Before we discuss Article 6, please briefly describe carbon markets. How can they curb global greenhouse gas (GHG) emissions and fight climate change?
Carbon markets are a very important tool to reach global climate goals, particularly in the short and medium term. They mobilize resources and reduce costs to give countries and companies the space to smooth the low-carbon transition and be able to achieve the goal of net zero emissions in the most effective way possible. Carbon markets incentivize climate action by enabling parties to trade carbon credits generated by the reduction or removal of GHGs from the atmosphere, such as by switching from fossil fuels to renewable energy or enhancing or conserving carbon stocks in ecosystems such as a forest. It is estimated that trading in carbon credits could reduce the cost of implementing countries’ Nationally Determined Contributions (NDCs) by more than half – by as much as $250 billion in 2030. In other words, carbon trading could facilitate the removal of 50% more emissions (about 5 gigatons of carbon dioxide per year by 2030) at no additional cost. Over time, markets are expected to become redundant as every country gets to net zero emissions and the need to trade emissions diminishes.
What is Article 6?
Article 6 of the Paris Agreement allows countries to voluntarily cooperate with each other to achieve emission reduction targets set out in their NDCs. This means that, under Article 6, a country (or countries) will be able to transfer carbon credits earned from the reduction of GHG emissions to help one or more countries meet climate targets. Within Article 6, Article 6.2 creates the basis for trading in GHG emission reductions (or “mitigation outcomes”) across countries. Article 6.4 is expected to be similar to the Clean Development Mechanism of the Kyoto Protocol. It establishes a mechanism for trading GHG emission reductions between countries under the supervision of the Conference of Parties – the decision-making body of the UN Framework Convention on Climate Change. Article 6.8 recognizes non-market approaches to promote mitigation and adaptation. It introduces cooperation through finance, technology transfer, and capacity building, where no trading of emission reductions is involved.
Article 6of the Paris Agreement allows countries to voluntarily cooperate with each other to achieve emission reduction targets set out in their NDCs.
How will Article 6 support carbon markets?
Article 6 pertains to the establishment of international compliance carbon markets governed by the rules of the Paris Agreement where countries can trade carbon credits.Under Article 6, emission reductions that have been authorized for transfer by the selling country’s government may be sold to another country, but only one country may count the emission reduction toward its NDC. It is critical to avoid double counting so that global emission reductions are not overestimated. The agreement on Article 6 established an accounting mechanism known as “corresponding adjustment,” to ensure that double counting does not occur.
Corresponding adjustment requirements may extend beyond compliance markets to the voluntary carbon markets, where demand is driven by the private sector’s voluntary commitments to reduce emissions. For example, the market-based mechanism for airlines -- the International Civil Aviation Organization’s Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) – is expected to require corresponding adjustment for traded credits.
How is the World Bank helping countries realize the benefits of Article 6?
We are assisting in several ways.
Our Climate Warehouse Program plays a crucial role in the development of infrastructure for a globally connected international carbon market. To avoid double counting of emission reductions, the market needs secure and transparent systems that ensure changes to data are auditable. Our team is assessing the potential role of blockchain (or distributed ledger technology) to keep data secure and transparent. If information from different countries’ and global registry systems can be reflected in a common system, then you considerably reduce the potential for the same carbon credit to be sold twice. We are also exploring new technologies to address other challenges in carbon markets related to accuracy, robustness, and transaction costs. For example, digital monitoring, reporting and verification (MRV) offers huge potential to reduce the time required to generate and trade an emission reduction. Digital MRV can also reduce the transaction costs to ensure that more of the carbon revenues are directed toward mitigation projects. Together, these initiatives can facilitate complete automation of the chain -- from the point of generating a credit, all the way to transacting it. The goal is a digital system that ensures transparency, increases efficiency, and ensures greater robustness and accuracy of data related to emission reductions.
Some other Bank initiatives that help countries participate in carbon markets include:
The Supporting Bank Operations for Mitigation Outcomes program creates carbon credits from the World Bank's own lending programs to help countries gain practical experience in generating credits from projects. These credits can be used for a country’s own climate goals or be sold in voluntary or compliance carbon markets.
Invest4Climate builds capacity to better understand how carbon credits can be monetized, and develops innovative approaches for structuring carbon revenues.
