Carbon market negotiations under the Paris Agreement

BONN, Germany – The world’s climate negotiators recently concluded two weeks of discussions about the next steps for the landmark 2015 Paris Agreement, with carbon market rules high on the agenda.

The annual mid-year climate negotiations are generally held ahead of the annual Conference of the Parties (COP), the top decision-making body for climate negotiations.

The recent COP24, in Katowice, Poland, was heralded by many as a success in multilateralism and diplomacy. It adopted an almost complete set of rules and guidelines supporting implementation of the Paris Agreement. However, the parties did not ultimately reach a consensus on one specific area: the rules for using carbon markets.

These rules are known in the climate jargon as the “Article 6 rules”, after the Paris Agreement article that mandates them. After the inconclusive talks at COP24, negotiators were tasked to come up with a new proposal for the Article 6 rules that could be adopted at the next COP25, in Santiago, Chile, later this year.

At the recent meeting in Bonn, which concluded last week, countries made good progress on technical discussions and came up with a new negotiating text. But disagreements remain about the status of the text and how to take it forwards. This means that there is everything to play for as we move towards COP25.

Here are some key points for understanding why carbon markets matter so much under the Paris Agreement and what the bottlenecks are in the negotiations.

Carbon markets are aimed at lowering the cost of reducing greenhouse gases emissions. Expanding and linking those markets internationally can help further drive down the cost of achieving emission reduction targets, helping to stimulate the needed investments for clean energy transitions.

By agreeing to Article 6 of the Paris Agreement, countries opened the way for a new form of international interaction on carbon markets. Article 6 builds on a long history of market approaches under the Kyoto Protocol, the Paris Agreement’s predecessor.

Article 6 is intended to support countries in enhancing the ambitions of their stated climate actions, known as Nationally Determined Contributions (NDCs), which collectively contribute to the overarching goal of the Paris Agreement: keeping the rise in global average temperatures to well below 2 degrees Celsius and to pursue efforts to limit the temperature increase to 1.5 degrees Celsius. However, the nature of carbon markets means that robust rules are important to ensure that environmental and sustainable development gains are realised. Article 6 introduces two voluntary market-based paths for international co-operation.

Article 6.2 sets out the principles for voluntary co-operative approaches. One country can transfer so-called “internationally transferred mitigation outcomes” (ITMOs) to another country, which can then use them towards its NDC target. These transfers must apply robust and transparent accounting rules to avoid double counting of ITMOs and to ensure environmental integrity. The transfers can take place using various approaches and mechanisms, such as bilateral cooperation programmes between countries, or national or regional emission trading schemes (ETS).

Article 6.4 establishes a mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development, under the oversight of a central UN governance body. Public and private entities can participate in this mechanism if authorised by a country. While the main intention is that emissions reductions from the mechanism will count towards achievement of countries’ NDCs, the mechanism could also be used in other ways. For example, airlines could use credits from the mechanism to comply with the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) of the International Civil Aviation Organization (ICAO). Other companies could use them to count towards carbon neutrality. However, double counting of these emission reductions must be avoided.

Despite the lack of a formal outcome on Article 6 at the recent negotiations in Bonn, countries made substantial progress and had constructive discussions. Differences remain on several issues ahead of COP25, though. For instance, countries have not yet agreed on an accounting system to avoid double counting and other elements needed to prevent potential environmental integrity risks.

The IEA is contributing to the discussions on Article 6 – as well as to the negotiations more broadly – through technical analysis by the joint OECD-IEA Climate Change Expert Group (CCXG). For more than 25 years, the CCXG has been developing and publishing technical papers in consultation with a wide range of countries to inform ongoing climate negotiations.

Through the CCXG, the IEA recently co-published a technical paper that analyses two specific unresolved issues in the negotiations of rules for Article 6 of the Paris Agreement: the accounting system of Article 6.2, and the implications of a potential transition of Kyoto Protocol mechanisms to the Article 6.4 mechanism. The outcomes of the paper were presented at a side event during the Bonn conference and directly informed the negotiations.

The CCXG also convenes two major events per year to promote dialogue among government delegates and experts from developed and developing economies, outside of the formal negotiations. Discussions stretch well beyond carbon markets, also covering the transparency framework of the Paris Agreement and climate finance issues, among others. The next edition of these invitation-only Global Forums on the Environment and Climate Change will be held at the IEA headquarters in Paris on 1-2 October. In addition, the IEA is ramping up its efforts to support countries in implementing and enhancing their NDCs.