Market Mechanisms: SDM is the new black!

This article was co-written with the Italian Climate Network.

The Article 6 of the Paris Agreement (PA) on market and non-market mechanisms was among the last to reach a consensus at COP21. This was due mainly to the opposition of some parties to include explicit references to a market mechanism and carbon pricing. The Article is therefore complex and the Parties, currently gathered in Bonn, urge to have clarification for a common understanding of concepts and definitions. At the same time, everyone is well aware that it touches directly the future of the market mechanisms developed under the Kyoto Protocol such as the Clean Development Mechanism (CDM)  and Joint Implementation (JI).

The Article 6 of the PA is based on voluntary cooperation in the implementation of the NDCs (art. 6.1), which, in this context, expresses the freedom of the Parties in the use of the following ideas:

  • The cooperative approach (6.2-3) aims at facilitating cross-border transfer of emission reduction units through the use of Internationally Transferred Mitigation Outcomes (ITMOs). It also provides the framework for linking different carbon markets in bilateral and plurilateral forms, which IETA(a) considers a flexible way to fulfil the NDCs under the guidance of the CMA (b), and avoiding double counting(c);
  • The mechanism to contribute to the mitigation of GHG emissions and support sustainable development (6.4-7), a pretty long name for defining a market approach, aims at contributing to the mitigation of emissions levels in host Parties. CMA has been requested to adopt rules, modalities and procedures for such a mechanism;
  • The non-market approach (6.8-9) which should aims at creating non-market synergies “in the context of sustainable development and poverty eradication”.

Article 6 lay the foundation of a new mechanism different from JI and CDM

CDM and JI were created to reach countries’ commitments of GHG emission reduction. CDM allows developed countries(d) to generate certified emission reduction (CER) emitted thanks to a mitigation project in developing countries. JI is very similar but includes mitigation outcomes transfers between Annex I countries.

 

clean-development-mechanism-1024x720

The CDM mechanism (source: climatechange.moe)

The CDM mechanism (source : climatechange.moe)

 

 

Future of CDM and JI are mostly concerned by paragraphs 6.4 to 6.7 of the PA, which define what has already been informally mentioned and referred to as sustainable development mechanism (SDM)(e). On the road to Paris, Brazil pushed for an enhancement of the current CDM mechanism through the PA. At first, SDM could seems very similar to CDM or JI, but there are major differences:

  • Under the PA, all parties submitted NDCs to contribute to mitigation and therefore should have access to the SDM mechanism to fulfill their NDCs, when CDM and JI were based on the distinction between Annex I and Non-Annex I countries.
  • Paragraph 6.4(d) refers to the fact that the SDM shall aim « to deliver an overall mitigation in global emissions ». With CDM, every tonne reduced in a Non-Annex I country was used to allow for an additional one emitted in an Annex I country. This leads, at best, to a zero sum game and is more likely to increase emissions because of suspected credibility of some CER. With SDM, “the tonne might be less than the tonne”(f)  in an attempt from Annex-I and Non-Annex-I countries to ensure an overall reduction in global emissions.  

The form of this new mechanism still remains to be determined

“The PA is like a marriage agreement, where you got married but you haven’t sorted out who washes the dishes »(7). This sentence summarises perfectly the status of the current negotiations on Art.6 and its outstanding issues:

  • Definitions: the wording of Art.6 remains ambiguous and a common interpretation has to be reached. One of the controversial topics is the definition of environmental integrity, which could be crucial to ensure the acceptance of emission transfers worldwide.
  • Governance and legal status: SDM is clearly under the authority of the CMA and is more likely to have a CDM-like body, however its composition and role is yet to be decided as well as the legal status of the mechanism.
  • Accounting: there is the necessity to find a balance between flexibility, which allows governments to easily account for their emission reductions, and transparency (Art. 13). The Parties also agree on the need to develop a robust framework to avoid double counting.

A lot of work remains on this topic, both technical and political, in order to ensure that a new cooperation to fulfill NDCs will emerge.

 

About the Author

This article was co-written with the Italian Climate Network, a civil society and youth NGO engaged in UNFCCC negotiations and dialogue with stakeholders to promote education to sustainability

Gabriele Motta is Student in MA of International Relations – European Affairs, University of Turin, member of Italian Climate Network and partner of Germanwatch. His main interests are the reform of the EU ETS, carbon pricing and the impact of the Paris Agreement art. 6 on the EU ETS

Rachele Rizzo is Member of the Italian Climate Network since May 2013. Her main interests are economics of climate change and private sector implementation of climate and environmental policies.

Guillaume Le Labousse has a Master degree on Energy and a Master degree on Environmental Policies and Sustainable Development and he is currently working for an NGO in France on GMOs. He is a member of CliMates since 2013 and has worked on several projects such as COP in MyCity and Heat Wave in MyCity.

Martin Salmon is an energy and environment engineer currently finishing a Master in Public Affairs in Sciences Po Paris. He’s member of CliMates since 2015, as director of the programme Youth Visions for the future. 

(a) International Emission Trading Association
(b) Conference of the Parties serving as the meeting of the Parties to the Paris Agreement
(c) The double counting concerns the risk of seeing the same tonne of carbon reduction being integrated in the GHG diminution trajectory by both the host country and the one financing the project.
(d) Commonly named as “Annex 1 countries”
(e) First SB-44 first contact groups showed the opposition of some party (Panama, New-Zeland) on this choice.
(f) Eduardo Calvo, Executive Board Chair, during SB-44
(g) Mandy Rambharos (Eskom International / South Afri. Delegation) during SB-44

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