Carbon markets under the Paris Agreement
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“Under the market mechanisms of Article 6 (i.e. of The Paris Agreement), countries that exceed their emissions reduction targets would be able to sell their excess reductions as credits to other countries that have failed to meet their targets. “ (time.com)
In simple words, carbon markets are trading systems in which carbon credits are bought and sold, where one carbon credit is the equivalent of one ton of carbon dioxide. There are two types of carbon markets on the international market: voluntary and compliance.
The compliance market was created on the demand of industrialized countries with mandatory emission reduction targets. This type of carbon market falls under the regulations of the Paris Agreement and Kyoto Protocol.
”One type of compliance market that many people will have heard of are emissions trading systems (ETS). Operating on a “cap-and-trade” principle, regulated businesses – or countries, as in the case of the European Union’s ETS – are issued emission/pollution permits, or allowances by governments (which add up to a total maximum, or capped, amount). Polluters that exceed their permitted emissions must buy permits from others with permits available for sale.” (climatepromise.undp.org)
Another example of the compliance carbon market is the Clean Development Mechanism (CDM), adopted in 1997 under the Kyoto Protocol. The CDM went under further regulations at the Glasgow Conference (COP26), where three-quarters of nations submitted their revised national climate strategies as agreed under the Paris Agreement.
Article 6 of the Paris Agreement has been revised and split into 2 articles – Article 6.2 and Article 6.4, each of the two representing a different market mechanism.
Article 6.2
This new article sets up a carbon market ”which allows countries to sell any extra emission reductions they have achieved compared to their target” (carbonmarketwatch.org). The carbon credits resulting from selling extra emission reductions are called Internationally Transferred Mitigation Outcomes (ITMOs). This system allows countries to create bilateral agreements, which means that there is no specific institution or group to control the market, resulting in a possible lack of transparency.
Article 6.4
Also known as Sustainable Development Mechanism (SDM), this carbon market resembles CDM, the only difference being that it is not restricted to projects started in developing countries. In this case, entities will develop emission reduction projects in a country and be able to sell these emission predictions to a country, company, or person.
Of course, even if there are regulations and compliance to follow, challenges may arise concerning carbon markets. Maybe the one that stands out the most is related to transparency in the financial and institutional infrastructure of carbon market transactions. Although the Paris Agreement and its rulebook try to regulate that aspect, countries might not totally respect human rights in their CDM, or even double count the GHG emissions reduction.
