Scaling Article 6 carbon markets

Executive summary

The Paris Agreement stands as a pivotal opportunity to accelerate climate action. Yet it is falling short of its potential. Article 6 is designed to address the key aims of the Paris Agreement: mobilising capital to increase country ambition and accelerating action towards net zero.

Scaling Article 6 markets requires a comprehensive understanding of previous market building attempts, notability the experiences of the Clean Development Mechanism (CDM). It must also learn from established financial markets and experienced practitioners. 

Lessons learned:

1. The market needs government participation. 

Governments need to signal support and purchase Article 6 credits. The overreliance of the CDM on the EU Emissions Trading Scheme (ETS)  led to an insufficient and unsustainable source of demand. 

2. Countries need to build on the UN framework to create a viable international market.

The Article 6 framework needs to be enhanced through domestic legislation and appropriate market infrastructure. To mitigate the quality challenges experienced during the CDM era, governments need to set their own standards and criteria for credits traded.

3. The market needs a simple and clear framework that enables public and private sector involvement. 

A complex and overly technical framework will act as a barrier for actors to enter the market. The top-down approach of the CDM enabled governments to quickly enter the market.

4. The market should be positioned as a positive climate story - central to meeting the Paris Agreement. 

Article 6 is by nature a technical topic. Communications need to highlight the bigger picture - how Article 6 is crucial to meeting the 2 degrees target set out in the Paris Agreement. 

Building blocks to scale Article 6:

1. Public markets require public information disclosure.

Confidentiality provisions within Article 6 must be narrowly defined and governments must commit to greater public disclosure in the market.

2. Markets need oversight to build trust.

Lack of oversight, particularly on Article 6.2, risks undermining trust. Developments from the VCM could help to address this, such as the use of threshold standards, like the Core Carbon Principles, or third-party oversight. 

3. Efficient markets are built on effective price mechanisms:

Project developers must be incentivised to produce high quality projects. Innovations, such as carbon credit ratings can help to ensure the quality of ITMOs is reflected in the price

4. The market must be attractive to investors to deliver scale.

A6.4 may struggle to attract the levels of investment necessary for meaningful climate action unless the process for authorisation is clarified and provisions such as project revocation are narrowly defined.