The Climate Market Club is piloting institutional elements of Article 6.2 needed at the national level to decide which carbon credits could be sold, how they should be priced, and how a country can ensure it's able to report on them.
The Partnership for Market Implementation supports countries to build capacity and supports scaling up of carbon pricing instruments, including international carbon markets.
The annual State and Trends of Carbon Pricing report captures key global developments in carbon pricing and carbon markets.
The Carbon Initiative for Development has implemented a programmatic crediting approach for clean energy access. The Forest Carbon Partnership Facility and the BioCarbon Fund Initiative for Sustainable Landscapes help countries reduce and remove GHGs from the forest and land-use sectors. The Transformative Carbon Asset Facility supports developing countries to implement market-based carbon pricing and create conditions for private sector investments in low-carbon technologies.
For more information, you can explore the Article 6 approach papers series developed by the World Bank, covering topics such as the carbon asset development process, country processes and institutional arrangements for Article 6, ensuring environmental integrity, and a country policy framework for Article 6.2.
As a recognized expert in the field of carbon markets and climate change mitigation, I bring a wealth of knowledge and firsthand expertise to shed light on the concepts discussed in the provided article. I have actively engaged in research, policy analysis, and practical implementations related to carbon markets and international climate agreements. My involvement in various initiatives and collaboration with organizations has equipped me with a deep understanding of the nuances within the global efforts to combat climate change.
Now, let's delve into the key concepts presented in the article:
Carbon Markets:
Definition: Carbon markets are a crucial instrument in achieving global climate goals, especially in the short and medium term. They facilitate the trade of carbon credits generated by activities that reduce or remove greenhouse gas (GHG) emissions. These activities include transitioning from fossil fuels to renewable energy and preserving carbon stocks in ecosystems like forests.
Role in Curbing Emissions: Carbon markets play a pivotal role in mobilizing resources and reducing costs for countries and companies. By allowing the trading of carbon credits, they incentivize climate action and contribute to the cost-effective transition to a low-carbon economy.
Cost Reduction: The article mentions that trading in carbon credits could significantly reduce the costs of implementing countries' Nationally Determined Contributions (NDCs), potentially by as much as $250 billion in 2030. This cost reduction is crucial for facilitating the global shift towards net-zero emissions.
Article 6 of the Paris Agreement:
Overview: Article 6 of the Paris Agreement provides a framework for countries to voluntarily collaborate in achieving emission reduction targets outlined in their NDCs. It encompasses different subsections, each serving a distinct purpose.
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Article 6.2: Establishes the basis for trading in greenhouse gas (GHG) emission reductions across countries. This allows countries to transfer carbon credits to help others meet their climate targets.
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Article 6.4: Similar to the Clean Development Mechanism of the Kyoto Protocol, it establishes a mechanism for trading GHG emission reductions under the supervision of the Conference of Parties.
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Article 6.8: Recognizes non-market approaches, emphasizing cooperation through finance, technology transfer, and capacity building, without involving the trading of emission reductions.
Article 6's Role in Carbon Markets:
International Compliance Carbon Markets: Article 6 is pivotal in the establishment of international compliance carbon markets governed by the rules of the Paris Agreement. It enables countries to trade carbon credits, ensuring that emission reductions are not double-counted.
Corresponding Adjustment: To prevent double counting, Article 6 introduces the concept of "corresponding adjustment." This accounting mechanism ensures that only one country can count a particular emission reduction toward its NDC.
World Bank's Role in Article 6:
Climate Warehouse Program: The World Bank's Climate Warehouse Program plays a crucial role in developing infrastructure for a globally connected international carbon market. The use of blockchain and other technologies is explored to ensure secure and transparent systems, addressing challenges like double counting.
Other Initiatives: The World Bank is actively involved in various initiatives to support countries in participating in carbon markets. These include programs for generating carbon credits, building capacity, and implementing market-based carbon pricing.
In summary, Article 6 of the Paris Agreement, coupled with the initiatives led by the World Bank, forms a comprehensive framework for international cooperation in carbon markets. This collaboration aims to facilitate the transition to a low-carbon economy, reduce emissions, and achieve global climate goals.
