The Future Role of the Carbon Market

July 2018 - On 12th July, GIZ India organised a side event on ‘Emerging Carbon Market Approaches in light of NDC Implementation’. The side event held at the Asia Pacific Climate Week 2018 in Singapore (11th – 13th July 2018) and supported by the Federal Ministry of the Environment, Nature Conservation and Nuclear Safety (BMU) discussed evolving aspects on carbon market approaches in light of the Paris Agreement and its linkages to domestic policies.

The facilitator of the session, Mr. Kundan Burnwal from GIZ India set the context by introducing key components of Article 6, including “cooperative approaches”, “internationally transferred mitigation outcomes” and “mitigation and sustainable development mechanism”. He also highlighted that more than 100 nations that signed the Paris Agreement plan to use market mechanisms and other carbon pricing approaches to implement their ‘nationally determined contributions’ (NDCs). Of these, 19 nations are in the Asia Pacific region. The Indian NDC has set a target of reducing the emission intensity of its GDP by 33-35 per cent until 2030 and that within the suite of choices that India has for implementing its mitigation targets, the role of market mechanisms will be critical.

Mr. Thomas Forth (BMU) deliberated upon the status of negotiations around Article 6 of the Paris Agreement and on what it is that the Article 6 is expected to deliver. He mentioned that the current text provides more as a basis for negotiations rather than a legal text. Mr Forth highlighted the importance of setting up priorities in terms of avoidance of double counting through unique tracking and a registry, overcoming CDM-like thinking, governance and promotion of sustainable development. He further emphasized the need for more standardization and for reducing complexity compared to CDM. In terms of timing he estimates that after the adoption of the Paris rulebook three additional years will be required for establishing reliable market conditions.

Mr. VK Duggal from the ADB highlighted the importance of the three ADB’s  trust funds and their efforts on decoding Article 6 of the Paris Agreement. He highlighted One example is the ADB’s work on the Japan Fund for the Joint Crediting Mechanism (JFJCM), which is a single-donor trust fund established in 2014 and managed by ADB. The fund aims to provide financial incentives for the adoption of advanced low carbon technologies in projects ADB-financed and administered by the ADBsovereign and non-sovereign projects. He highlighted the importance of collective action of MDBs in the light of the Paris Agreement.

Mr. Chandrashekhar Sinha of the World Bank highlighted the World Bank’s products and services on climate markets and carbon pricing. He introduced the World Bank’s Asset Development Facility which can monetise adaptation and mitigation benefits using a Results Based Framework (RBF) window of the World Bank Group. Mr. Sinha emphasized  the relevance of country engagement in the development of the mitigation outcomes (MOs) and outlined a MO generation process that the WB could support. The timeline for the entire process of setting up an asset development facility is anticipated to be 3 years until the end of 2021.

Dr. Axel Michaelowa of Perspectives spoke about environmental integrity and additionality under Article 6 of the PA and its linkages to domestic policies. His presentation emphasized on ‘Why is additionality testing under Article 6 needed? When is a policy instrument additional? And solutions for additionality determination of policies’. He concluded that the issue of additionality under Article 6 needs to be addressed by policymakers and that NDCs can generate hot air which increases the relevance of additionality tests for policy instruments. He proposed that pilot activities will be important to develop proof of concepts and develop additionality testing very carefully.

The session concluded by highlighting that carbon markets are gaining ground under the Paris Agreement and will be an essential tool in helping countries not only to meet their mitigation contributions but also for increasing the ambition of their NDCs.