The context for the operation of carbon markets and the specification of UN guidance is radically different under the Paris Agreement from under the Kyoto Protocol. The Governments of Sweden, Germany and Switzerland are keen promoters of the use of carbon markets for enhancing ambition, subject to rigorous standards on environmental integrity and accounting.
The overall approach of the Paris Agreement is fundamentally decentralized, in that countries may determine their Nationally Determined Contributions (NDCs) and the voluntary cooperation they pursue under Article 6. Some countries are wary of UNFCCC guidance that may limit the choice of actions they are granted under Paris, while others are concerned that safeguards be established for integrity and ambition. The future rules will therefore need to map out and walk a fine line between these positions.
Decentralization brings diversity. This is already seen in relation to NDCs, within which contribution types range from absolute, economy-wide, quantitative targets denominated in greenhouse gas (GHG) emissions and specified for multiple years, through GHG-based intensity targets, to non-GHG outcomes or the definition of policy instruments or project activities. Restraint from prescribing countries’ action has helped deliver a Paris Agreement with prospects of universal participation, but it brings practical problems of transparency, comparability and complexity.
There are two broad areas of diversity which impact on the effectiveness and robustness of carbon markets:
- the diversity of NDCs, not all of which are immediately amenable to the operation of carbon markets. There are opportunities to promote conditions which facilitate the use of carbon markets through the negotiations on NDC features, upfront information, common timeframes, and updating modalities. Also, the elaboration of specific mechanisms by countries offers opportunities to establish conditions that are not included directly in NDCs. For example, when implementing an emissions trading system (ETS), there are opportunities to ensure an appropriate basis for the “corresponding adjustments” under Article 6.2 and sufficient stringency of the emission caps to assure environmental integrity;
- the diversity of specific mechanisms, in particular those that can be expected to emerge under the auspices of Article 6.2. These may differ in the standards they apply and the systems and processes that they use, leading potentially to differences in the internationally transferred mitigation outcomes (ITMOs) themselves and complexities in being able to compare them. Exchange rate systems have been mooted to establish comparability across differences. However, it may also be the case that pragmatism and the twofold desire for fungibility and cost-efficiency will win over at least large portions of the international carbon market, leading to the harmonization or convergence of approaches.
In November 2016, the climate negotiations took place in Marrakesh, Morocco.
The objective of this assignment is to assist the Governments of Sweden, Germany and Switzerland in identifying relevant features and implications of NDCs for carbon markets, including by identifying gaps in current work, and by contributing to the design of market mechanisms and the carbon market architecture.
In particular, the Consortium will help identify and explore issues that would benefit from being specified at the UNFCCC level, help advance their consideration through providing options and recommendations on how to deal with them, and consider how they may be fed into the negotiations.
The work under this assignment will map out and structure the systems and guidance under the Paris Agreement and provide insight in the main negotiation positions on Article 6. The work has been commissioned bySweden, Germany and Switzerland. The Governments of Sweden and Germany are pivotal members of the EU negotiating block in the Article 6 negotiations while Switzerland is a thought leader of the Environmental Integrity Group. They are keen promoters of the use of carbon markets for enhancing ambition, subject to rigorous standards on environmental integrity and accounting. When evaluating options for Article 6 implementation the consortium would do so from the vantage point of countries that are interested in the use carbon markets but want to ensure key principles are respected when committing public or private resources. Among these key principles are environmental integrity and an active contribution from the host country where the mitigation activity takes place.
In parallel to their engagement in the negotiations, the Governments of Sweden, Germany and Switzerland have a long tradition in actively engaging in carbon market transactions, directly and/or through participation in multilateral facilities. Switzerland has indicated reliance on carbon credits from international mechanisms in its INDC and is actively considering the piloting of carbon markets under Article 6. Both Germany and Sweden may be contemplating the use of Article 6 for supporting developing countries in their energy transition.
Clients: Governments of Sweden, Germany and Switzerland
Partners: Climate Focus, Koru Climate (Andrew Howard) and Perspectives Climate Group