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The Role of Carbon Markets in the Paris Agreement: Mitigation and Development

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Climate Change and Global Development

Part of the book series: Contributions to Economics ((CE))

Abstract

In its Article 6, the Paris Agreement foresees international cooperation and tasks it with mitigating greenhouse gas emissions, guaranteeing environmental integrity and assuring sustainable development. In its paragraphs, the same article provides for three different systems of international cooperation. The so-called market mechanisms or carbon markets could play a role in two of them.

Article 6 makes it apparent that international cooperation and the use of markets are valid—but not exclusive—approaches in reconciling climate change and (sustainable) economic development. The question is how to align both through the operationalization of market systems. This paper provides first an overview of “carbon markets” within the body of the Paris Agreement. Then, it discusses why and how carbon markets reconcile climate change-related action with (sustainable) economic development. Third and lastly, the paper points at some safeguards in the operationalization of the international cooperation using markets as stipulated in Article 6 of the Paris Agreement. The most important safeguard regards to accounting principles.

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Notes

  1. 1.

    A guide to all relevant aspects of the UNFCCC, the Kyoto Protocol, and the Paris Agreement can be found here: http://bigpicture.unfccc.int.

  2. 2.

    At the time of negotiation and beyond, these contributions were called “intended nationally determined contributions” (INDCs). After the ratification of the Paris Agreement by a country-Party, the contribution is fixed, thus becoming a “nationally determined contribution” (NDC).

  3. 3.

    Ad hoc working group on the Paris Agreement (APA).

  4. 4.

    Article 6 has a highly politicized genesis (see Marcu 2016b). While some Parties opposed the use of the word “market” in the Agreement, others threatened with developing markets outside the scope of the UNFCCC. Finally, it was agreed to create an overall article involving all forms of international cooperation, market-based and not market-based.

  5. 5.

    The Paris Agreement makes it clear that there is no conditionality in the nations’ levels of ambition.

  6. 6.

    A guidance is less technical and less compulsory that rules, modalities, and procedures are.

  7. 7.

    Remembering that it is each Party to the Paris Agreement that defines what its understanding of and policies regarding sustainable development are.

  8. 8.

    There are several other “carbon markets” in place; but those under the Kyoto Protocol are the first—and remained for a long time the sole—international carbon markets.

  9. 9.

    Each of these “carbon markets” has its own unit denomination; but all unit denominations go back to the tCO2e. The units are international emissions trading (IET) that allows countries that have reduced emissions below their targets to sell excess allowances to countries whose emissions exceed their targets. This is also known as a “cap and trade” system. The allowances are known as assigned amount units (AAUs). Joint Implementation (JI) allows countries in the annex to the Protocol to earn emission reduction units (ERUs) through emission reduction or removal projects in other countries. The Clean Development Mechanism (CDM) allows countries to earn certified emission reduction (CER) credits through emissions reduction projects in developing countries.

  10. 10.

    Two anecdotal examples that this author assessed are: In Southeast Asia, a CDM financed project transforming methane from landfills (garbage) into electrical power was regarded skeptically by the local population. As the metropolitan government built net infrastructure making this electricity available for the local community, the attitude changed. The local political leader stated in a private conversation in 2015 “I don’t care for the money, but electricity it’s what we want. Since I have access to this electricity, I have more children in the school, less criminality and even less health-related problems.” In Central Africa, a CDM-financed project substituted coal or wood stoves with lower carbon cook stoves. Around this project, local entrepreneurship developed, for example, selling utensils for the new cook stove or increasing the energy efficiency of other household components (cooling, water). These local entrepreneurs benefit from tax breaks.

  11. 11.

    All of the following are cooperative instruments enabling cooperating parties to increase their ambition, allowing for international transfer of units and allowing transferred ITMOs to adjust or to be counted toward an NDC: Linked ETS, Bilateral Offsetting, Government to Government transfers, Redd+, instruments under article 6. Subnational ETS and domestic policies are not cooperative approaches and do not allow for counting ITMOs toward national NDC.

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Schneider, H. (2019). The Role of Carbon Markets in the Paris Agreement: Mitigation and Development. In: Sequeira, T., Reis, L. (eds) Climate Change and Global Development. Contributions to Economics. Springer, Cham. https://doi.org/10.1007/978-3-030-02662-2_6

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