Before we discuss Article 6, please briefly describe carbon markets. How can they curb global greenhouse gas (GHG) emissions and fight climate change?
Carbon markets are a very important tool to reach global climate goals, particularly in the short and medium term. They mobilize resources and reduce costs to give countries and companies the space to smooth the low-carbon transition and be able to achieve the goal of net zero emissions in the most effective way possible. Carbon markets incentivize climate action by enabling parties to trade carbon credits generated by the reduction or removal of GHGs from the atmosphere, such as by switching from fossil fuels to renewable energy or enhancing or conserving carbon stocks in ecosystems such as a forest. It is estimated that trading in carbon credits could reduce the cost of implementing countries’ Nationally Determined Contributions (NDCs) by more than half – by as much as $250 billion by 2030. In other words, carbon trading could facilitate the removal of 50% more emissions (about 5 gigatons of carbon dioxide per year by 2030) at no additional cost. Over time, markets are expected to become redundant as every country gets to net zero emissions and the need to trade emissions diminishes.
What is Article 6?
Article 6 of the Paris Agreement allows countries to voluntarily cooperate with each other to achieve emission reduction targets set out in their NDCs. This means that, under Article 6, a country (or countries) will be able to transfer carbon credits earned from the reduction of GHG emissions to help one or more countries meet climate targets. Within Article 6, Article 6.2 creates the basis for trading in GHG emission reductions (or “mitigation outcomes”) across countries. Article 6.4 is expected to be similar to the Clean Development Mechanism of the Kyoto Protocol. It establishes a mechanism for trading GHG emission reductions between countries under the supervision of the Conference of Parties – the decision-making body of the UN Framework Convention on Climate Change. Article 6.8 recognizes non-market approaches to promote mitigation and adaptation. It introduces cooperation through finance, technology transfer, and capacity building, where no trading of emission reductions is involved.
Article 6 of the Paris Agreement allows countries to voluntarily cooperate with each other to achieve emission reduction targets set out in their NDCs.
How will Article 6 support carbon markets?
Article 6 pertains to the establishment of international compliance carbon markets governed by the rules of the Paris Agreement where countries can trade carbon credits. Under Article 6, emission reductions that have been authorized for transfer by the selling country’s government may be sold to another country, but only one country may count the emission reduction toward its NDC. It is critical to avoid double counting so that global emission reductions are not overestimated. The agreement on Article 6 established an accounting mechanism known as “corresponding adjustment,” to ensure that double counting does not occur.
Corresponding adjustment requirements may extend beyond compliance markets to the voluntary carbon markets, where demand is driven by the private sector’s voluntary commitments to reduce emissions. For example, the market-based mechanism for airlines -- the International Civil Aviation Organization’s Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) – is expected to require corresponding adjustment for traded credits.
How is the World Bank helping countries realize the benefits of Article 6?
We are assisting in several ways.
Our Climate Warehouse Program plays a crucial role in the development of infrastructure for a globally connected international carbon market. To avoid double counting of emission reductions, the market needs secure and transparent systems that ensure changes to data are auditable. Our team is assessing the potential role of blockchain (or distributed ledger technology) to keep data secure and transparent. If information from different countries’ and global registry systems can be reflected in a common system, then you considerably reduce the potential for the same carbon credit to be sold twice. We are also exploring new technologies to address other challenges in carbon markets related to accuracy, robustness, and transaction costs. For example, digital monitoring, reporting and verification (MRV) offers huge potential to reduce the time required to generate and trade an emission reduction. Digital MRV can also reduce the transaction costs to ensure that more of the carbon revenues are directed toward mitigation projects. Together, these initiatives can facilitate complete automation of the chain -- from the point of generating a credit, all the way to transacting it. The goal is a digital system that ensures transparency, increases efficiency, and ensures greater robustness and accuracy of data related to emission reductions.
Some other Bank initiatives that help countries participate in carbon markets include:
The Supporting Bank Operations for Mitigation Outcomes program creates carbon credits from the World Bank's own lending programs to help countries gain practical experience in generating credits from projects. These credits can be used for a country’s own climate goals or be sold in voluntary or compliance carbon markets.
Invest4Climate builds capacity to better understand how carbon credits can be monetized, and develops innovative approaches for structuring carbon revenues.
The Climate Market Club is piloting institutional elements of Article 6.2 needed at the national level to decide which carbon credits could be sold, how they should be priced, and how a country can ensure it's able to report on them.
The Partnership for Market Implementation supports countries to build capacity and supports scaling up of carbon pricing instruments, including international carbon markets.
The annual State and Trends of Carbon Pricing report captures key global developments in carbon pricing and carbon markets.
The Carbon Initiative for Development has implemented a programmatic crediting approach for clean energy access. The Forest Carbon Partnership Facility and the BioCarbon Fund Initiative for Sustainable Landscapes help countries reduce and remove GHGs from the forest and land-use sectors. The Transformative Carbon Asset Facility supports developing countries to implement market-based carbon pricing and create conditions for private sector investments in low-carbon technologies.
For more information, you can explore the Article 6 approach papers series developed by the World Bank, covering topics such as the carbon asset development process, country processes and institutional arrangements for Article 6, ensuring environmental integrity, and a country policy framework for Article 6.2.