Kari Hämekoski, Manager, Trust Funds and Climate, NEFCO. Photo: Patrik Rastenberger

The implementation of the Paris Agreement moved forward at the recent Katowice climate conference in Poland. The key elements of how to operationalise the Agreement were agreed, and the Paris Rulebook now allows implementation from 2020 onward. The Agreement also establishes a framework for voluntary cooperation between countries, including the use of carbon markets. While there was good progress on these mechanisms, some obstacles remained, and the decisions were deferred to the next climate conference to be held later this year.

The Paris Agreement was negotiated in 2015 and swiftly came into force in November 2016. By January 2019, 184 countries out of 197 parties to the United Nations Framework Convention on Climate Change (UNFCCC) had ratified the Agreement. The Agreement is a complex international document covering various climate-related aspects, including mitigation, adaptation and financing. The Chief negotiator for Finland, Ms. Outi Honkatukia, summarised the Agreement in three key elements in her recent presentation to the Nordic Financial institutions: (i) Nationally Determined Contributions (NDCs), i.e. countries’ own plans to mitigate and adapt to climate change; (ii) transparent reporting; and (iii) a mechanism to increase the ambition in five-year cycles.

The Paris Rulebook adopted in Katowice at the Conference of the Parties (COP24) allows the Agreement to be operational from 2020, albeit with some exceptions. Article 6 of the Agreement establishes a framework for cooperation and the voluntary use of international carbon markets. Due to a lack of consensus on some contentious topics surrounding accounting, integrity and ambition, the rules for these mechanisms have been postponed to the next COP.

Article 6 – Higher ambition to promote sustainable development
Article 6 can be seen as a continuation of the flexible mechanisms under the Kyoto Protocol (Clean Development Mechanism and Joint Implementation). Article 6 therefore offers scope for a broad range of international cooperation on climate change mitigation. It is important to note that the use of Article 6 activities can allow a higher ambition to promote sustainable development and environmental integrity. A higher ambition is needed since the current NDCs are failing to achieve the objectives of the Agreement.

Article 6.2 relates to cooperative approaches involving international transfers of mitigation outcomes (ITMOs or ‘carbon credits’). Article 6.4 establishes a mechanism to contribute to the mitigation and support sustainable development. Non-market-based approaches under Article 6.8, for example, can mobilise finance flows.

Cooperation could allow one country to use mitigation outcomes achieved in another country towards its NDC. The cooperation could also help the host country achieve its NDC and generate sustainable development benefits. Developing countries, in particular, can be expected to benefit from this cooperation. Article 6 can also enhance the cost-effectiveness and flexibility of mitigation actions. This is important to highlight, as it would enable more impacts for the same amount of resources. This, in turn, can allow for a higher ambition.

Piloting Article 6 the Nordic way
Full operationalisation of the mechanisms is expected to take some time, and pilot activities and learning-by-doing approaches are essential to developing credible international post-2020 carbon markets. This is especially relevant after the COP24, as the rules were not yet adopted. The Paris Agreement is also more complex than the Kyoto Protocol, and stronger host country roles are needed with robust accounting systems. All these new elements would need to be tested, conceptualised and integrated into the Article 6 mechanisms. Utilisation of all the lessons learned from the Joint Implementation and Clean Development Mechanism, including the major methodologic work, would be important so the ‘wheels are not re-invented’. Moreover, the Nordics have great experience of these Kyoto Mechanisms. Article 6 can be used to promote issues that are typically important to the Nordic countries, such as raising the ambition, private sector engagement and sustainable development.

The Nordic Initiative for Cooperative Approaches (NICA) has been developed in close collaboration between NEFCO, Sweden, Finland and Norway since late spring 2018 following the successful cooperation in the waste sector in Peru. NICA is currently supporting and piloting the operationalisation of Article 6 via the various activities, e.g. providing concrete input for the development of robust and practical rules. NICA also aims to pilot scalable and replicable models and transaction approaches in ambitious climate action and to access finance from the markets and beyond – including potential concrete transactions in the longer term.

As shown by the development of the rules for the Kyoto Mechanisms, a successful mechanism is being built through a long process. Functional approaches can only be developed in a rapid fashion if pilot activities test the key issues. This requires engagement by all stakeholders and a transparent process of documenting the results of the piloting.

Written by Kari Hämekoski
Manager, Trust Funds and Climate, NEFCO