INTERVIEW: Carbon markets need enhanced global cooperation as trade tensions escalate

Countries need to show greater global cooperation in emissions trading and be more flexible in using carbon credits in their compliance markets as US tariffs usher an era of turbulence in global trade, according to International Emissions Trading Association President Dirk Forrister.

In an interview with Platts, Forrister said that linking "cost containment" to carbon pricing and climate action is the way forward for governments, especially as geopolitical and economic uncertainties are hampering the energy transition.

"I think it's going to be important for policymakers to explain to the public that they are achieving high ambitions at the least cost and ensuring they tie climate progress to affordability," he said in an interview during IETA's European Climate Summit in Lisbon, Portugal.

Forrister explained that countries will need to seriously consider using offsets in their national and regional carbon trading systems to help drive down costs while accelerating the green transition.

"There's a recognition that some of the international markets in development are going to recognize credits in those domestic systems like Singapore and South Korea," Forrister said. "If they are able to do that, should European industry have access to that same market for cost mitigation? That is another topic that comes up."

Article 6-ETS integration

This comes as the EU and some other countries with developed emissions trading systems are considering allowing the use of international carbon offsets, such as those under Article 6 of the Paris Agreement, to achieve their climate goals.

"How do you involve international credits in your ETS to mitigate some of that cost impact and make friends along the way?" Forrister said.

"You could do that in collaboration with project developers that work globally and can help reduce emissions in developing countries at a project level that those countries will not have the resources to achieve themselves. So, a market and a market incentive at a policy level can really help to deliver the affordability that consumers are going to want," he added.

EU member states stopped using offsets to meet their climate goals under the EU ETS post-2020. The decision was made after questions emerged about the integrity of offsets under the UN's Clean Development Mechanism outlined in the Kyoto Protocol, leading to very low prices for EU allowances.

However, since the landmark decision to finalize the key rules and guidelines for international carbon trading under Article 6 of the Paris Agreement, activity under both Article 6.2 and Article 6.4 has picked up. Article 6 of the Paris Agreement enables countries to transfer carbon credits earned from eligible domestic projects to other countries, helping them meet their climate targets.

The UK is currently seeking to integrate carbon credits from greenhouse gas removals or carbon removals in its emissions trading scheme by 2028. The move is part of the UK's broader strategy to scale up technologies such as bioenergy with carbon capture and storage and direct air capture as it strives to meet its net-zero goals.

Removal credits, which represent the actual removal of CO2 from the atmosphere, differ fundamentally from traditional carbon offsets and from carbon allowances.

Wide price gaps

Forrister urged both developed and developing economies to allow the use of offsets.

"The challenge is that not enough compliance systems recognize credits in their systems. That is why we are urging the EU, UK, and Japan, along with some of the major OECD countries, to outline their plans for how they will use them or allow for their use against domestic targets," he said.

There is a significant gap in global carbon prices, particularly between compliance carbon markets and carbon credits.

Carbon permits in emissions trading systems tend to be far more expensive than offsets, and Forrister stated that incorporating more offsets in ETSes could help bring down carbon costs.

Platts, part of S&P Global Commodity Insights, assessed UK carbon prices under the UK ETS, known as UK Allowances, at GBP41.59/mtCO2e ($53.09/mtCO2e) on April 7.

Platts CEC, which reflects credits eligible under the first phase of CORSIA, was assessed at a record high of $20.75/mtCO2e on April 8.