Introduction

The United Nations Framework Convention on Climate Change (UNFCCC) was adopted in 1992. It is an environmental treaty signed by 197 “parties”[1] around the world. The overarching aim of the convention is to "stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system"[2].

The UNFCCC sets non-binding limits on greenhouse gas emissions for individual countries. It does not contain enforcement mechanisms, but the convention outlines how specific protocols or agreements can be negotiated to specify further action towards its overall objective.

The Conference of the Parties (COP) is the supreme decision-making body of the UNFCCC. The COP has met annually since 1995 and adopts decisions necessary to promote effective implementation of the Convention. The most well-known COP meetings are COP3 in 1997, where the Kyoto Protocol[3] was agreed upon and COP21 in 2015, where the so-called Paris-Agreement[4] was reached. At COP21, parties reached a landmark agreement to combat climate change and accelerate and intensify the actions and investments needed for a sustainable low carbon future.

The ensuing COP gatherings have focused on implementing and evaluating progress in the Paris Agreement. COP24 was held in Katowice, Poland from Dec 2 to 14, 2018 with the aim of setting a Rulebook on how countries will achieve the Paris Agreement goals.

At COP21, parties reached a landmark agreement to combat climate change.

So what was agreed upon and what could be the implications for industry around the world? In this article, we will take a look at the key elements of the Paris Agreement and where things stand after COP24.

 

Transparency

What Was Agreed?
At COP24, despite contention on reporting requirements, particularly between the United States and China, the parties agreed on sections of the Paris Rulebook covering transparency. Specifically, Article 13 outlines a country’s responsibility to report its climate efforts to other party countries and covers seven different types of information that need to be reported: emissions reporting, progress towards meeting climate pledges, adaption, climate finance provided and climate finance needed.

At COP24, parties finally agreed on a single set of rules applicable to all countries, allowing for an international level playing field.[5]

Therefore, all countries—including the US, the European Union, China and India—will follow the same methodology when reporting emissions. By 2024, all countries will have to submit biannual reports using common reporting tables and a common tabular format. Previously, 44 developed nations listed under Annex I and Annex II of the UN Framework Convention on Climate Change were subject to biannual reports.[6] However, the final rulebook agreed at COP24 applies flexibility for “those developing country parties that need it in light of their capacities.” The final rulebook allows a developing country to “self-determine” whether it needs flexibility. Concerned countries would have to state why flexibility is needed and for how long they expect to continue needing it.

Countries also agreed on Article 9 rules governing climate finance reporting. The final rules state that developed countries “shall” and developing countries “should” report on any climate finance they provide. Under the agreement, countries must also give an indication of what new and additional financial resources have been provided and how they determined that such resources are new and additional, among other requirements.

By 2024, all countries will have to submit biannual reports using common reporting tables and a common tabular format.

The Business Impact
Although the COP24 agreements on reporting do not impose additional requirements on companies, companies emitting greenhouse gases may be affected by climate and emission policy changes in the future. Companies emitting greenhouse gases may be subject to policy changes relating to reporting requirements. As all country parties are now subject to the same transparency requirements under Article 13, companies operating internationally, including in “developing” countries, may be subject to additional, uniform reporting requirements in the future.

Focus on the United States
Despite President Trump's vow to abandon the Paris Agreement, the US cannot formally withdraw from the agreement until 2020; however, several US states remain committed to advancing the goals of the Paris Agreement. The United States Climate Alliance[7] was formed by the governors of California, New York, and Washington to continue to advance the objectives of the Paris Agreement at the state level. Sixteen states and Puerto Rico have joined the United States Climate Alliance. As a result, companies operating facilities within these states may be impacted by state-level policy changes aimed at meeting recordkeeping requirements agreed upon during COP24.

 

Nationally Determined Contributions (NDCs)―Emission Goals

What Was Agreed?
Under the Paris Agreement, countries pledged to limit the rise in global temperatures to roughly 1.5°C, or 2.7°F., above preindustrial levels. Nationally-determined contributions (NDCs) are country-specific climate pledges which reflect a specific country’s ability to reduce emissions while accounting for domestic circumstances. Some countries address climate change impacts within NDCs. NDCs may also include support countries need or will provide to other countries when building climate resilience.

