When countries convene at the United Nations Climate Change Conference in November, a key item on the agenda will be Article 6 of the Paris Agreement. Still to be finalized, Article 6 recognizes the role of voluntary cooperation to achieve global climate goals and to raise the level of ambition to tackle climate change, including through carbon markets. Specifically, Article 6.2 allows for new forms of bilateral or plurilateral cooperation among countries.
Article 6.2 offers an opportunity to reduce greenhouse gas (GHG) emissions from a variety of processes and mechanisms. Such flexibility, however, also introduces complexity, and countries would need greater capacity to participate. This is because a less prescriptive approach to markets means that more decisions will need to be made at the country level.
The World Bank Group is helping countries deal with these complexities and participate in post-2020 carbon markets. In 2020, the Bank Group committed over $77 billion in development financing, of which 29% has climate co-benefits and in December, announced a more ambitious target of 35% of its financing, on average, to support direct climate action in client countries over the next five years. This support can help countries gain practical experience developing climate assets and understand the implications and benefits of adopting different approaches through learning-by-doing.
Creating mitigation outcomes
Under the Paris Agreement, the term Mitigation Outcomes (MOs) replaces most forms of international carbon credits. MOs generated in a country could be transferred to another country, thereby becoming Internationally Transferred Mitigation Outcomes (ITMOs). Through the Climate Warehouse program, the World Bank supports client countries to create MOs on a pilot basis, drawing on the lessons of the Kyoto Protocol.
Creating MOs involves four main steps: the application of a methodology to quantify MOs from a project; the establishment of monitoring, reporting, and verification systems; validation or independent assessment of the quality of the mitigation activity; and an institutional process for authorization and trade of MOs.
The Climate Warehouse program has supported the quantification of MOs from several World Bank projects in India, Bangladesh, Kenya, and Chile using internationally peer-reviewed methodologies. The program has also outlined monitoring, reporting, and verification (MRV) arrangements that could give projects the option of participating in markets in the future.
Throughout the process, notable lessons were learned that will help ensure that participating countries are better positioned to strategically leverage post-2020 climate markets:
- Using existing methodologies can reduce effort. Existing methodologies were used to quantify MOs with some adaptations such as updating baselines. However, in cases where a relevant methodology was unavailable, we found that the level of effort required to adapt a methodology or establish baselines is quite high and could limit a country’s ability to leverage markets to support these activities. This may be a factor that influences countries’ choice of projects or sectors from which MOs will be created.
- Use Monitoring, Reporting, and Verification systems that reduce the cost of MO creation and have the potential for scaling up. The use of new technologies, smart meters, remote sensors, and artificial intelligence to streamline MRV processes is being explored and is an opportunity for countries to expand coverage of sectors where MRV could otherwise be difficult. Additionally, issues such as privacy concerns of developers and handling of commercially sensitive information need to be addressed upfront in the design of MRV systems.
- Conduct an independent assessment. The Mitigation Action Assessment Protocol (MAAP) was applied on a pilot basis to strengthen the quality of MOs and enable a nuanced assessment of the quality of mitigation activities. To limit subjectivity and ensure consistency of assessment, the team worked with the Designated Operational Entities and Independent Entities Association (D.I.A.) to develop a Recognized Rating Agency manual.
- Develop an Institutional framework. While the work stream was originally formulated with a project-level focus, it became clear that for the lessons from the pilots to be evident at the country level, greater engagement with national stakeholders is needed. A key challenge is developing institutional frameworks for decision-making related to the international transfer of MOs. These decisions could have direct implications for the country’s Nationally Determined Contribution (NDC). The Climate Market Club is expected to provide a platform for countries to share knowledge on the development of a country level policy framework for Article 6.2.
Going forward, several next steps have been identified to help countries take advantage of future climate markets. Opportunities for scaling up need to be better understood; at present, MO creation remains similar to the project-based approach of the Clean Development Mechanism (CDM). The potential for programmatic interventions also needs to be assessed and developed further at the country level. Furthermore, the interaction of climate markets with broader climate policy needs to be understood through piloting, development of MRV systems, and the required registry infrastructure to facilitate informed decisions at the country level. To this end, the Bank has initiated a new program to support the generation of MOs in support of countries’ decarbonization pathways.
Join the Conversation