Key Carbon Market Developments From 2020: Part 2

Law360 (October 29, 2020, 5:30 PM EDT) --
Brook Detterman
Brook Detterman
Stacey Halliday
Stacey Halliday
Allyn Stern
Allyn Stern
Our annual carbon markets roundup covers domestic and international developments related to carbon pricing and related regulatory programs aimed at regulating or reducing greenhouse gas emissions. Despite — or perhaps because of — the numerous challenges presented by the COVID-19 pandemic, market-based GHG reduction measures have continued to advance rapidly in the U.S. and elsewhere.

Private governance actions have seen a significant uptick, while several states have advanced carbon pricing plans. The Carbon Offsetting and Reduction Scheme for International Aviation has seen a baseline change and finalization of eligible emissions reduction measures, while implementation of the Paris Agreement inches along — notwithstanding the planned U.S. withdrawal this November.

In the first installment of this two-part article, we discussed carbon market developments in the U.S. In this installment, we will focus on international developments, and how the upcoming election may influence carbon market policy.

International Developments

Paris Agreement Progress As U.S. Prepares to Withdraw

This year celebrates the five-year anniversary of the Paris Agreement. This marks an important inflection point in the accord's progress, as its 189 ratifying members must submit increased climate commitments, while significant political shifts and a global pandemic play out over the coming months.

President Donald Trump's June 2017 announcement that the U.S. — the world's largest GHG emitter, accounting for 13% of global emissions — planned to withdraw from the agreement began a four-year process that will go into effect the day after the 2020 presidential election, Nov. 4. But Trump's 2017 announcement seemed to galvanize domestic and international support for the agreement's goal to cut emissions and limit global temperature rise to 1.5°C above pre-industrial levels.

Various state-based initiatives and nonprofit organizations emerged — such as the U.S. Climate Alliance, America's Pledge, We Are Still In and We Mean Business — with a shared commitment to continuing state, municipal, academic and corporate efforts to meet the U.S.'s prior emissions reduction goals of 26-28% from 2005 levels by 2025, regardless of federal support. In addition, other parties that had not yet formalized their commitments — like Syria and Nicaragua — ratified the agreement in the months following Trump's announcement.

However, with the U.S. presidential election on the immediate horizon, postponement of the 26th United Nations climate change conference, known as COP26, until 2021, and the strain on global economies caused by the COVID-19 pandemic, the Paris Agreement's progress may stall, and 2020 climate commitment submissions may be delayed. As of August, only a handful of nations had presented updated plans to the United Nations Framework Convention on Climate Change secretariat, with many potentially waiting to move forward until the policy direction of the U.S. is more certain.

A victory by the Democratic presidential nominee, former Vice President Joe Biden, who pledged to remain in the agreement should he win, could result in the U.S. rejoining as soon as early 2021 — 30 days after inauguration. Even with these complicating circumstances, 2020 saw the ratification of the agreement by several new parties, including Angola — Africa's second-largest oil producer — Kyrgyzstan and Lebanon, leaving only seven parties (Eritrea, Iran, Iraq, Libya, South Sudan, Turkey and Yemen) unratified without a binding commitment.

Should the U.S. ultimately withdraw from the agreement, the shift could embolden other critics — such as Brazilian President Jair Bolsonaro — to step back from prior commitments. In addition, though the U.S. may continue to attend climate talks as an observer after it is no longer a party, it will not be a decision maker at COP26, where high-stakes determinations on rules governing Article 6 carbon markets and other forms of international cooperation may be determined.

Ultimately, given the importance of U.S. participation in achieving the agreement's ambitious reduction goals, the coming months will play a large role in dictating the accord's success.

CORSIA Emissions Reduction Measures Approved

In the midst of a historic and costly slowdown in air travel due to COVID-19, the Carbon Offsetting and Reduction Scheme for International Airlines, or CORSIA, continues to advance in key areas ahead of the program's 2021–2023 pilot phase.

Most significantly, in June, the International Civil Aviation Organization, or ICAO, decided to exclude 2020 emissions data from the CORSIA baseline calculation. Air traffic emissions are abnormally low this year due to pandemic-related reductions in air travel.

Accordingly, had ICAO had retained the 2020 emissions data, the pilot phase's baseline would not provide a truly representative snapshot against which to measure future sector growth, and corresponding offsetting requirements. Instead, the baseline will be determined solely by 2019 emissions. ICAO will have the opportunity to review the emissions baseline in 2022 during a periodic review of CORSIA, where ICAO can revisit COVID-19's impact on air traffic emissions.

ICAO has also provided clarity on eligible offset credit programs necessary to comply with CORSIA. Earlier this year, ICAO approved an initial round of six carbon offset programs for use during the pilot phase, and its Technical Advisory Board has taken public comment on 10 additional applications. As ICAO Deputy Director of Environment, Jane Hupe, stated: "With the Council's approval of eligible emissions units, ICAO now has all of the pieces in place to implement CORSIA." The six offset programs approved in the first round are:

  • American Carbon Registry;
  • Climate Action Reserve;
  • Verified Carbon Standard;
  • The Gold Standard;
  • China Greenhouse Gas Voluntary Emission Reduction Program; and
  • Clean Development Mechanism.

Separately, a number of airlines have established their own GHG reduction targets. Most recently, 13 airlines comprising the Oneworld alliance have committed to achieving net zero carbon emissions by 2050. Other airlines that have announced net zero goals include Delta Air Lines Inc., JetBlue Airways Corp., British Airways PLC, Iberia, Japan Airlines Corp. and Qantas Airways — each has established net zero by 2050 targets — and Finnair Oyj aims for carbon neutrality by 2045.

