions because that's who's tallying them on the global stage. And Microsoft is very generously and wonderfully contributing to that. But the claim that this is somehow reducing Microsoft's emission is a bit misleading. And so that's what a lot of these negotiations on the corporate level and what kind of claims you can make, that's what that's all about.
Jane: [00:10:31] And Lisa, can you just clarify something for me here about kind of the relationship between all of what's talked about in your paper versus the voluntary carbon markets? Because we do have a difference, don't we? We have the compliance markets and then we have voluntary markets. So, when we're talking about Article six, are we talking about compliance or are we talking about voluntary?
Lisa: [00:10:52] That's kind of the exciting, there's a nexus going on now that wasn't present in previous negotiations. Negotiations have historically been for and by parties about what they can and cannot do in the eyes of the UN for this global treaty, the Paris Agreement. But now that private sector and the voluntary markets are increasingly involved because Senator Kerry, for instance, from the United States, he's the lead negotiator on climate, he actually proposed something as a US government proposal that involves the private sector where companies would help take care of some of the emissions reductions necessary for developing countries to achieve their targets. And that was sort of under the umbrella of climate finance on the part of the US and other rich countries. So increasingly we're seeing this merger of private sector and voluntary markets with the existing UN structure that used to be and still is mostly for parties.
Jane: [00:11:44] Really it is like an onion, isn't it? It's got so many different layers and sort of the more you peel it back, it kind of gets almost more complicated. But so, in terms of thinking about kind of the future of carbon markets, what's your take on this as this moment? And then after that, let's think about what, if anything, might need to happen at COP 28, perhaps to help stimulate things further.
Lisa: [00:12:06] Yeah. So, from a private sector point of view, this outcome, especially this creation of the new way of describing a credit, a mitigation contribution, it kind of challenges firms to get clear on what claims they are and are not allowed to make about offsetting and carbon credit purchases what they're telling their shareholders and the consumers without greenwashing. So, there's a couple of stakeholder groups actually set up to establish some kind of standard. The biggest one is probably the Voluntary Carbon Markets Initiative for Integrity. They're called the VCMI. And firms generally try to follow whatever they come up with as best practices because they're the kind of umbrella group that's trying to come up with some sort of standards. But it's a bit of a chicken and egg game because that group in turn is of course made of voluntary market stakeholders and companies involved in voluntary carbon market trading in the first place. So, they've already got some skin in the game. So, there's some reluctance to say, you know, you've been telling the world you're offsetting your emissions, but now you're just claiming to have used that money to help countries achieve their Paris Agreement targets. It’s a different claim that you're making. So sometimes to some buyers it might seem weaker or less worth paying for when really, it's what's happening. So it's just the nature of the claim that companies are making. So, what really resulted from this cop and all the interaction between the private sector and countries and parties is that there's a lot more interpretation going on about what claims can actually be made and what it means to have done an emissions reduction and paid for it in another location. So, what really is an offset and what is offset integrity? And that's great that the COP has provoked all this thinking because it really needs to be done in the corporate world. We need to understand what we're claiming to have reduced and who's paying for it and who's getting credit for it.
Jane: [00:13:48] Yeah. And so, in terms of where we're currently at now, so great that there's been some progress at this COP 27 in this regard. But what's the next steps? What needs to happen next and what should we be looking out for in terms of what the key developments might be coming down the pipe? And as we look to COP 28.
Lisa: [00:14:06] Yeah, well, a lot of the decisions on Article six were punted towards the next COP, because a lot of this text is very specific and the negotiators, you end up with what's called bracketed text. Everything that they couldn't come to consensus on is left in brackets. So, it's a suggestion for what the text should be. But because they couldn't agree on it, they didn't remove the brackets. So, it doesn't actually pass as text. So, a lot of that type of text has been punted to the next COP with some subsidiary bodies that are more in charge of technical solutions being asked to take an assessment, see what parties, where they stand on the issue, and then bring that back to the next COP or the next round of discussions for further review so that they can hopefully come up with a solid text to accept at that COP. So, we'll be looking forward to that. But meanwhile, these independent private sector organizations like the VCMI will be trying to develop some standards so that companies can move forward with trading offsets going forward under some sort of structured, mutually agreed to scenario where we're in agreement on what claims can be made. And that's coming up in the next couple of months. They're having constant meetings and there's a lot of back and forth among the stakeholders on that.
Jane: [00:15:17] Okay, great. And in terms of where people can find your research paper that we've been talking about that's online, I'm guessing.
Lisa: [00:15:26] Yeah. So LSEG has a product called Icon and all of our research for the carbon Research team is published there. So, if you're a subscriber to Icon, you can just go right over and download the report. And then we're also making it available on various other platforms, including this podcast one.
Jane: [00:15:43] Super. This has been a fascinating, very quick sort of dip into the world of carbon markets and what's going on with Article six of the Paris Agreement. Thank you very much, Lisa. I feel like this would warrant a much longer conversation, but it's been very, very interesting. So, thank you so much for your time and sharing your expertise with us. Thanks very much.
Lisa: [00:16:02] Thank you.
Jane: [00:16:03] That's it for this week's episode of the The Green Room. Will now be taking a short break over the festive period and will be back in the New year with even more and new, exciting guests. If you're not already following us, give us a follow and rate us on Spotify, Apple Podcasts, or wherever you get your podcasts. If you have any questions, comments, or someone you'd like us to talk to, then drop us a line at fmt@lseg.com. Thanks very much. See you in the new year.
