Cross your fingers for Article 6, no joke

The most momentous element of decarbonization architecture is being decided in Glasgow this week, and you can't do anything about it, so think good thoughts

In general you shouldn’t spend too much time wishing for success in decarbonization - it’s far more important to sit down and do the work. Typically Carbonware tries to close with a specific call to action for readers. But you should consider crossing your fingers this week, because there’s something that will influence your life (and if you’re in climatetech, your business) happening. Also, unless you’re a diplomat or possibly an activist) it’s unlikely you can directly influence it1 - so crossing your fingers might just be worth it.

It’s been both a momentous COP26 week in the world of decarbonization, and one leaving many deeply worried that we aren’t doing enough fast enough. Both are right. In big news (admittedly mostly from the G-20 meeting prior to COP), South Africa announced that they had arranged financing to transition away from coal far faster than many had imagined. That deal might be a template for many other transitions - especially in several Asian countries that are highly dependent on coal and which have not yet signed on to this week’s agreement to stop new coal development projects. And the EU/US agreement to implement a CBAM (carbon border adjustment mechanism) on steel, so that imports and exports face a level playing field with domestic competitors is enormous; again this could form the prototype for so-called “climate clubs” where large economies enforce policies through trade which reward others for decarbonization.

Much of the rest of the work and news thus far has been in the form of pledges - which are enormously important, but only impactful if the pledging nations follow through. Otherwise they run the risk of simply being, if you’ll pardon the phrase, hot air.

But despite the fact that all the dignitaries and heads of state have now left Glasgow, the next week is the time that matters if you care about (a) the goal of decarbonizing as fast as possible, and/or (b) the potential to make significant returns for investing in decarbonization. The Paris agreement was largely ratified in 2015, but a key section, known as Article 6, wasn’t. That’s the part that creates international carbon markets and sets up mechanisms to align them increasingly over time2. That’s the part that allows countries to pay each other for more rapidly decarbonizing. That’s the part that creates “international carbon competitive advantage” (to borrow loosely from Roger Porter). Lots of disagreements remain about additionality, double-counting, and those pesky old low-quality credits that Australia and Brazil have had sitting on the books. But it looks now as though these arguments are getting resolved. It’s too bad that betting markets are uninterested in the resolution of Article 6 at COP26, because it’s probably the most important issue in the world for activists and climate entrepreneurs.

A cynic might say “it’s just accounting”, but it would be the first system to actually draw together and bind behavior using a market mechanism across borders3. If we establish a set of international carbon markets, and the US can pay a developing country (let’s pick Vietnam) for developing a large-scale solar project or cutting coal faster (or both), and all countries are subject to an increasingly aligned set of incentives, we are far more likely to get the global decarbonization project done, done faster, and done efficiently (which matters, because there’s a lot of work to do). The value of climatetech investments depends directly on the establishment of well-functioning, well-regulated carbon markets as well. Of course, we’ve never actually done anything like this in international law, so the devil is in the details, and much could be implemented clumsily because of lack of foresight or sand in the gears of negotiation.

If you’re busily building a new DAC technology, or working on climate project finance, or a software project in carbon accounting, or buying offsets, your eyes should be on Glasgow. Anyone with a carbon footprint individual or corporate, should prefer sooner and more orderly transition vs. a later, chaotic, and more costly transition. We’ve dawdled long enough. For those of us in business and finance, let’s hope that the diplomats working through Article 6 get it across the finish line - because it is the first and greatest international tool in making the transition happen sooner, in a more orderly and fair way4. I rarely cross my fingers, depending more on good planning, an action bias, and analysis. This just happens to be one of those weeks where my fingers are crossed5.

1

Just to state the obvious, it’s not clear whom you’d lobby if you’re a big multinational company or investor and it’s an international negotiation.

2

Of course, there’s a risk here that Cullenward & Victor point out in their incomparably important book Making Climate Policy Work. If you align markets and/or policies internationally and the minimum standards are worse or less strigenent than those a country creates domestically, you’ll see a flight to the minimum. So we not only have to hope for a negotiated decision, but a set of standards (on issues like additionality, leakage, etc) that raise standards. Finished and worse is a substantial risk.

3

For a great primer on why Article 6 matters to companies and investors, if you have time to listen to a podcast, S&P Global interviewed Kelly Kizzier from EDF. She was a lead Article 6 negotiator at previous COPs, she knows what she’s talking about. It’s not an abstraction, promise.

4

Even those with deeply embedded carbon (eg, energy extraction & exploration companies) will likely better serve their shareholders with a more orderly transition. While the delay of climate action serves today’s shareholders, eventually someone will be holding the bag. And management/boards are unlikely to win in a game of dirty energy musical chairs.

5

And I’m doing some real hard work too. It’s a littler harder to type with crossed fingers, but this week I think it’s wroth the effrot.