EU Effort to Develop Carbon Border Adjustment Mechanism

The European Union has begun development of a Carbon Border Adjustment Mechanism. At bottom, a CBAM would impose a tax or fee on certain goods or materials imported into the EU, with the level of tax based on the carbon intensity as compared to the production of a similar product within the EU. The CBAM is designed to prevent, or at least reduce, leakage from the EU as producers or manufacturers move operations from jurisdictions with stringent GHG policies, like the EU, to jurisdictions lacking such policies.

Feedback on the proposal was due by Oct. 28. The EU plans to adopt a final policy during Q2 2021, which may have implications for many businesses doing business in the EU or importing products into the EU.

China's Plans For National Carbon Trading Program

In 2017, the China National Development and Reform Commission issued the National Carbon Emission Trading Market Construction Plan (Power Generation Industry), which is considered a landmark for the official launch of China's national carbon trading market. The plan specified that the construction of the national carbon market should be divided into three phases: an infrastructure construction period (2018), a simulation operation period (2019) and a completion period (2020).

The development of the national carbon trading program made significant progress in 2019 and 2020, although the overall project appears behind schedule. The Ministry of Ecology and Environment, has drafted an interim regulation on management of carbon emission trading; a national carbon emission quota setting and distribution plan; management measures on carbon emission reporting; and management measures on carbon emission verification institution. These provide a solid legal basis for the operation of the national carbon trading market.

In 2019, the ministry completed carbon emission data monitoring, reporting and verification of key emission entities in power generation, construction materials, iron and steel, nonferrous metals, petrochemicals, chemicals, papermaking and aviation, and collected relevant information on key emission enterprises in the power generation industry for accounts opening in the national carbon trading platform. The construction of the carbon trading system commenced in May 2019, and was completed in March of this year.

Under China's current carbon emission permit trading system, no national trading platform has been established. Emissions trading currently is carried out by seven pilot exchanges in Beijing, Shanghai, Tianjin, Chongqing, Hubei, Guangdong and Shenzhen, and two registered exchanges in Sichuan and Fujian.

China also has established a voluntary GHG emissions reduction program that enables the generation and trading of offset credits, known as China Certified Emission Reductions, or CCERs. Under this program, CCERs are generated and traded voluntarily, and can be used for compliance with the various GHG programs currently operating in China, although rules differ across exchanges in terms of which CCERs qualify. Since its launch in in 2015, the voluntary GHG emissions reduction program has approved over 200 emissions reduction methodologies.

Election Focus: Climate 2020

The upcoming U.S. election will have a big impact on climate policy in the U.S., because the two parties have diametrically opposed views. The approach of the current administration is clear. The Trump administration has scaled back ambitious efforts by the Obama administration to address climate change within the current U.S. federal and state regulatory structure, and has not expressed support for addressing the issue through legislation. The U.S. will also complete its withdrawal from the Paris Agreement on Nov. 4.

A new administration would almost certainly tack in a different direction. In his presidential campaign, Biden has embraced aspects of the Green New Deal, and has made a commitment to elevate climate action and clean energy. Biden has proposed investing $1.7 trillion in clean energy, with the goal of net zero emissions no later than 2050. He has also pledged to reestablish U.S. leadership on climate, starting with reentry into the Paris Agreement.

Of course, a new president will need congressional support, but Congress will not have to start from scratch. In 2009, the House proposed the American Clean Energy and Security Act, which proposed a cap-and-trade system to reduce greenhouse gases. This legislation can provide a basis for one possible approach. The current congressional session has also considered over a dozen different pieces of legislation that can be renewed or modified or serve as a basis to develop a broader climate change framework.

In the event of a Biden administration, the U.S. Environmental Protection Agency would also be ready to address climate change without waiting for congressional action. The Environmental Protection Network has just issued a blueprint for change in the agency. The report, titled "Resetting the Course of EPA," provides a framework for addressing issues including the role of science in decision-making, environmental justice, strengthening enforcement, and reversing current air and water policies.

The report contains many recommendations relating to climate, and includes proposed action for the first 100 days. For example, the report recommends withdrawal from defending the Affordable Clean Energy rule; reissuing the vacated significant new alternative policy rules for hydroflurocarbons; implementing the Kigali Amendment to the Montreal Protocol; withdrawing or reproposing rules regulating methane; assessing the regulatory framework around carbon storage; prioritizing electrification of vehicles; and setting aggressive GHG standards for vehicles. It is also likely that a Biden EPA would reaffirm California's authority to adopt its own motor vehicle standards.

A bipartisan group of former EPA administrators supports the report, which lends increased credibility to the document. New political leadership would not be in place for many months after the election. However, the new team will have no shortage of ideas. In addition to the direction set by the president and Congress, this report, along with other sources that have been tracking environmental rulemaking and policy over the past four years, will serve as a guideline for agency decision makers.

Brook Detterman is a principal at Beveridge & Diamond PC.

Stacey Sublett Halliday is an independent consultant and a former special counsel at the U.S. Environmental Protection Agency.

Allyn Stern is of counsel at Beveridge & Diamond. 

Weiwei Luo, of counsel to Beveridge & Diamond, and Zach Pilchen, an associate at the firm, also contributed to this article.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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