Moving towards next generation carbon markets

Moving towards next generation carbon markets

A recently published study Moving Towards Next Generation Carbon Markets: Observations from Article 6 Pilots takes a closer look at the emerging Article 6 Pilot landscape.

Some overarching messages observed are:

  • Article 6 already is real with more than USD 345 million committed to pilot initiatives

  • A diverse set of approaches is being applied, ranging from projects and programmatic initiatives to sector and policy level interventions

  • The initiatives are anticipating Article 6 design elements and differ from the CDM in many respects

While the climate community patiently awaits Article 6 negotiations to be finalized at COP25 in Santiago, Chile at the end of this year, a number of countries and initiatives have turned to piloting and testing the emerging concepts.

Despite the lack of agreement on a rulebook, some governments have allocated some $345 million to around a dozen pilot initiatives designed to be pursued under Article 6. This number is comparatively small but not insignificant considering all this is happening before the rules are put in place.

Figure 1: Article 6 pilot initiatives    Adapted from the study “Landscape of Article 6 Pilots – A closer look at initial cooperative approaches” commissioned by NEFCO and NICA, April 2019

Figure 1: Article 6 pilot initiatives

Adapted from the study “Landscape of Article 6 Pilots – A closer look at initial cooperative approaches” commissioned by NEFCO and NICA, April 2019

At this point, mapping and assessing the pilot landscape can already feed into informing current Article 6 negotiations and help to shape future development and implementation of carbon markets. In contrast to the Kyoto Protocol, which relied on a uniform emissions budget approach for industrialized countries, all countries under the Paris Agreement have adopted national commitments to reduce greenhouse gases but lack a common approach to defining the target.

In addition, the framing of international cooperation under the Paris regime reflects the desire of many Parties to give greater responsibility to the participating countries in designing their cooperative schemes. Other intentions aim to move beyond the crediting of single mitigation projects to transformative and sector-based cooperation, and to redefine international cooperation as a tool to enhance mitigation ambition. Countries therefore need to create workable solutions for preventing the heightened risk of double counting of mitigation outcomes between Parties and for ensuring environmental integrity in the context of heterogeneous mitigation targets.

Our analysis of the role of governments in Article 6 transactions shows that diversified contractual structures for ITMO transfer agreements emerge. At the same time, all pilots seek to avoid double counting of mitigation outcomes and often seek to enhance the current ambition of NDCs.

While sustainable development features prominently in the Paris Agreement and in the agenda of the Article 6 negotiations, early indications from the Katowice texts suggest that the operationalization of the concept may not differ much from how it was operationalized under the CDM. Yet, with notable exceptions, sustainable development is a clear focus of many of today’s pilot activities.

All-in-all, market-based policy instruments are not an objective in themselves, but are key to deliver on the ambition of the Paris Agreement, by enabling NDC implementation and increased stringency of NDC targets over time. Rapid progress is urgently needed in both the finalization of the multilateral rules for Article 6, as well as the development of practical initiatives such as those featured in this study.

The key aspects of pilots are how they tackle and define government responsibilities, connect transactions with NDCs, account and track ITMOs, establish a baseline and related methodologies, test additionality, implement safeguards to ensure sustainable development and ensure an overall contribution to global mitigation.