As Article 6 policymakers design a new global carbon market, employing proven solutions will accelerate implementation, writes Xpansiv CEO John Melby
Time is running out to head-off the most damaging effects of climate change. Governments and the private sector find themselves at a historic crossroads for climate action.
At the upcoming COP28 gathering, a major focus will be ironing out details of new Article 6 markets for international trading of carbon credits between governments.
It is our view that, to perform effectively, interoperability between these new government markets and the existing private sector carbon offset market is essential if we are to unlock their potential and generate the funding required to mitigate the effects of climate change.
This new, integrated market will need to include national registries for managing and tracking international offset trades, which will ensure complete transparency of the trade lifecycle and thereby promote greater confidence.
For this level of interoperability across geographies, a multilateral registry is planned to track transactions globally, as well as exchange platforms that support transparent price discovery, liquidity formation, and a level playing field for all participants.
Fortunately, the existing infrastructure underpinning private-sector environmental markets, including the Voluntary Carbon Market (VCM), is well suited to support and drive the growth of governmental national markets.
Harnessing the existing infrastructure will enable governments to confidently deploy market-based solutions to address climate change. This secure infrastructure will also streamline access to capital and investment flows from global financial institutions, which is necessary to fund climate action at scale.
New Article 6 markets
The Paris Agreement's Article 6 establishes the foundation for a new market to enable countries to achieve their emission reduction targets set out in their Nationally Determined Contributions (NDCs).
The Article 6 discussions are now focused on designing new international compliance markets as well as addressing the complexity of connecting existing compliance and voluntary markets to this new Article 6 market.
"The existing infrastructure underpinning private-sector environmental markets, including the Voluntary Carbon Market, is well suited to support and drive the growth of governmental national markets"
This includes the connection between international carbon registries and implementing the corresponding adjustment mechanism to prevent double-claiming (when a credit is claimed by two parties) in cross-border transfers. This is critical to achieving an efficient, transparent, market in which both public and private sectors can participate.
Under Article 6, when two governments transact in internationally transferred mitigation outcomes (ITMOs), they are engaging in the transfer of carbon accounting data and require a transparent emission reduction accounting system to record information on transactions with other governments.
Successful Article 6 implementation will require both the resolution of these complex policy issues and the swift deployment of operational infrastructure, on which the new markets envisioned by Article 6 will operate. Fortunately, the VCM has pioneered solutions that policymakers can use to meet these needs.
The intersection between the VCM and Article 6
In the VCM, private entities buying and selling offset ownership claims rely on registries to track project and ownership data. The VCM's registries track ownership and transfers at a granular level with auditability. This fulfills the governmental requirements set out in the Paris Agreement, including corresponding adjustments and other cross-border and multilateral mechanisms.
Scaling these different, yet aligned, market systems – one focused at the government level on claims for emissions and reductions, and the other on international, multilateral tracking of verified emissions reductions – must be done in parallel, to address the critical issues of double counting and double claiming, which have been one of the driving debates around the validity and effectiveness of these markets.
Successful Article 6 implementation will require both the resolution of complex policy issues and the swift deployment of operational infrastructure, on which the new markets envisioned by Article 6 will operate.
The infrastructure necessary to support these interconnected markets exists today. The core components include registry systems to manage transactions between governments, private sector purchases, and retirements of credits, including corresponding adjustments, and multi-registry systems to track carbon instruments on a global basis over their complete lifespan from origination to retirement.
This infrastructure has been used to issue and track billions of environmental commodities with a universal, lifetime numbering system equivalent to ISIN or CUSIP numbers used in financial markets.
This infrastructure, which is currently deployed and operational in the international VCM, can help reduce the challenges that may otherwise impede swift climate action, and allow us to achieve the goals outlined in the Paris Agreement and various corporate net-zero programs.
How the market can move past discussion to action
Nations must expedite the deployment of necessary infrastructure and sovereign policies to operationalize their climate plans.
By coordinating efforts, new compliance and voluntary carbon markets can converge into a unified infrastructure, supporting both private and public interests.
Modern registry technology, like that deployed in the voluntary carbon markets, can enable this two-tiered Article 6 framework for carbon accounting to operate and function between countries, as well as between the public and private sectors.
"Scaling these different, yet aligned, market systems – one focused at the government level on claims for emissions and reductions, and the other on international, multilateral tracking of verified emissions reductions – must be done in parallel, to address the critical issues of double counting and double claiming"
This market structure can be operated in collaboration with national governments and the UNFCCC Secretariat.
The existing voluntary market infrastructure, and the technology that powers it, provides a pragmatic ready-to-deploy pathway for national policymakers and other stakeholders to design and implement new Article 6 markets, today.
Predictability, a well-defined regulatory framework, and proven market infrastructure will be the cornerstones of success in implementing Article 6.
As in any market, participants seek stability and clarity. By deploying a robust and proven market foundation, we can promptly produce a thriving new market mechanism that unleashes the required level of climate finance to limit the effects of climate change.
John Melby is CEO of Xpansiv.