Resilience Dispatch #32: Putting Together the Pieces of a Global Carbon Market

Putting together the pieces of a global marketplace for carbon: A crash course on Article 6 of the Paris Agreement 

The carbon markets landscape is getting more complicated. In addition to the voluntary carbon markets (VCM), more and more countries are also developing jurisdictional approaches and national frameworks that can both connect with the VCM and also fit into global constructs, most notably, Article 6 of the Paris Agreement. 

Article 6 of the Paris Agreement outlines a way for countries to voluntarily cooperate to meet greenhouse gas (GHG) emission reduction targets under their national climate strategies. As put by the World Bank, “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.” These are regulated, national level markets working together to ensure the world achieves Paris Agreement emissions reductions goals.  

Voluntary carbon markets (VCM), which have been active for about three decades, generate carbon credits from private sector emissions offset projects. The VCM has exploded in value, quadrupling from $520 million in 2020 to $2 billion in transactions in 2021, according to Ecosystem Marketplace research. It plays an important role in how Article 6 is implemented: all that experience, innovation, and growth, harnessed transparently and with integrity, has potential to substantially enhance country efforts to meet national and international goals using Article 6 of the Paris Agreement. 

Part of what Forest Trends is trying to do is help build the linkages and architecture between voluntary and regulated markets. That includes an ongoing partnership with the US Department of State to support lower income country governments in considering how international carbon markets could enhance their national climate strategies.  

In other words, building the system from the ground up. Since it was passed, responding to Article 6 has been a little like the chicken or the egg: Do we try to create global guidance first for countries to reference? Or should each country create their own according to their climate strategies?  

There is a consensus emerging around the latter approach, including during a webinar hosted by Ecosystem Marketplace on August 16th (link here or below for the full recording). One main takeaway was that in building their national strategies, countries should not wait on outside guidance, partly because enough already exists in the Article 6 rulebook and expertise among market actors is enough to get started.  

To make sure the VCM and regulated markets are complementary, countries need to work in very close partnership with their private sectors, local communities, and other experts to build capacity for a carbon market that works for their country’s unique needs and strategies. Only then will capacity and coherence be built at the global scale.

Another important part of the conversation that needs to remain a top priority is equitably sharing benefits from carbon markets with all, especially local and indigenous communities on the front lines of protecting our landscapes. These communities are also instrumental to carbon project implementation.  

Building a national carbon market strategy that builds on the experience to date with voluntary markets and connecting it to a global framework is an exciting endgame, but a daunting task. This will require collaboration amongst unusual partners. Convening sectors who don’t usually work closely together, like governments, local communities, and the private sector, is our wheelhouse, and our work on Article 6 and the VCM is no different.

We are participating in a set of events at Africa and New York Climate Weeks next month designed to drive action forward. We will share our calendar of events soon. Hope to see you there!

Best,  

Michael

HELPFUL DEFINITIONS 

Nationally Determined Contributions (NDCs): Under the Paris Agreement, starting in 2020, all countries have agreed to reduce their emissions according to the national targets they’ve set for themselves. (source: Conservation International)

Article 6: Article 6 of the Paris Agreement allows countries to voluntarily cooperate with each other to achieve greenhouse gas (GHG) 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. (source: World Bank)

Corresponding adjustments (CA): 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. Article 6 established an accounting mechanism known as “corresponding adjustments” to ensure that double counting does not occur. (source: World Bank)

LINKING VOLUNTARY AND REGULATED CARBON MARKETS  

However countries structure their national carbon markets, they must have a way to plug in to the global framework to ensure their emissions are measured and counted against country-specific climate goals within their Nationally Determined Contributions (NDCs). Voluntary carbon markets (VCM) offer another way to sell carbon credits generated in one country to buyers looking to offset their emissions, either domestically or in another country.

There is debate about whether the VCM must operate in the same framework as Article 6 of the Paris Agreement; at the heart of this discussion is whether these credits must use the same accounting methods. Article 6 established the concept of “corresponding adjustments” to account for and ensure that credits traded globally are only counted once.

As outlined by Kelley Hamrick, Senior Policy Advisor for The Nature Conservancy during Ecosystem Marketplace’s recent webinar, each country has the right to decide how Article 6 will apply to the voluntary carbon projects in their country, and many do not yet have a position on corresponding adjustments (CA). New legislation from Ecuador, Tanzania, the Bahamas, and Papua New Guinea is diverse. Some, like Indonesia, have placed a temporary hold on VCM exports from 2021-2022, with India following a similar approach. Just last week, Kenya granted host communities 40% of the profit generated by land-based carbon projects. For now, none of the major carbon offset standards require a CA, though the Gold Standard has indicated plans to do so in the future.

While building this architecture seems complex, it is most important for governments and their private sectors and local communities to build a carbon market that works for their country and their citizens, and inspires greater ambition to lower emissions globally.

ECOSYSTEM MARKETPLACE INSIGHTS WEBINAR RECORDING + Q&A: ARTICLE 6 OF THE PARIS AGREEMENT AND THE VOLUNTARY CARBON MARKETS 

Access to English and Spanish webinar recordings, slides, and answers to audience Q&A are below. Take a deep dive on how governments are engaging with carbon markets in the context of Article 6 of the Paris Agreement. Speakers included:

• Kelley Hamrick, Senior Policy Advisor, The Nature Conservancy
• Lydia Sheldrake, Director of Policy & Partnerships, VCMI
• Kavya Bajaj, Government Relations Manager, Gold Standard
• Stephen Donofrio, Managing Director, Ecosystem Marketplace (moderator)