COP26 Establishes Rules for Carbon Markets
After intense negotiations, Article 6 of the Paris agreement has reached consensus among nearly 200 countries present at the climate conference in Glasgow. Article 6 forms the legal framework to allow the use of market-based climate change mitigation mechanisms for countries pursuing their Nationally Determined Contribution (NDC) targets. These NDCs contain information on targets (e.g. greenhouse gas reduction goals), and policies and measures for reducing national emissions and on adapting to climate change impacts.
In this article we’ll provide context on the ramifications of this Article 6 decision and how it will influence Klima’s growth prospects in the years ahead. First, let’s take a look at two key differentiations in the carbon market.
Compliance Carbon Market
Credits traded here refer to the global UNFCCC facilitated carbon market wherein government regulations require emitters to either reduce their emissions or purchase offsets.
In some cases this term is used in literature to refer to the domestic markets within countries (e.g., Ecosystem Marketplace refers to Australia’s domestic market as its compliance market).
Voluntary Carbon Market (VCM)
Activity in the carbon markets where buyers and sellers trade on their own volition, and not to fulfill regulatory mandates. Credits traded on this market are verified based on standards such as Verra Carbon Standard (VCS), the Gold Standard and Climate, Community and Biodiversity Standards (CCB).
Currently, all offsets brought on-chain into the Polygon DeFi carbon ecosystem come from the voluntary carbon market. In the future, there may be opportunities to bring Internationally Traded Mitigation Outcomes (ITMOs) on-chain to interface with Klima. We provide an overview on that prospect later in this article.
Creating a global compliance market
Article 6 is crucial for realizing the goals of the Paris Agreement. Essentially, countries can purchase carbon credits representing emissions reductions from nations which have already lowered pollution by more than they have originally pledged. It also opens the possibility for public institutions and private companies to invest in carbon projects that cut emissions in developing countries, where project development costs are often lower. Examples of such projects can be found in our article Introducing KLIMA, leveraging the supply of carbon.
For a number of years, the state of Article 6 was unclear. For one, there was an open question on the role that the voluntary market might play, and how corresponding adjustments (CA) would be handled. For example, let’s imagine that Switzerland finances an afforestation project in Peru. Implementing a CA would require Peru to not count these emissions reductions toward its NDC when they are transferred via an ITMO to Switzerland (who can count these toward its NDC target).
Regarding the voluntary market, there were some proponents which wished all mitigation and carbon removal activities to be registered into the compliance market, essentially dismantling the raison d’etre of the VCM. However, the final rules agreed to at COP26 will not require CAs to be made for projects utilized in the VCM (unless of course the country in question wish to register them for their own NDCs, as that would effectively move them to the compliance market).
Ultimately, these decisions open up the door for continued expansion and financing of carbon reduction projects by individuals and private companies. Summarized by Kelley Kizzier, vice president for global climate at the Environmental Defense Fund and a former negotiator: “Today’s agreement on Article 6 provides the rules necessary for a robust, transparent and accountable carbon market.”
ITMOs & Klima
Klima’s future may not rest entirely on the voluntary market, however. For context, consider the activities of the Blockchain for Climate Foundation. They’ve consulted with national governments and been active in the carbon market since 2017 to build & share the logic for use of blockchain to enable issuance & exchange of Article 6 ITMOs. They launched the BITMO Platform last week at COP26, which enables national governments to issue Article 6.2 ITMOs as ERC1155 Non-Fungible Tokens (NFTs) on Ethereum. Blockchain for Climate Foundation has convened a National Party Working Group to engage signatories to the Paris Agreement in testing and piloting the BITMO Platform to enable a quick-start to international carbon trading under the Paris Agreement.
When Article 6 ITMOs can be issued onto the blockchain, Klima can create a carbon pool, similar to the existing BCT pool, for tokenized Paris Agreement carbon credits. We applaud and support Blockchain for Climate Foundation’s efforts in bridging the gap between the legacy carbon market and the world of decentralized finance, and believe their actions will help accelerate the delivery of global finance for climate action.
How does the VCM deliver climate finance?
In the words of the International Carbon Reduction & Offsetting Alliance (ICROA): The VCM exists to enable non-state actors to take climate action ahead of and beyond regulation. There are countless private companies ramping up efforts to tackle climate change above and beyond what is required of them due to government regulations. The VCM provides an avenue of directing finance by such companies toward high-impact sustainability projects, including greenhouse gas reduction, mitigation and removal projects. This finance is crucial, as one of the biggest challenges in the fight against climate change is simply the cost of action itself. Carbon markets help lower these costs and subsidize innovative projects and thus accelerate emissions reductions.
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