The carbon market has existed in one form or another since the early 1990s. However, COP27 and discussions surrounding Article 6 of the Paris Agreement are sure to solidify a new, more refined carbon market, one which is designed to involve both the private sector and governments in achieving their climate-action goals. Meanwhile, as the focus on carbon markets increases, experts agree that the voluntary carbon market holds great promise as a means of financing sustainable infrastructure in developing nations. Funds from the private sector would go a long way in leapfrogging the industry technologies of developing nations toward a more sustainable future.
As the rest of humanity watches, leaders across the world are gathering yet again for the annual Conference of the Parties – COP27. This year’s summit, which is running from November 6 to November 18 in Sharm el Sheikh, Egypt, has a number of focuses, namely financing solutions for emissions reductions, as well as mitigating the emissions output of countries and their associated industries.
Taking centre stage for many of these conversations will be the carbon market, more specifically, the newly developed carbon market scheme prepared under Article 6 of the Paris Agreement. Within this new scheme, both countries and companies can engage in carbon credit transactions to mitigate their own emissions outputs. In effect, the scheme provides a much-required avenue for both the government and private sector to collaborate effectively in achieving their net-zero and emissions reductions goals.
Furthermore, with increased attention on global carbon markets, the voluntary carbon market (VCM) is showing promise as a development mechanism for impoverished countries. Through the use of the VCM, much-required sustainability-focused funds can be allocated towards impoverished locations across the globe.
But before we can have a discussion on what article 6 means for the future of carbon markets, there needs to be a common understanding of the associated vocabulary, so what exactly are we talking about when we say “carbon market” and “carbon credits”?
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What Are Carbon Credits?
As established under Article 6 of the Paris Agreement, carbon credits are defined as verified and measured reductions in emissions that are achieved by accredited climate-action projects. Before a project is accredited, they must seek approval from their host country party, then make an application to what is known as the Supervisory Body; a collection of 12 members specially chosen from the parties of the Paris Agreement. Once the project has been approved, the Supervisory Body generates the carbon credits. These credits can then be sold to companies, countries, and even individuals so that they can meet their emissions reductions goals in accordance with the Paris Agreement.
For more information on carbon credits, check out this next: What are Carbon Credits and How Do They Work?
What Does Article 6 Entail?
In a nutshell, article 6 of the Paris Agreement describes the means by which countries and companies will be able to voluntarily cooperate with one another to achieve their Nationally Determined Contributions (NDCs), a set of climate-action goals that each party of the Paris Agreement is required to submit and improve upon every five years.
Within article 6 (specifically 6.2), it is stated that a country is permitted to transfer the carbon credits they earned thourgh carbon emissions reductions in their own country to other countries. Known as Internationally Traded Mitigation Outcomes (ITMO), a country can utilise this bilateral mechanism to sell carbon credits (carbon credits that have become ITMOs) to other countries. However, they must “un-count” their own emissions reductions towards their NDCs once the purchase has been made so as to prevent double-counting.
The fourth paragraph of article 6 (6.4) sets the framework for a multilateral mechanism of carbon credit exchange with the intention of involving the private sector. Using this mechanism, a company from one country can credit their emissions reductions and then sell them to another company in another country. These reductions, in the form of carbon credits can then be used by the purchasing company to meet their own emission-reduction goals, likely set in accordance with their net-zero commitments.
What Are Carbon Markets?
The scientific and legislative jargon associated with carbon credits, especially carbon markets as a whole, is quite complex, making it difficult to decipher and to understand fully. Thankfully, there are experts like Naomi Swickard, the Head of Public Affairs for South Pole – a climate advisory and strategic action firm – available to sift through the technical vocabulary, making it a little easier for the layman to understand what exactly a carbon market is.
“So there has been two major markets – technically there’s more than that – but essentially, there has been two for a number of years.” explained Swickard in an exclusive interview with Earth.Org.
“There was a prior version of the Paris Agreement called the Kyoto Protocol, and under the Kyoto Protocol there was a mechanism called the Clean Development Mechanism or CDM. CDM was the initial international regulatory market, but the CDM was quite slow, and so the voluntary market really cropped up because a lot of companies wanted to go beyond what was regulated under the Kyoto Protocol.”
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As Swickard explained, a standardised, methodological approach was required for these markets, and so the Verified Carbon Standard (VCS) was prepared to ensure that there was a high degree of integrity when determining carbon credit measurements. When the Paris Agreement eventually replaced the Kyoto Protocol, a new market was designed to replace the CDM, under what has been designated Article 6.
