Full Article on the relationship between The Paris Agreement and Carbon Markets is available here
The Paris Agreement is often celebrated as a landmark in the global fight against climate change. Its inclusivity and flexibility have fostered unprecedented cooperation, enabling nearly every country to set its own climate targets. Yet, this very flexibility—the bottom-up approach allowing countries to determine their own Nationally Determined Contributions (NDCs)—is also its Achilles’ heel. By permitting a wide range of interpretations, the Agreement risks a fragmented and uneven global response to the climate crisis, with the potential for exploitation and inefficacy in carbon markets. After reflecting on this new information, I see the Paris Agreement as both a significant step forward and a structure that still needs much reform to ensure it delivers on its promises.
The Dual Nature of Flexibility: Progress or Loophole?
The Paris Agreement’s core strength—its flexible NDC framework—was designed to accommodate the political, economic, and environmental diversity of nearly 200 nations. This bottom-up approach was a deliberate departure from the rigid Kyoto Protocol, where only developed nations faced legally binding targets. The Paris model, on the other hand, sought to bring all countries, rich or poor, into the fold, encouraging broader participation in climate action. However, this flexibility also means that nations can set their own ambitions, with varying levels of stringency. This creates significant discrepancies in how countries approach their commitments, with some opting for ambitious goals, while others choose minimal targets, often aligned more with short-term economic interests than with genuine climate action.
For example, developing nations might emphasise their right to economic development, while industrialised nations with historically high emissions may set relatively modest targets under the guise of economic stability. This lack of uniformity threatens the effectiveness of global efforts, as high emitters with weaker NDCs dilute the overall impact of those countries that are striving to make significant emissions reductions.
This double-edged sword of flexibility is especially critical when we examine Article 6, which governs the carbon markets designed to help countries meet their climate targets.
Carbon Markets and Corresponding Adjustments: The Risk of Illusionary Progress
One of the most innovative aspects of the Paris Agreement is its allowance for carbon markets, including mechanisms under Article 6 that enable Internationally Transferred Mitigation Outcomes (ITMOs). The intent is clear: by trading carbon credits, countries can reduce the cost of meeting their NDCs and promote global cooperation. However, the concept of corresponding adjustments (CAs), which is designed to prevent the double counting of emissions reductions, remains a contentious and fragile mechanism.
The main problem lies in the lack of a universal framework for what constitutes a proper CA. Without a clear set of rules, countries could exploit loopholes, leading to multiple claims on the same emissions reductions. This scenario would create a dangerous illusion of progress, where climate goals are seemingly met on paper, but global emissions continue to rise in reality.
The voluntary carbon markets (VCMs) further complicate the situation. While they offer flexibility and private sector engagement, their integration with Article 6 mechanisms is fraught with tension. The hesitance to fully align VCMs with stricter CA requirements may reflect countries’ reluctance to surrender control over their climate strategies. But this reluctance risks creating fragmented and potentially weak carbon markets, undermining the long-term effectiveness of carbon trading.
The Challenge of Additionality and Environmental Integrity
Another critical flaw within the Paris framework is the issue of additionality. Ensuring that carbon offset projects generate emissions reductions beyond what would have occurred under a business-as-usual scenario is fundamental to the integrity of carbon markets. Unfortunately, the lack of a standardised methodology for assessing additionality leaves room for manipulation. Baselines used to define what would have happened without the project are speculative, and projects that don’t deliver real emissions reductions could still generate credits.
This problem is compounded by the Paris Agreement’s decentralised structure. With countries determining their own baselines and targets, there is a risk of inflated projections, where overestimated emissions scenarios generate more credits than justified. We saw this happen under the Kyoto Protocol, and the persistence of this issue under Paris suggests that without robust oversight, additionality could continue to be exploited as a weak point in the system.
Linking Carbon Markets: A Necessary Step, but a Complex Process
One solution to bolster the effectiveness of carbon markets lies in linking them, which would harmonise carbon pricing and create larger, more efficient trading systems. This has already begun, with examples like the European Union linking its Emissions Trading System (ETS) to Norway, Iceland, and Liechtenstein.1 The potential benefits are clear: larger markets can reduce compliance costs, enhance liquidity, and foster international cooperation.
