Let’s get practical: Will 2021 mark a shift from theory to field testing for international carbon markets under Paris?

What 2021 holds in store for the new carbon markets under Article 6 of the Paris Agreement remains to be seen – especially given the continued onslaught of the COVID-19 pandemic. However, countries and stakeholders are already moving beyond conceptual and abstract discussions. They are starting to work together to test Article 6 on the ground.

International carbon markets have been around for a while, and we know that they can help to lower the global cost of achieving countries’ mitigation targets and thereby boost ambition. We also know that engaging in carbon markets can support countries in identifying low-cost abatement opportunities and encourage international collaboration to share knowledge, build capacities, and diffuse low-carbon technologies.

How exactly can Article 6 play out in practice?

However, while the Paris Agreement has sparked new life into international emissions trading, what we do not know is how exactly Article 6 will play out in practice. First, the Paris Agreement does not require countries to adopt a standardized framework for climate action, instead of allowing them to establish their own national climate measures and targets in their Nationally Determined Contributions (NDCs). While this bottom-up model was necessary to woo critical endorsers to the climate pact, it complicates efforts to design cooperative approaches across country borders.

Adding to this, four years after the Paris Agreement was signed, the guidelines for the operationalization of Article 6 (the “Article 6 Rulebook”) have not yet been finalized. But these complications haven’t stopped countries and stakeholders from getting ahead of the game and testing the proposed rules from the ongoing UNFCCC negotiations.

Article 6 pilot activities in a number of countries

Our latest publication – Article 6 Piloting: State of Play and Stakeholder Experiences – captures the dynamic landscape of the current Article 6 scene. Our study revealed the following takeaways: 

Early adopters have been eager to explore the new carbon market rules and have developed Article 6 pilot activities. For example, the Swedish Energy Agency (SEA) has been pursuing pilot activities in different countries that range from early exploration of mitigation program opportunities to designing cooperation activities and formalizing political commitment. One of SEA’s most advanced activities is a project that aims to promote electricity from non-conventional renewable energy sources in Chile. The Chilean government has already signed a letter of commitment to the project. If implemented, the project will help foster the development of biogas, methane recovery, and flaring technologies in Chile.

Another example is the Swiss KliK Foundation, which recently signed the world’s first implementation agreement for Article 6 cooperation with Peru. The Swiss-Peruvian bilateral agreement represents an important milestone as it offers a first glimpse into what an Article 6 agreement would entail (such as criteria for ensuring the environmental integrity and sustainable development of mitigation outcomes as well as the process to authorize and account for transfers made between Peru and Switzerland). These are big steps! Shifting to piloting Article 6 helps countries to better understand the opportunities for Article 6 cooperation and assess the needed capacities. Preparing for cooperation now will kick-start mitigation collaboration once Article 6 guidance is in place. At the same time, Article 6 pilots generate important insights into how the UNFCCC rules will play out in real life. These insights can inform negotiators and create a feedback loop to strengthen the design of the system.

Article 6 ‘enabling’ initiatives set up to help countries overcome barriers

On this basis, another important observation we’ve made is the proliferation of Article 6 supporting or ‘enabling’ initiatives that are increasingly being developed to help countries to overcome barriers, build their capacities and establish the necessary frameworks and structures to implement these pilot activities. While the idea of emissions trading may seem straightforward, Article 6 participation requires institutional frameworks and infrastructures that can support mitigation activities, enable the transactions of mitigation outcomes and ensure that all of this is done without preventing seller countries from achieving their own NDC goals.

While the list of initiatives is extensive, some key examples include two alliances on carbon markets and climate finance that have been formed in West and Eastern Africa. Both alliances are working to foster sub-regional and national cooperation and to enhance readiness for the implementation of the new carbon market mechanisms. Another interesting initiative is the voluntary Climate Market Club initiated by the World Bank. Expected to include about 15 countries, the Club will support them in piloting Article 6 and facilitate the exchange of experiences, insights, and lessons learned from carbon market engagement. While the West and Eastern Africa alliances have been active longer, the Climate Market Club is just kick-starting its efforts.

One missing jigsaw piece to be added at COP26: the final Article 6 rulebook

In summary, it is clear that there is significant determination to roll out Article 6 activities and to establish the proper enabling environment to drive piloting efforts forward. But, to tie all of this effort together, what we need now is the crucial yet missing jigsaw piece: the finalization of the actual Article 6 Rulebook. COVID-19 flipped the Article 6 agenda upside down, forcing COP26 to be postponed into 2021. But in Glasgow at the end of this year, negotiators must finally deliver the guidance that countries are counting on. In the meantime, we must keep up the momentum of Article 6 readiness and piloting. With this drive toward operationalization, we may push Parties to produce at last what we’ve all been waiting for: a solid, all-encompassing, fair, and environmentally sound new carbon market framework that is not just made up by piecemeal bilateral activities but is the result of a multilateral effort.