Article 6 of the Paris Agreement enables the signatory states to cooperate in mitigating climate change. However, the market mechanism can also create false incentives, for example if host countries set less ambitious targets for themselves in order to be able to sell more internationally transferred mitigation outcomes (ITMO). Together with an international research team, INFRAS developed four approaches to counter this phenomenon.
The Paris Agreement enables its parties to cooperate in mitigating climate change. Article 6 forms the basis for nations to cooperate in reaching their nationally determined climate protection contributions (Nationally Determined Contributions, NDC). In this sense, a host country can realize climate mitigation measures and sell the attained reduction amounts to an acquiring country as an internationally transferred mitigation outcome (ITMO). The acquiring country can then deduct these transferred ITMO from its own nationally determined contribution.
However, this instrument – explicitly designed to increase ambition – might possibly set false incentives: instead of settling on more ambitious climate protection targets, some individual countries might be tempted to monetarize their emission reductions and to sell them to other signatory states. In this sense, host countries might have an incentive not to increase their own nationally determined contributions (NDC) on a regular basis. However, the continual progress in ambition level forms a cornerstone of the Paris Agreement.
An international research team working on behalf of the Swedish Energy Agency developed four approaches to avoid perverse incentives under Article 6 of the Paris Agreement and to help to increase the ambitions of parties. The report, written under the lead of INFRAS, provides concrete recommendations as to how the proposed measures can be realized. The authors see a need for action, among other areas, with respect to:
- Acquiring countries: The market mechanisms are quite interesting for highly developed acquiring countries because they can also profit from lower cost measures for reducing emissions in host countries. However, more ambitious domestic targets should encourage the acquiring countries to invest in host countries, which themselves have their own robust targets.
- Reporting: In order to increase ambition, the reporting under the Paris Agreement must attain certain minimum standards with respect to transparency and detail.
- Regulation of market mechanisms in Article 6: The authors propose a number of options for designing and implementing carbon market mechanisms that help host countries maintain their own levels of ambition and to increase them over time.
- Host countries: Less developed countries should be actively supported with resources and capacity to help increasing the effectiveness of their measures.
Even if top-down realization at the international level of all parties would be desirable: most of the developed approaches will first be realized by individual parties or by a “club” of several like-minded parties.
You will find the complete report written on behalf of the Swedish Energy Agency here. This should also serve as general information for the negotiating partners at the UN climate conference (COP 25) in Madrid in December 2019. You can find other reports from INFRAS for scope for design in the framework of Article 6 here.