“The other trading mechanism is Article 6.4, which will have a crediting mechanism.” said Swickard. “It is essentially CDM 2.0.”
What she is referring to is the Sustainable Development Mechanism (SDM). Under Article 6, the SDM will provide a more robust and demanding framework for participating parties to engage with, while also taking into consideration all previous emissions reductions accomplished under the CDM. “It’s going to leverage a lot of what’s already been done under the CDM, hopefully.” she added.
Potential Issues With Article 6
As ambitious and well-prepared as Article 6 may be, there are still some grey areas of contentious debate that are sure to rear their ugly heads at COP27, namely the issues of double-counting, the wording associated with “overall mitigation of global emissions”, the share of proceeds, and the carryover from the Kyoto mechanism.
Double-counting has become an issue due to corresponding adjustments, which may or may not be required for certain projects. If, for example, credits from an emissions project were purchased by a country, a country may then use those credits towards their NDC’s. However, if no adjustment has been made, the reduction will be counted twice.
“In the accepted view of the market until now, and I think we will likely continue to see this stand, units that are traded between countries need to be adjusted because you can’t count across more than one country.” explained Swickard.
As for the overall mitigation in global emissions (OMGE), it is specified within Article 6.4 that the mechanism is intended to deliver an OMGE. For some countries, this could mean that a portion of the credits produced under Article 6.4 are not used towards any specific party’s NDC’s, rather they are used for a net decrease in emissions.
The share of proceeds discussion arose due to the levy that was placed on carbon trades occurring under the CDM. The levy was intended to be used for administrative purposes, as well as to replenish the Adaptation Fund ( a support fund to assist vulnerable countries with adapting to the impacts of climate change). When the Paris Agreement replaced the Kyoto Protocol, it was explicit in maintaining the share of proceeds levy, but under Article 6.4. The wording was unfortunately unclear as to whether or not the same tax would be applied to trades occurring under Article 6.2.
Lastly, one of the greater sleeping giants awaiting those fighting for the 1.5-degree limit is the problematic result of possibly billions of unused CDM credits. If countries were able to use these credits (which could amount to as much as 4 gigatons of emissions) towards their current NDC’s, achieving the 1.5-degree goal would become even further out of reach.
The Potential of the Voluntary Carbon Market to Assist Developing Countries
One of the main topics being addressed at COP27 is the need to maintain global warming to 1.5 degrees or less, an amount that many experts believe is practically unreachable. In fact, in a recent report by the IPCC, it was found that under all scenarios examined, the Earth will reach the 1.5 degree limit within a decade.
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“While we expect some increased commitments, it’s also really obvious that we need to go beyond the Paris agreement and what governments have committed.” explained Swickard. “In order to do that, we really need the private sector to step up. And one of the key ways that they can do that is through the voluntary market.”
Though the voluntary market isn’t regulated by the Paris Agreement (and therefore isn’t a topic of discussion at COP27), as Swickard elaborates, it does provide a mechanism for the injection of funds from the private sector (i.e companies) towards select, developing locations. This immediate allocation of funds provides a speedier, and sometimes necessary alternative for those countries which may not have the means to make their industries more sustainable.
Furthermore, if the funds are used correctly, they can be put towards a sustainable infrastructure, rather than an infrastructure that supports high-emissions industries.
“Instead of building new coal, You can use this finance to help distribute renewable energy, for example, and avoid the emissions problem from occurring at all while also providing that development advancement.” explained Swickard. “So that’s a fundamental part of what we do at South Pole. We help companies understand what their emissions profile is, how they can reduce it internally, and then how they can use these credits to fund climate action around the world.”
The Carbon Market Is Here to Stay
As the demand for carbon credits increases in the face of growing climate commitments, the carbon market is sure to become a much greater area of focus. Thankfully, last year’s COP26 solidified Article 6, but there is still much work to be done in efficiently utilising this mechanism to reach NDC’s, and to avoid the 1.5-degree limit.
For developing countries, the private-sector funds made available through the voluntary carbon market mechanism could be a game changer, not only for the well-being of their people, but in involving them in the climate-action agenda. With every country doing their part, it may be possible to avert worsening climate-change related disasters in the near future, while also building sustainable infrastructure from the ground up.
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