The final agreement at COP24 states that countries “shall” use emissions accounting guidance from the 2006 Intergovernmental Panel on Climate Change (IPCC) report.[8] The 2006 report includes a higher global warming potential for methane. Within their NDCs, countries will not be required to adhere to scientific methods when comparing emissions and proposed emissions reductions. Instead, the final COP24 agreement allows countries to use “nationally appropriate methodologies,” which provides accounting flexibility. Countries also agreed to record NDCs in a public registry with a search function. Additionally, pledges are now required to cover a common timeframe from 2031, but the number of years will be agreed on later. Currently, some pledges cover five years, while others cover 10 years.

Business Impact
As countries begin to redevelop and implement NDC requirements, companies should expect policy changes relating to emission limitations as increased international awareness of climate change places the topic on governments’ political agenda. NDCs are country specific, which may lead to inconsistent policy changes if companies operate facilities globally. Therefore, companies operating facilities internationally may be faced with piecemeal benchmarks and emission limitation requirements depending on the country of operation. To alleviate international inconsistencies, some companies have started to implement more stringent internal requirements.[9] This may result in improved institutional infrastructure and increased development in the areas of renewable energy, energy efficiency, sustainable transport, carbon capture and storage, conservation and sustainable management of forests, sustainable agriculture and opportunities to reduce emissions of non-CO2 gases from the private sector.

Companies may also expect a continuing fight over climate science.[10]  At COP24, countries debated the necessity of a special IPCC published in October 2018,[11] which stated that fossil-fuel emissions would have to fall roughly by half within 12 years to avoid severe global climate change. While the majority of party countries wanted to formally endorse the report, the US, Saudi Arabia, Kuwait and Russia, all large oil producers, argued to rely less on the report. The final COP24 agreement expresses appreciation and gratitude for the report but does not officially endorse it. As a result, companies operating facilities within oil producing countries, like the US, may anticipate less-stringent emissions limits.

A Focus on China’s NDC
It is worth looking at the case of China in particular. China submitted its Intended NDCs (INDCs) in June 2015 in which it declared the following commitments:

  • Cap peak CO2 emissions by 2030 at the latest
  • Lower carbon intensity[12] by 60 to 65 percent below 2005 levels by 2030
  • Increase the share of non-fossil energy carries of the total primary energy supply to around 20 percent by 2030
  • Increase its forest stock volume by 4.5 billion cubic meters, compared to 2005 levels

China has instituted a series of internal policies and measures to achieve the targets, such as the 13th Five-Year Period Greenhouse Gases Emission Control Work Plan; the launch of a nationwide carbon emission trading market and a renewable energy certificate issuance and trading scheme.

China has also committed to serious efforts in reducing and decarbonizing energy consumption. For example, under the Notice on Strengthening Energy Saving and Environmental Protection Work of Boilers (jointly issued by several national governmental agencies), it is now prohibited in China to operate any coal-fired boilers with a capacity of more than 10 steaming tons per hour.

It is estimated that China is on track to meet or exceed the targets in its INDC;[13] China announced in 2017 that it had already met its internal 2020 carbon intensity target―a reduction by 18 percent compared to 2015 levels.[14] To further enhance its political positioning as a global climate leader, it is predicted that China may submit strengthened NDCs in the future. This could have an impact on companies operating in China that may see stricter emission limits.

 

Market-Based Mechanisms

What Was Agreed?
The three market-based mechanisms introduced under the Kyoto Protocol[15] have the advantages of being flexible and creating monetary incentives and have already led to burgeoning carbon markets in various forms in the EU, US, Switzerland, South Korea, Japan, Canada and China. However, these mechanisms have also incurred widespread criticism. Article 6 of the Paris Agreement provided for the development of new market-based mechanisms to achieve NDCs. The COP24 negotiations on these new mechanisms proved to be arduous and time consuming.

 Article 6 envisages the following approaches:

  • A cooperative approach which allows Parties to use internationally transferred mitigation outcomes (ITMOs) towards NDCs (Article 6.2)
  • A mechanism to contribute to the mitigation of GHG emissions and support sustainable development (SDM) (Article 6.4)
  • A non-market approach to sustainable development (Article 6.8)

However, how to operationalize the ITMOs and SDM approaches in the absence of top-down and varying emission commitments poses difficult questions. As Article 6 only provides broad and ambiguous guidelines, leaving the details to be further developed during the COP meetings.

At COP24, parties could not find consensus on a number of matters relating to Article 6,[16] so negotiations will continue on this matter at COP25.

Despite this setback, according to the COP24 outcomes published by the UNFCCC,[17] there was basic consensus on numerous aspects of Article 6.2. These included, for example: a definition of ITMOs; conditions for participating in the cooperative approach, such as communicated NDC and required national inventory reports; and establishment of national registry to track and identify ITMOs.

