The Paris Agreement and Carbon Markets: A Quick Overview

Note: A long form article of this topic is available here. Feel free to read it for a deeper understanding.

Introduction: From Kyoto to Paris

As the Kyoto Protocol transitioned to the Paris Agreement, one key legacy that has persisted is the establishment of carbon markets. These markets, originally developed under Kyoto, continue to be a crucial tool in global efforts to reduce greenhouse gas (GHG) emissions. While both the Kyoto Protocol and the Paris Agreement aim to cut global GHG emissions to combat climate change, the Paris Agreement sets a more ambitious target: limiting global temperature rise to well below 2°C, with an aspiration of 1.5°C. Unlike Kyoto’s focus on developed countries, the Paris Agreement involves all nations through Nationally Determined Contributions (NDCs), marking a shift from mandatory commitments to voluntary pledges. Carbon markets are central to this evolving climate policy framework; thus, it is important to understand how carbon markets work within the new policy.

Legal Binding and Transparency

The Paris Agreement is a nuanced blend of legally binding and non-binding elements. The binding aspects, often indicated by the term “shall,” mainly pertain to transparency and reporting. Article 13, for example, mandates countries to submit GHG inventories and report on their progress towards implementing their NDCs. This emphasis on transparency aims to build trust and accountability among nations.

The Role of Article 6

At the heart of the Paris Agreement’s market mechanisms lies Article 6, which introduces cooperative approaches and mechanisms for carbon markets. Article 6.2 allows for the transfer of Internationally Transferred Mitigation Outcomes (ITMOs), essentially permitting countries to trade GHG reductions. While ITMOs can take various forms, they most commonly facilitate bilateral trading of emission reductions, akin to Joint Implementation (JI) under Kyoto.

Article 6.4: Sustainable Development Mechanism

To generate carbon credits in the absence of Kyoto’s Clean Development Mechanism (CDM) and JI, Article 6.4 establishes the Sustainable Development Mechanism (SDM). This mechanism ensures that countries can still create and trade emission reduction credits, though it comes with the risk of double counting – where the same emission reduction is counted by both the buyer and the seller. The Paris Agreement’s rulebook addresses this by requiring transparency and adjustments to ensure accurate accounting.

The Scope of NDCs and Double Counting

One of the contentious issues in the implementation of Article 6 is the scope of NDCs. Countries have varied targets, with some focusing on specific GHGs or sectors. For example, China targets only CO2 reductions. This variability raises questions about how to account for emission reductions that fall outside the scope of a country’s NDC. The potential for double counting increases when mitigation outcomes not included in the NDCs are traded.

Despite the challenges, there are clear benefits to allowing the transfer of outside-scope mitigation efforts, such as enhancing capacity building and better emissions data collection. However, these transfers can undermine the Paris Agreement’s objectives by discouraging comprehensive NDCs and risking double counting. Ensuring that these transfers do not lead to inflated global GHG emissions is crucial.

Voluntary Carbon Markets (VCM) Under Paris

Voluntary Carbon Markets (VCMs) have proliferated globally, involving both developed and developing economies. Despite the collapse of the EU’s international credit market, there remains significant activity in VCMs, driven by sectors like financial services. These markets rely on a structured framework involving voluntary standards, standard-setting organizations like the Gold Standard, third-party verification, and independent credit registries to avoid double counting.

The Paris Agreement emphasizes maintaining environmental integrity in these markets, meaning that the credits should genuinely contribute to reducing global emissions. However, defining and ensuring this integrity remains challenging. Governance varies, with public and private sectors often intersecting, leading to a complex landscape of market regulation.

Offsetting and Additionality

Offsetting in VCMs involves balancing emissions by purchasing carbon credits. A key challenge is accurately counting emissions to avoid double counting and ensure credible data. Additionality is crucial here – a project must prove that it results in emissions reductions beyond what would have occurred without the project. Establishing a baseline for comparison and demonstrating actual reductions are essential steps in verifying additionality.

Corresponding Adjustments (CA)

Corresponding Adjustments (CA) are measures to prevent double counting in ITMO transfers. When a country transfers an ITMO, it adjusts its own GHG accounting, deducting the reduction, while the acquiring country adds it. This ensures that only one country claims the reduction. However, the role of CA in VCMs and outside-scope mitigation remains debated. Linking VCMs to the Article 6 framework could enhance accountability and prevent disingenuous NDC achievements.

Financing Emission Reductions and Carbon Neutrality

Various models for CA include linking directly to NDC crediting, non-NDC crediting, and a financing model where the host country owns the mitigation outcomes. The financing model could prevent double counting but limits non-state actors’ ability to claim carbon neutrality. The NDC crediting model appears most robust, allowing for offsetting through the Paris Agreement while maintaining environmental integrity.

Additionality Revisited

Additionality remains a cornerstone of carbon markets, ensuring that emission reduction projects are genuinely beyond business-as-usual scenarios. Establishing a baseline and proving actual reductions are critical. However, ensuring additionality is methodologically and politically challenging, especially given the Paris Agreement’s bottom-up approach.

Conclusion

The Paris Agreement represents a significant evolution from the Kyoto Protocol, emphasizing broad participation and flexibility through NDCs and market mechanisms like those in Article 6. While these mechanisms offer potential for robust carbon markets and global emission reductions, challenges like double counting, additionality, and the scope of NDCs must be carefully managed. As countries navigate these complexities, the success of the Paris Agreement will depend on maintaining transparency, integrity, and ambition in climate action.