However, linking also presents significant challenges. Harmonising different markets requires stringent Monitoring, Reporting, and Verification (MRV) systems,2 and the success of linkages often hinges on political will and economic alignment. For instance, it took Switzerland nearly a decade to link its ETS with the EU’s,3 largely due to differences in their regulatory frameworks. Furthermore, non-party cooperation, as stipulated by the Paris Agreement’s Article 6, raises questions about how ITMOs can be transferred between countries that may not even be part of the Agreement. For example though the US’ withdrawal from the Paris Agreement was temporary, any ITMO transfers between themselves and a party to the Paris Agreement further complicating potential linkages, as it remains a mystery how such a transfer from non-parties could count towards a parties NDC.4 This is possibly why so many parties have yet to link to the EU ETS.5
Despite these hurdles, linking remains an essential strategy to enhance the transparency and effectiveness of carbon markets. But the complexity of merging different schemes, each with its own rules and baselines, means that progress in this area will likely be slow. Waiting for the Paris Agreement to clarify such instances has not been an option for many States, and instead the development of their own ETS has begun, perhaps due to the benefits of emissions reductions potential that can be granted, of course this on top of the ability to profit from the market. However, some research has noted that linking does not lend itself to environmental integrity and may in fact harm it.6
Toward a Transparent and Effective Climate Framework
The Paris Agreement has undoubtedly been a critical step forward in global climate governance, but its mechanisms, particularly regarding carbon markets and emissions accounting, are vulnerable to exploitation. To prevent the Agreement from becoming a tool for greenwashing rather than genuine climate action, several reforms are essential:
Standardise Carbon Market Mechanisms: A universal framework for corresponding adjustments, additionality, and ITMO transfers is needed to close loopholes and ensure real emissions reductions.
Strengthen MRV Systems: Robust MRV mechanisms must be implemented and harmonised, especially if carbon markets are to be linked across jurisdictions. Transparent reporting and verification will build trust among parties and prevent double counting.
Link Markets Where Feasible: While linking carbon markets presents challenges, it can greatly enhance the efficiency and liquidity of trading systems. More linkages between national ETSs could be key to closing the global ambition gap.
Encourage Ambitious NDCs: Countries should be incentivised to raise the bar on their climate commitments, supported by international financing, capacity building, and technology transfers to developing nations.
Two of the most crucial instruments we have for battling climate change are the Paris Agreement and carbon markets. But both are currently dealing with significant difficulties. Market fragmentation is a major issue for the carbon market. There are too many markets, each with its own set of rules and regulations. Due to this, it is more challenging to develop a truly global market and for States to exchange carbon credits. Linking is a possible remedy to this, as suggested. Although there has been progress, there are still few States that desire to link their carbon markets, and even fewer States that have designed their ETS with linking in mind. Businesses rarely have the chance to exchange carbon credits between each other. This limits the capacity of carbon markets to develop and enhance their efficiency. Thus, I shall conclude by saying the Paris Agreement is a framework with great potential, but its success hinges on rigorous oversight, international cooperation, and a commitment to reform its carbon market mechanisms. We must avoid the temptation to rest on its inclusivity and flexibility and instead ensure that the Agreement serves as a robust, transparent foundation for real climate action.
- European Commission, Emissions trading: Commission announces linkage EU ETS with Norway, Iceland and Liechtenstein (2007) ↩︎
- ibid ↩︎
- Federal Office for the Environment ‘Linking the Swiss and EU emissions trading systems’ (FOEN 2020) ↩︎
- Ling Chen, ‘Are Emissions Trading Schemes a Pathway to Enhancing Transparency under the Paris Agreement?’ (2018) 19 Vermont J’ Env L 306-337, 335 ↩︎
- Gerard Kelly, ‘The Quest for Coherent Climate Governance and the Importance of Linking Emissions Trading Schemes’ (2022) 2 Env L Rev 85-92, 87 ↩︎
- Erik Haites and X Wang, ‘Ensuring The Environmental Effectiveness of Linked Emissions Trading Schemes Over Time’ (2009) 14 Mitigation and Adaptation Strategies for Global Change 465–476, 475-476 ↩︎