2024 Bilateral Offsets: Is The First Paris Agreement Carbon Credit Trading Meaningful?

by Olivia Draycott

Carbon Trading, Carbon Credits and the Paris Agreement, how are they connected?

Carbon Credit Trading can be seen globally in international agreements, and national initiatives. It is based on the notion of carbon pricing which can be understood by breaking it down into three levels:

1. The limitation of a company’s carbon output,
2. The introduction of a carbon tax on companies’ carbon output, 
3. The implementation of an emissions trading scheme which is based on the notion that companies can buy and sell ‘pollution credits’ from one another, depending on whether they are below or have exceeded their carbon allocations [1].

The 2015 Paris Agreement is particularly relevant to carbon trading, as it formalised using carbon markets to meet climate targets. Under Article 6 of the agreement, countries can voluntarily cooperate to reach their emission reduction targets set out by their nationally determined contributions (NDCs) [5]. Article 6.4 in particular, provides a mechanism for countries to attract financial support for emissions reduction activities and collaborate internationally to contribute to the success of global climate goals [6]. 

In the context of carbon trading, this means that actors (such as businesses, governments, and financial institutions) may be incentivised to reduce their emissions or implement emissions reduction projects (such as reforestation projects) on the basis that they can sell these emissions as carbon credits to other actors. Despite the recent attention on carbon credits, they are not a new phenomenon, with over 40 countries, and 1200 companies implementing carbon pricing, with the European Union Emissions Trading Scheme (ETS) [2], representing the largest carbon trading initiative to date [3]. As stated by the World Economic Forum, carbon credits are effectively  ‘placing a value on ecosystems’ as they internalise external costs and thereby promote the emergence of sustainable global markets. 

A company may also wish to offset the carbon it emits by buying carbon credits. Each tonne of CO2 equivalent (CO2e) is equal to one credit. These credits come from businesses that actively reduce their emissions through more efficient technology or from projects, initiated by an array of different actors, such as reforestation projects that lower the quantity of carbon in the atmosphere through negative emissions and sell these reductions as carbon credits [4].

Swiss meets Thai: The Paris Agreement’s first carbon transaction:

The first bilateral (between two states) carbon transaction was achieved under Article 6.2 of the agreement between Switzerland and Thailand [7]. Unsurprisingly, Switzerland took the lead for action under Article 6.2, as despite this being the first bilateral carbon transaction, Switzerland has already signed agreements with Peru, Ghana, Senegal, Georgia, Dominica and Vanuatu to offset its emissions. These agreements resulted in the transfer of funds from Switzerland used for solar panels, geothermal energy-efficient buildings and novel public transport initiatives [8]. Nevertheless, the agreement with Thailand is the first, of what may be several, bilateral carbon credit agreements.  It took the form of a purchase of 1,961 credits from Thailand’s Energy Absolute (Thai Energy Company), which equated to an estimated 1,961 tonnes of carbon being bought by Switzerland with the funds used to support the replacement of petrol-fueled buses in Bangkok with electric ones [9]. This, as presented by Mischa Classen, an independent consultant and former director of the Klik Foundation, is based on the fact that Thailand has no policy intervention that would support private bus operators to switch to electric buses, and thus the bilateral agreement addresses this gap t [9].

However, critiques are prevalent concerning the new bilateral agreement. Alliance Sud, a Swiss Charity, presents the argument that the transition from petrol to electricity in Bangkok was already imminent. They indicated that ‘the target transport operator had already been running electric buses in Bangkok before the offsetting scheme began’ [9]. As a result, there has been increased demand to investigate the true incentives for deals occurring and for evaluations as to the credibility of the emission reductions from offsetting schemes [8]. This critique comes as no surprise given the absence of any centralised oversight of credits for carbon trading. As such, there are concerns that the agreement is giving  Switzerland a ‘licence to pollute without funding real climate action’ [7], reinforcing the notion that these deals are merely a form of greenwashing. However, despite efforts from the EU to introduce more stringent oversight of the carbon market, proposals for stringent regulations failed at COP 28 in Dubai [8]. 

These critiques are not limited to the market as a whole.  The project between Switzerland and Thailand is coordinated by South Pole (Swiss Company), which has itself been  ‘mired in controversy’ due to its weak climate ambition as well as its vague modelling of outcomes from the REDD+ (Reducing Emissions from Deforestation and Degradation) [10] project in Zimbabwe [11]. The Swiss firm’s abrupt decision to end its partnership with the  Kariba project in Zimbabwe occurred due to growing criticism and difficulties regarding the project’s integrity and the carbon credits associated with it, with the company (South Pole) denying that it knowingly sold worthless CO2 certificates. SRF’s follow-up research into the Kariba project, conducted in partnership with Die Zeit [12] and Follow the Money [13], published in July 2023, indicated that just a portion of pledged investments in Zimbabwe could be validated on-site [12]. As a result, it is unsurprising that the new bilateral agreement between Switzerland and Thailand is facing an onslaught of criticism [13]. Consequently, the arguments provided by Alliance Sud invite scrutiny, paving the way for questions regarding the weak oversight of the carbon market and Switzerland’s actual contribution to mitigating climate change through carbon emission reductions in this new Bilateral Agreement.

