The new context of the Paris Agreement - particularly the universal commitment to regularly make increasingly ambitious contributions towards the global effort - present new challenges for carbon market stakeholders, especially for host countries. This guide proposes a number of considerations which countries hosting emission reduction activities should take into account when engaging in carbon markets under the Paris Agreement. It looks especially at how carbon market engagement relates to other aspects of national climate policy making and the fulfilment of commitments under the Paris regime. The report further explores a number of issues meant to support decision making for considerations to achieve overall mitigation in global emissions and the choice between engagement through Article 6.4 and Article 6.2.
Article 6 of the Paris Agreement provides countries with a framework for cooperation in their efforts to limit climate change, including through the use of internationally transferred mitigation outcomes (ITMOs) towards achieving their Nationally Determined Contributions (NDCs). An important difference between Article 6 approaches and market mechanisms under the Kyoto Protocol is that under the Paris Agreement, all countries have emission reduction targets in the form of NDCs. These contributions are supposed to reflect countries’ highest possible ambition (Article 4.3), and countries are to update and ratchet up the ambition of their contributions at least every five years (Article 4.9). Accordingly, every emission reduction sold and transferred to another country, makes it harder for host countries to meet both their current NDC and future NDCs. Therefore, before engaging in Article 6, a host country should carefully assess its own situation to ensure that the export of an ITMO undermines neither the achievement of the current NDC nor future NDC ambition.
Although at the time of writing, the exact guidance, rules, modalities, and procedures for engagement through Article 6 remain the subject of ongoing negotiations, host countries should understand their overall rationale for engaging in Article 6 activities prior to any engagement regardless of what the exact rules may be in the end. Reasons to engage in Article 6 include revenue generation, technology transfer, capacity building, financing high-cost measures, and generating sustainable development co-benefits.
Engagement also means making corresponding adjustments which will require reductions elsewhere to achieve the host country’s NDC. In order to have a solid basis on which to make an informed decision regarding individual projects, countries should ideally have:
- A recent and accurate GHG inventory;
- A clearly formulated NDC that can be compared to inventory levels and accounted for;
- A long-term strategy outlining the country’s plan for decarbonisation towards 2050; and
- The institutional framework for overseeing Article 6 activities.
Potential host countries should carefully weigh the potential costs and benefits of engagement to make sure that Article 6 lives up to its purported goals of ensuring environmental integrity, promoting ambition and sustainable development. This paper is meant to provide insight into this process.