Companies can anticipate more stringent rules compared to the Kyoto Protocol mechanisms of environmental integrity, sustainable development and avoidance of double counting.

Regarding the rules, modalities and procedures for Article 6.4, a basic agreement was reached on, for example: a definition of Article 6.4 activities and emission reductions; establishment of a supervisory body, while the CMA has the power to decide rules, modalities and procedures of the mechanism and a voluntary cancellation method to deliver overall mitigation in global emissions.

With regards to the non-market approach, a basic agreement was reached on the principles, principal boundary, modalities and reporting aspects.

Business Impact
The operationalization of mechanisms under Article 6 will be of importance to companies that have benefitted, or plan to benefit, from carbon emission reduction transactions, especially those located in countries or regions where an emission trading scheme has already been implemented.

Specifically, Article 6 mechanisms will provide an opportunity for companies to profit from responsible climate actions, as countries may allow companies to help meet their NDCs by purchasing carbon credits (in the form of ITMOs or offset credit under SCM) from other countries.

For companies operating in jurisdictions where emission trading is already operating or under development, the implementation of Article 6 would provide the possibility of transferring emission allowances or offsets from another country to meet their obligations. The operation of Article 6 would also help companies live up to their commitments under the ICAO’s Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).

However, companies can anticipate more stringent rules compared to the Kyoto Protocol mechanisms of environmental integrity, sustainable development and avoidance of double counting. The rulebook for Article 6 would also be pivotal for companies holding credits generated by the Clean Development Mechanism or Joint Implementation regarding the transition issue.

 

Financial Assistance

What Was Agreed?
Article 9 of the Paris Agreement stipulates that developed countries “shall” provide financial resources to assist developing countries for both climate change mitigation and adaptation initiatives. Developed countries are encouraged to provide or continue to provide such support voluntarily. Developed countries are also urged to take the lead in mobilizing climate finance from private sector.

As such, developed and developing countries have different responsibilities regarding climate finance.

Under Article 9.5 and 9.7, developed countries must develop means to communicate quantitative and qualitative information on financial support.

However, there is also a lack of detail and definition and the obligation to provide climate finance lacks precision under Article 9. Ambiguity also exists in the definition of what constitutes climate finance (funds, grants, loans and bonds), a quantitative target and how to share the burden.[18]

The major achievement regarding climate finance at COP24 was that the COP parties decided to deliberate at their third session in November 2020 on setting a new collective quantified goal with a starting point of USD $100 billion per year.[19]

Moreover, consensus was reached with regards to information to be provided by parties according to Article 9.5.[20] Under the Paris Agreement, developed countries must biennially communicate indicative quantitative and qualitative information about projected levels of public financial resources provided to developing countries. As a further step, the COP meeting requested developed countries submit the biennial communications from 2020 in which they should indicate what new and additional financial resources have been provided, and how it has been determined that such resources are new and additional.

A dedicated online portal will be established by the secretariat for posting and recording the biennial communications. The information will be also used to inform the global stock-take from 2021. Further negotiations will need to take place on this issue at future COP meetings.

Business Impact
The potential precision on the obligation and goal of providing financial assistance would push developed countries to develop legal or financial instruments to incentivize climate investment from private sources. The financial assistance would also be subject to scrutiny under the reporting and transparency rules.

 

Conclusion

COP24 is perhaps best described as a stepping stone. It achieved a number of agreements on technical issues, but others remain resolved. COP24 suffered from the reluctance of some countries to endorse key scientific reports—and there also remains uncertainty about the future participation of the United States in the Paris Agreement. The impacts on business will initially be indirect and will depend on the laws and policies brought in by parties (developed and developing) to help them meet their commitments. In that respect, for multinational companies it will be business as usual in the sense that they should continue to examine and explore means and methods to reduce their greenhouse gas emissions wherever possible to help to mitigate global climate change, while analyzing and acting on how they can adapt to the inevitable consequences of climate change.

 

[1] Including all UN member states, Palestine, UN non-member states Niue and the Cook Islands and the European Union.

[3] The Protocol commited Parties to setting internationally binding emission reduction targets.

[12] The ration of carbon emissions produced to gross domestic product.

[15] Emissions trading, clean development mechanism (CDM), and joint implementation (JI)

[18] PATRÍCIA GALVÃO FERREIRA, ‘Climate Finance and Transparency in the Paris Agreement: Key Current and Emerging Legal Issues’, CIGI Paper No. 195, October 2018, p. 10.