In conclusion, the critique, particularly from Alliance Sud, sheds light on potential pitfalls and greenwashing risks associated with carbon credits and trading and raises essential questions about the efficacy and transparency of such agreements. The controversies surrounding the South Pole further underscore concerns about the lack of oversight and credibility of credits. As the first bilateral carbon transaction materialises, the need for enhanced scrutiny, regulatory measures, and transparency becomes apparent, all of which should prompt stakeholders to reevaluate the true impact and sustainability of carbon credit trading.

References:

[1] Hartmann, T. (2017). How does carbon trading work? [online] World Economic Forum. Available at: https://www.weforum.org/agenda/2017/09/everything-you-need-to-know-about-carbon-trading/. (Accessed 4 February 2024)

[2] European Commission (2023). What is the EU ETS. [online] climate.ec.europa.eu. Available at: https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/what-eu-ets_en. (Accessed 4 February 2024)

[3] Walker, L. (2019). How blockchain will help save the environment. [online] World Economic Forum. Available at: https://www.weforum.org/agenda/2017/09/carbon-currency-blockchain-poseidon-ecosphere/. (Accessed 4 February 2024)

[4] L, J. (2022). The Top 4 Carbon Exchanges for 2023 (Updated). [online] Carbon Credits. Available at: https://carboncredits.com/the-top-4-carbon-exchanges-for-2023/. (Accessed 4 February 2024)

[5] The World Bank (2022). Climate Explainer: Article 6. [online] World Bank. Available at: https://www.worldbank.org/en/news/feature/2022/05/17/what-you-need-to-know-about-article-6-of-the-paris-agreement#:~:text=Article%206%20of%20the%20Paris%20Agreement%20allows%20countries (Accessed 4 February 2024) 

[6] United Nations Climate Change Secretariat (2023). The Paris Agreement. [online] Unfccc.int. Available at: https://unfccc.int/process-and-meetings/the-paris-agreement/article-64-mechanism (Accessed 4 February 2024)

[7] Civillini, M. (2024). First-ever Paris Agreement offsets face integrity questions. [online] Climate Home News. Available at: https://www.climatechangenews.com/2024/01/09/first-ever-paris-agreement-offsets-face-integrity-questions/ (Accessed 4 February 2024)

[8] Keystone-SDA/sb (2022). Government approves carbon-offsetting deal with Thailand. [online] SWI swissinfo.ch. Available at: https://www.swissinfo.ch/eng/politics/government-approves-carbon-offsetting-deal-with-thailand/47646282 (Accessed 4 February 2024)

[9] Stankova, T. (2024). Concerns Raised Over Integrity Of First-Ever Paris Agreement Carbon Credits Deal. [online] Carbon Herald. Available at: https://carbonherald.com/concerns-raised-over-integrity-of-first-ever-paris-agreement-carbon-credits-deal/  (Accessed 4 February 2024)

[10] United Nations Environment Programme (2021). UN-REDD Programme About REDD+. [online] UNREDD Programme. Available at: https://www.un-redd.org/about (Accessed 4 February 2024)

[11] Bradley, S. (2023). Swiss carbon offset giant pulls plug on Zimbabwe project amid allegations. [online] SWI swissinfo.ch. Available at: https://www.swissinfo.ch/eng/sci-tech/swiss-carbon-offset-giant-pulls-plug-zimbabwe-project-amid-forest-protection-allegations/48927908 (Accessed 4 February 2024)

[12] Fischer, T. and Matiashe, F.S. (2023). Klimaschutzprojekt in Simbabwe: Profitiert wird woanders. Die Zeit. [online] 26 Jul. Available at: https://www.zeit.de/2023/32/co2-kompensation-klimaschutzprojekt-simbabwe-kariba-south-pole/komplettansicht  (Accessed 4 February 2024)

[13] Gijzel, T. (2023). Renowned carbon credits project in Zimbabwe has more financial holes than Swiss cheese. [online] Follow the Money – Platform for investigative journalism. Available at: https://www.ftm.eu/articles/renowed-carbon-credit-project-lacks-transparancy?utm_source=twitter&utm_medium=social&utm_campaign=zimbabweeu  (Accessed 4 February 2024)