What does it take to maximize readiness for post-2020 climate markets?

Lessons from pilot assessments of countries’ international transfer readiness under Article 6.2 of the Paris Agreement

Context  

Future climate markets will differ substantially from those that emerged under the Kyoto Protocol.  Unlike the top-down approach of markets created by the Kyoto Protocol, such as the Clean Development Mechanism (CDM), international markets under Article 6 of the Paris Agreement are expected to have far more bottom-up linkages that could create an opportunity for new and innovative approaches.   

While the Kyoto Protocol only required Annex I (or developed) countries to meet specific climate targets, the Paris Agreement created a new paradigm for all countries – both developed and developing – to voluntarily adopt individual targets, elaborated in their nationally determined contributions (NDCs). This new environment has effectively introduced national “caps” on emissions for all countries. This means that a greater level of preparation is needed to ensure that traded assets are aligned with NDCs and accompanied by robust accounting.

While the Paris Agreement gives climate markets a renewed basis for support, the definition and architecture required for post-2020 markets have been left to future negotiations. Closing statements made by Parties at COP25 as well as the declaration of the San Jose Principles suggest that there is great momentum for early action under Article 6. 

World Bank Support to Countries

The World Bank supported the development of the “International Transfer Readiness” (ITR) module under the Mitigation Action Assessment Protocol (MAAP) to identify capacity building needs to ensure that countries have the requisite institutional frameworks, processes, and infrastructure for Article 6. The ITR Module evaluates: (a) whether processes are developed at the country level to ensure environmental integrity and that transfers of units between Parties do not lead to an overall increase in global GHG emission; (b) the alignment of traded activities with the issuing Party’s NDC to ensure that the activity is carried out in priority areas; (c) the robustness of a country’s infrastructure and procedures to deal with double counting of emission reductions; and (d) the extent to which a country is complying with the Transparency Framework of the Paris Agreement.  

The ITR Module has gone through several rounds of peer review and has been piloted by the World Bank and its partners in 13 countries, both developing and developed. The pilots are conducted with support from local experts, and in consultations with key stakeholders, including with the line ministry in charge of developing the countries’ NDCs. The World Bank published a summary report with details of the pilot results. The key findings are: 

• Substantial capacity building is still needed to ensure readiness for Article 6, even for countries with significant experience in Kyoto markets. The bottom-up nature of the Paris Agreement means that countries would need significantly higher levels of preparation for markets. For example, it is critical for countries to develop robust measurement, reporting and verification systems at different levels, and develop or have access to a registry in order to ensure that the traded units are real and are not double counted. Countries also need to develop systems to ensure corresponding adjustment is made against traded assets.
• Reference to NDCs is critical. Some countries may have more ambitious domestic policies and targets in comparison to their NDCs. However, the assessment should be benchmarked against NDCs to ensure consistency of countries’ market activities with their broader NDC strategy.
• Institutional coordination is key to ensure international transfer readiness. Decision-making at the national level requires coordination across relevant ministries and stakeholders, particularly for questions such as the eligibility of projects for international transfer, the process for authorizing transfer, and the country’s progress with meeting its own NDC goals. 
• Additional frameworks are needed to build trust and drive market demand towards high-quality climate assets. The ITR Module focuses on assessing readiness at the jurisdictional level. However, it should be complemented with additional frameworks that assess risks at the project level, such as through MAAP’s Module 1-4 which assesses the project’s design and implementation, management entity, financial structure and development benefits. The ITR module by design is not expected to cover all aspects of NDC ambition, and only assesses the business-as-usual (BAU) emissions scenario and the stringency of the NDC targets compared to BAU. Other types of assessments could be leveraged to include the full range of ambition considerations.  

Potential Next Steps

Applying the ITR Module in a consultative manner offers an opportunity to better understand the opportunities and risks of participating in Article 6, and facilitate a consensus-driven, informed decision-making process.

Given the urgency to increase climate action, the development of tools like the ITR Module provides an opportunity to reflect on how cooperative actions under Article 6 can be designed and enable learning-by-doing.  Moving forward, the World Bank will carry out consultations to explore how ITR can facilitate broader capacity building efforts for Article 6.