The UN climate talks that stuttered to a belated and inconclusive close on Sunday in Madrid were undone by a technical issue that turned into a fatal obstacle.

A central task of this year’s talks, known as COP25, was to iron out rules for a new global carbon market—referred to as “Article 6” because it is the sixth article of the Paris climate accord—and create a system that would allow countries to pay each other for projects that reduce emissions.

But the talks, impeded even before they started by the impending withdrawal of the United States from the Paris accord, were haunted by the legacy of old carbon credits created under the 1997 Kyoto protocol.

Most of those credits, which were conceived as a way for rich countries to pay poorer nations for emissions reduction projects, are nearly worthless and their use has been widely discredited. However, the countries that still hold the old credits—mainly China, India and Brazil—have been fighting to have the right to carry them over into the new system.

This battle was central to why the negotiations in Spain failed to produce any deal on carbon markets despite running 44 hours over their allotted time.

“COP25 showed that the yawning gap between what citizens are demanding on climate action, and what UN negotiations are delivering, is wider than ever,” said Nat Keohane, senior vice president at Environmental Defense Fund and an observer to the talks.

Geopolitical tension and the low profile of the U.S. and China, the world’s two biggest emitters, severely handicapped the negotiations, which descended into open bickering on the plenary floor in the final hours. Delegates appeared to be exhausted after all-night negotiating sessions on Friday and Saturday as negotiators tried to salvage a deal.

The Paris climate accord, which aims to limit global warming to well below 2 degrees Celsius, has been signed by 197 countries. But the agreement operates only by consensus, and the original 2015 deal left many details to be worked out in future climate summits—a task that has been made much more complicated by fraying multilateralism and the recent U.S. opposition.

The U.S. is in the process of withdrawing from the Paris accord on the instructions of President Donald Trump. Its withdrawal, and efforts by Brazil and Australia to water down the outcome, all helped lead to a result that many countries said was dismaying.

 “The international community lost an important opportunity to show increased ambition on mitigation, adaptation and finance to tackle the climate crisis,” UN Secretary-General António Guterres said.

The Fight Over Carbon Credits

Environmental groups and countries, including the EU, have argued against carrying over the old carbon credits, because it would leave a new global carbon market awash with cheap credits generated under sometimes dubious circumstances.

Read more about the environmental justice concerns surrounding carbon markets.

Meanwhile, Australia lobbied hard to carry over a second type of credit, which would have allowed it to apply credits it received for overachieving on prior climate goals toward its future targets in 2030.

“If you want this carry-over, it is just cheating,” said Laurence Tubiana, an architect of the Paris accord. “Australia was willing in a way to destroy the whole system, because that is the way to destroy the whole Paris agreement.”

“It is a ghost from the past in some way,” said David Waskow, director of WRI’s climate initiative and an observer at the talks. “When you look at the final text, you can see that the Kyoto carry-over question was where the nub of the final issue lay—that was where things really did not get resolved.”

Around 4.3 billion credits are available under the Kyoto protocols’ Clean Development Mechanism, according to research by the NewClimate Institute, a think-tank in Berlin—more than the annual emissions of the EU. China holds about 60 percent of these, India holds 10 percent, and Brazil 5 percent.

Uncertainty for Carbon Offset Markets

The failure of the Madrid talks to reach an agreement will also create uncertainty for the private carbon-offset markets, which are used by companies and individuals seeking to compensate for their emissions.

A surge of purchases from airlines, including easyJet, has led to a boom in the private markets for carbon offsets, even though there is no single unified standard for them.

“It creates a lot of uncertainty,” said Gilles Dufrasne, policy officer at Carbon Market Watch. He points out that the lack of any global accounting rules for carbon offsets can result in double counting, because the offsets purchased by companies are also counted as emissions reductions in the country where they originate.

A Bigger Challenge for Next Year’s COP

The thorny issue of carbon markets under Article 6 will now be shunted to climate talks in Glasgow next year, which will be hosted by the UK.

“This outcome will make the UK’s job harder next year in terms of the negotiation items,” said Jennifer Tollman, policy adviser at E3G. “The UK has a pretty big lift next year in terms of doing that diplomatic outreach.”

“This isn’t just a rules discussion. This is a money discussion,” she added.

As president of the Glasgow talks, the UK’s job will be to rally more countries to adopt new climate targets for the middle of the century and to pick up the pieces on carbon markets.

Claire Perry O’Neill, the UK-appointed president of next year’s talks, said she welcomed the challenge of sorting out the carbon markets issue.

“No deal is definitely better than the bad deal proposed,” she said, referring to the carbon markets framework discussion. “We will pull no punches next year in getting clarity and certainty for natural carbon markets.”

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