Author: Jessica Garcia

I am grateful to have had the opportunity to speak with Alex Hanafi to gain insight into the ongoing conversations around Article 6 of the Paris Climate Agreement. We discussed two of the overarching market mechanisms being negotiated and why there is still hope in Paris’s capabilities even if a rulebook for Article 6 cannot be finalized at the next Conference of the Parties (COP) in November 2021.

Alex is the Director for Multilateral Climate Strategy and Lead Counsel at the Environmental Defense Fund and has engaged in many past international climate change negotiations.

What you need to know about Article 6 is that it is the carbon market section of the Paris Climate Agreement, even though you will not find that term used. As Alex articulated, “Words matter in negotiations. Which is why ‘markets’ is not used. There were a few countries who are politically or ideologically opposed to the word ‘markets.’ One example is Bolivia. Markets are in the Paris agreement, but the words are not.”

As Alex described it, “There are three groups: 1. Groups that want market-based tools for countries to use voluntarily. 2. Countries that are ambivalent. 3. Countries opposed to market-based tools in agreement and wanted to focus on non-market-based approaches.” What Article 6 has been able to do is appeal to all groups by having a platter of options that allowed agreement by Parties. Non-market mechanism are also included in Article 6.8, but we focused our conversation around Article’s 6.2 and 6.4.

Article 6.2 is the voluntary cooperation portion which gives freedom for countries to act bilaterally or multilaterally in setting up the two major forms of carbon markets: emissions trading systems (ETS) or offsetting projects. There is nothing in 6.2 that prevents countries from cooperating with each other right now. Finalizing 6.2 just solidifies the responsibilities which will fall more on the countries themselves. It will be up to them to act consistently with those agreements, with or without 6.2.

The advantage of 6.2 is that it can occur without the rulebook finalized. “Cooperative climate actions (voluntary cooperation i.e. carbon markets), can exist without centralization (UN run mechanisms and UN consensus). They can be more nimble and develop faster.” Said Alex.

Unlike with 6.2, for countries to use Article 6.4 an agreement does need to be met at the next COP. 6.4 is the centralized mechanism for carbon markets under Paris. Centralization means that countries cannot do anything until there is a UN body established for reporting and verification and a framework established for consistency and transparency. The centralized mechanism in 6.4 will be the biggest opportunity loss for international carbon markets if the Article 6 rulebook isn’t agreed upon. Those who hope to rely on a centralized system, primarily small developing countries with limited resources and capacity, will lose out.

Despite the frustrations around continued negotiations of Article 6, hope should not be lost that the Paris Agreement will be held up by decisions or lack thereof in Article 6. Alex emphasized, “Paris goes on whether Article 6 gets agreed upon or not. Countries have committed to Nationally Determined Contributions (NDCs). Article 6 is a tool in the toolbox to meet their NDCs. They are still obligated to meet NDCs in whatever way they can. Article 6 could simply be a driver of ambition, because it can help them go faster and further than doing it alone.” In other words, it would benefit all parties to Paris to come together in agreement on the opportunities for carbon markets in Article 6. However, we should not expect the system to fall apart even if Article 6 is not hashed out.

The Paris Climate Agreement may not be able to deploy as rapidly without all the mechanisms finalized from Article 6, but it will continue to be the backbone of global climate action for the next few decades.

Access to the latest climate change science and policy is not just for the select few working in that space anymore. Climate change and its global impacts are no longer a small, niche area and carbon pricing is now a unifying language, but one that has not been straightened out yet. However, if more transparency and clarity can be added then consistency in carbon crediting will follow as will the resulting mitigation benefits.

Climate Week New York City is a big deal for environmentalists coming together to tackle the global climate crisis. Even more so this year given that the UNFCCC Conference of the Parties (COP) 26, which was scheduled to take place in December, has been postponed to late 2021. The wonderful upside to the global pandemic is that in many ways it has expanded accessibility to events, such as Climate Week NYC, to people like me who benefit from getting to join critical but often exclusive conversations.

I “attended”, virtually that is, two discussions related to carbon pricing. The first was titled: “Emerging Carbon Market Insights – Role of Liquidity & Price Discovery.” The main themes for this event were enticing investors and ensuring that quality carbon credits are available.

There were some questions around what emitters versus investors want in a growing carbon market. Emitters seek some price stability, although they would settle for more clarity. Investors do not want volatility yet are often searching for niche investment opportunities – which carbon is. They may not require stability but do need transparency to make their investments. The process of moving toward a more consistent price on carbon is what “price discovery” is.

To get a project investment-ready is a lot of work on the side of carbon creditors, but it is necessary to get commitments from the private sector. Without more transparency up-front investments may fall away which will dry-up the supply of carbon credits available. Investors are looking for “liquidity”, essentially for the rules of the carbon market to be clear enough and the market big enough that the movement (buying and selling) of carbon credits is free-flowing and easy. By getting through price discovery and having more liquidity in the carbon market the exchanging will be easier to do and more governments and companies will be motivated to participate.

The second virtual event I attended was called: “Getting to Net Zero – Raising the Ambition on Global Climate Action.” The conversation focused on private sector climate ambitions outside of the Paris Agreement. It was mentioned that over 1,500 companies have made net-zero commitments, but that without detailed transition plans and some internal and/or public accountability these commitments lack legitimacy. Despite the message that corporations can and plan to make significant changes over the coming decades the speakers expressed that this cannot be done in isolation. It is important for companies to have their carbon goals be discussed internally across all departments. There is also value in sectors banding together and a need for public policy to support and spur private action.

The speakers at this event mentioned that effective carbon pricing, both internally and externally, needs to be at a price significant enough to compel change in behavior not simply changes in accounting, and that the price needs to rise over time. Interestingly it was also mentioned that nature has a large role to play in meeting net-zero targets. In the short term, nature-based solutions should be leaned on for 2030 goals in conjunction with longer-term systems transitions. Also, that deforestation needs to stop across all value chains by 2030 if anyone is to reach net-zero.

There are three messages these two events had in common. (1) The necessity for some level of consistency in carbon pricing and carbon credit valuation across geographies and sectors. (2) The need for the private sector to take action now around carbon reduction regardless of the outcome of the Paris Agreement’s next iteration. (3) Ambitious climate targets such as net-zero can only be met if public and private sector work within themselves and with each other to create actionable plans that exceed the current Paris targets.