CARBON PRICING MECHANISMS

CARBON PRICING MECHANISMS and GOVERNING BODY as SPELLED OUT IN THE PARIS AGREEMENT

Article 6 of the Paris Agreement provides for the following three carbon pricing mechanisms:

1. Voluntary bilateral arrangements

Under Article 6.2 State Parties can reach bilateral agreements, pursuant to which emission reductions achieved in a Country A could be transferred to a Country B and count towards Country B's Nationally Determined Contributions (NDCs).
This mechanism would require a transparent process with accurate accounting of emission reductions in order to avoid double counting (i.e. to prevent the same reduction counting towards both Country A and Country B's NDCs). Although this mechanism may potentially provide a more flexible approach, it is also likely to be less transparent than the mechanism implemented under Article 6.4.

2. An international carbon market

Article 6.4 aims to create an international carbon market, the 'Sustainable Development Mechanism', which would be supervised by a governing body designated by the Conference of the Parties. Under this mechanism, which would replace the Clean Development Mechanism (CDM) under the Kyoto Protocol 1997, both States and Private Actors would be able to trade emissions reductions.
The Paris Agreement however does not provide any details regarding the proposed form or operation of such a carbon market. This will be agreed by the Parties in the rules and modalities to be adopted. It is likely that the Parties will aim to ensure that standardised procedures are adopted in the design, implementation and verification of emission reduction activities.

3. Non-market-based approach

Article 6.8 provides for a framework for co-operation which is not based on a market mechanism, but would instead be designed to cover other forms of assistance which would target ``mitigation, adaptation, finance, technology transfer and capacity-building``. This may include cooperation on climate policy, fiscal measures (such as a carbon price) or similar activities to those under Articles 6.2 and 6.4 but without trading. The 'rulebook' for the carbon pricing mechanisms will determine how this non-market-based approach will operate in practice and how it will interface with the market based approaches.