COP21 Paris Agreement and the carbon markets resurgence

Published on Monday, 23 May 2016

Published by Virender K. Duggal on Monday, 23 May 2016

A technician working at the 73-megawatt Lopburi solar power plant in Thailand.
A technician working at the 73-megawatt Lopburi solar power plant in Thailand.

With 177 countries now having signed the Paris Agreement agreed by 195 countries at COP21 in December 2015, the hard work starts now. And while it may not have been so apparent at the outset, the pact charts a clear path for the resurgence of carbon markets, which may help countries achieve their Nationally Determined Contributions (NDCs) and the nations of the world to collectively keep the global temperature rise below 2°C. 

By allowing countries to use international carbon markets in meeting their greenhouse gas (GHG) emission reduction ambitions, the Paris Agreement also acknowledges the use of market-based instruments as one of the cost-effective solutions to address climate change. 

Here are two key points that are not to be missed, all in Article 6 of the Paris Agreement:  

  • "Cooperative approaches" (paragraph 2)
  • "A new mechanism” to contribute to the mitigation of GHG emissions (paragraph 4)

What does all that mean?

Under paragraph 2, the Paris Agreement allows for countries to voluntarily cooperate to meet their NDCs through the use of "internationally-transferred mitigation outcomes". In short, the agreement allows for GHG emission reductions in one country to be used by another country to help it fulfill its NDC.   

This use and transfer of GHG emission reductions – or mitigation outcomes in the jargon - to other countries as envisaged under cooperative approaches would offer opportunities for the linking of various domestic emission trading schemes (ETS) and creation of regional ETS. The agreement prominently obliges signatories to promote sustainable development and ensure environmental integrity and transparency in using such cooperative approaches.  

Cooperative approaches may well also spur further development of bilateral mechanisms such as the Joint Crediting Mechanism (JCM) promoted by the Government of Japan that may also help host countries in achieving their NDCs while simultaneously increasing the introduction of advanced low carbon technologies and more climate finance.

Meanwhile, paragraph 4 of the Paris Agreement will establish a mechanism by which public and private entities can support GHG emission reductions and sustainable development for example through projects or programs. Details of this new mechanism – along with other rules and procedures – will be laid out at the CMA (Conference of the Parties serving as the meeting of the Parties to the Paris Agreement) – once a sufficient number of countries ratify the agreement and it comes into force.   

The mechanism would be supervised by a body designated by the CMA which will also establish the rules, procedures, and modalities of the new mechanism. The concept of the mechanism to facilitate the transfer of GHG emission reductions is reminiscent of the Clean Development Mechanism (CDM) and the Joint Implementation (JI) for that matter under the Kyoto Protocol, which allowed GHG emission reduction activities to be established in developing countries and the Certified Emission Reductions (CERs) bought and sold on international carbon markets. The new mechanism established under the Paris Agreement will however be different from the CDM notably in that all those ratifying the agreement can use the GHG emission reductions to meet their NDC goals (unlike CDM under which only developed economies need to purchase the CERs) and that any countries can host carbon reducing projects (as opposed to only developing countries under the CDM). Still, the new mechanism will, of course, be able to draw on from the many lessons learned from other mechanisms such as CDM and the JI. While the UNFCCC’ Subsidiary Body for Scientific and Technological Advice meeting in Bonn this month will deliberate over the development of new approaches and mechanism, I hope lessons learned from the CDM/JI as also EU ETS will be taken into consideration in due course.

Moving forward, cooperative approaches and the new mechanism as enshrined in the Paris Agreement will open up opportunities for the global community to work together and generate momentum for market-based instruments and encourage low carbon growth. For sure, the landscape of the carbon markets will be quite different from what we have seen under the Kyoto Protocol. While it is likely to be decentralized, diverse and fragmented, at least initially, economic considerations may facilitate interlinking, where some, if not all, will participate.  

All this, we believe, lays the groundwork for what we expect will be a resurgence of the carbon markets, in a new stronger form and with greater global commitment.