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The basis for new international carbon markets

The German government views a functioning global carbon market as a key instrument for international climate action. Market mechanisms create flexibility and make it possible to reduce emissions in areas where savings can be achieved most cost-effectively. In addition, they offer the opportunity to guide private sector investments into more climate-friendly channels, supplementing public financing.

This is why the German government has continuously advocated for carbon market provisions in climate agreements, thereby establishing a long-term, stable price for greenhouse gas emissions. The advocacy has paid off. Article 6 of the Paris Agreement sets out a basis for the establishment of new carbon markets for the period after 2020. The article allows contracting parties of the agreement to pursue voluntary cooperation to allow for higher ambition in their mitigation and adaptation actions and to promote sustainable development. Cooperation mechanisms will be used for this purpose.

Article 6 explicitly defines three options for conducting international cooperation. Under the new agreement, the forthcoming carbon market will include direct bilateral cooperation in the form of cooperative approaches, as set out in Article 6.2, and a sustainable development mechanism, as set out in Article 6.4. Article 6.8 describes an additional, explicitly non-market based option for cooperation. These three very different options meet the needs of all countries for international cooperation options. The mechanisms are open to all countries and are to be used on a voluntary basis.

Direct bilateral cooperation: Article 6.2

One option is direct bilateral cooperation under Article 6.2 of the Paris Agreement. In this form of cooperation, mitigation actions can be implemented in one country and the resulting mitigation outcomes can be transferred to another country and count towards its nationally determined contributions. This requires transparency and accurate accounting of mitigation outcomes. The aim is to prevent double counting of emissions reductions – for example, counting reductions toward the contribution of the country where mitigation actions are implemented and toward the contribution of the country to which they are transferred.

Article 6.2 therefore could function as a framework for linking various national or regional instruments such as the EU emissions trading system to similar systems, thereby creating a common, transnational carbon market. There will be no international supervision for this kind of cooperation; however common guidelines for the application of Article 6.2 should be agreed.

It is important to emphasise that this form of cooperation should not undermine the environmental integrity of the overall system but should instead help raise the level of ambition in climate action.

Sustainable Development Mechanism: Article 6.4

Another option is the use of the newly created "mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development" (Article 6.4). In contrast to direct bilateral cooperation, this mechanism is to be supervised by an international body. In carrying out activities under Article 6.4, common rules, approaches and procedures must be applied. This is to ensure that the design and implementation of climate action and the monitoring of outcomes occur under uniform provisions. As in the bilateral cooperation defined in Article 6.2, mitigation outcomes achieved through this mechanism via emission reductions in one country can be transferred to another country and counted toward that country's nationally determined contribution. A special feature of this mechanism is its aim to facilitate private entity participation in mitigation actions. Appropriate incentives are to be established at international level for this purpose.

The path to 2020

The Paris Agreement and the accompanying decision of the conference of the parties already contain initial, general principles for formulating and applying the instruments defined in Article 6. Based on this, rules and practices must be developed that will make it possible to begin using these mechanisms in 2020. COP22 in Marrakech in November 2016 is the next stage in the formulation of these rules. The parties to the agreement will negotiate how the principles set out in Paris are to be understood. In advance of this round of negotiations, the parties and the registered observer organisations had the opportunity to make submissions to the UNFCCC Secretariat formulating their expectations for the mechanisms. The Wuppertal Institute conducted an analysis of these submissions on behalf of the BMUB. This analysis is available on the Carbon Mechanisms website as a JIKO Policy Brief.