The climate crisis is complex. As more solutions are operationalised and a wider range of stakeholders step up to the challenge of tackling emissions, this complexity is only growing. Within carbon markets, this complexity and diversity of approaches, particularly to reporting and verification of GHG emissions inventories and mitigation outcomes, is particularly worth noting.
For meaningful climate action to take place, multiple pieces of the puzzle, need to fall into place. First, there needs to be consensus, a shared vision or ambition to drive towards. Second, there needs to be policies in place that establish an enabling environment for change. Third, there needs to be sophistication to the technology available so that solutions can be operationalised.
The recent introduction of the Carbon Border Adjustment Mechanism (CBAM), which entered its transitional period on 1st October 2023, is a strong case study that captures how, when the various puzzle pieces fall into place, meaningful action can be taken.
The underlying vision or ambition of the CBAM is to establish global carbon pricing to reduce the risk of carbon leakage, raise revenue, direct international financial flows, and drive innovation. Whilst the CBAM might not achieve price convergency per se, it does generate a sense of obligation for countries to begin considering carbon pricing as a means to reduce emissions. It is an important tool that steers policy towards global carbon pricing, providing an incentive to view carbon pricing as a tool for climate action. Admittedly, the policy may be attractive for generating additional income and boosting domestic production in Europe. However, its main goal is clearly to drive towards global carbon pricing, and therefore to greater efficiency in emission reductions.
Under the Paris Agreement, which holds everyone accountable, encouraging them to set their own goals, pricing agreements favoured a bottom-up approach. This has led to a proliferation of different types of carbon pricing. Single countries have developed their pricing initiatives, heightening fragmentation in the market and making interactions between initiatives more complex.
The CBAM advocates for a global convergence of carbon pricing, creating a way for the different initiatives and countries to engage and communicate with one another. In essence, it offers a common taxonomy and language so that the fragmented pricing initiatives can exchange information more efficiently.
With CBAM, we are yet to see the final puzzle piece fall into place. We have seen the consensus around the importance of global carbon pricing materialise into a policy that provides a common language or taxonomy and thereby enables more efficient communication and engagement between pricing initiatives. We are yet to see, however, the deployment of digital technologies that support and underpin the convergence of scattered initiatives.
There are examples of solutions that can be adapted to the CBAM. For example, The Climate Action Data Trust was designed to support internationally compatible national registry systems and is an important enabler of Article 6 cooperative approaches. The platform links, aggregates and harmonises all major carbon credit registry data to enhance transparent accounting in line with Article 6 of the Paris Agreement. The spirit underpinning this approach aligns directly with the intention of the CBAM. Both the CBAM and CAD Trust are driving towards a global carbon pricing and common taxonomy to enable more efficient and transparent market operations.
The democratisation of data enabled by this technology means it is public, transparent and auditable. It allows distinct initiatives to converge and talk to one another. It is exciting to consider how, an evolution of this kind of blockchain technology could be the missing link, or puzzle piece, for CBAM, too.
Once this technology falls in place, we will see the full picture of what CBAM can achieve. I expect there to be a domino effect, with many other countries and jurisdictions applying similar systems. There will be a nest of complexity comparable to that which has been created by the increase in Article 6.2 cooperative approaches.
A future, blockchain-led system will likely be an important bridge that enables communication and builds a common taxonomy. And in many ways, this is something that has always been missing from these markets, which is now within reach.