Energy Insight from Bassam Fattouh & Andrea Maino, OIES.
Article 6 of the Paris Agreement recognizes the role of collaboration in countries’ efforts to implement their NDCs and to enable them to enhance their climate ambitions by increasing efficiency gains and lowering the marginal cost of abatement (Yu et al., 2021) and to promote sustainable development and environmental integrity (ADB, 2020).
Particularly, Article 6 establishes cooperative approaches in the form of a bottom-up bilateral or multilateral agreements (Article 6.2) and a centralized mechanism (Article 6.4) whereby countries can agree to trade ‘emission reductions’ or ‘mitigation outcomes’ (terms explained below) to meet their NDCs as long as a robust accounting framework is applied. By doing so, it formally establishes international carbon markets within the perimeter of the PA as essential towards meeting the PA goals (ADB, 2020).
Carbon markets exist in two forms. In compliance markets, regulated entities obtain and surrender emission permits (known as allowances) or offsets in order to comply with an imposed regulation or a regulatory act. In contrast, the voluntary carbon market (VCM) is a market where carbon offsets are not purchased to be used in an active regulated market but rather ‘with the intent to re-sell or retire to meet carbon neutral or other environmental claims.