Promoting transformational change through carbon markets : strengthening the transformational impact of carbon market cooperation under Article 6 of the Paris Agreement : final report

A transition to sustainable development and net-zero greenhouse gas emissions is key to achieve the temperature limits established by the Paris Agreement (PA) and the global sustainable development goals (SDGs) agreed in the 2030 Agenda. To explore how carbon market approaches under Article 6 of the Paris Agreement can contribute to the transformational change required by these global agreements, the German Environment Agency (UBA) has commissioned UNEP DTU Partnership in collaboration with Perspectives Climate Research and First Climate to carry out this research project. The project aims to generate insights and recommendations for how to design and implement Article 6 rules and activities to promote transformational change (TC) through carbon markets. Based on insights from a literature review and expert interviews, the authors propose a definition of transformational change with four characteristics particularly relevant to Article 6 objectives, namely 'Digitalisation’, ‘Private sector and Governments’, ‘Carbon pricing’ and ‘Dynamic baselines’. In the context of Article 6 negotiations up to COP26 in Glasgow and an overview of Article 6 piloting efforts, conceptual options are presented for Article 6 activities to promote transformational change. An incentive structure for carbon markets to promote Nationally Determined Contribution (NDC) ambition raising, and transformational impact is introduced. Insights from a comparative case study analysis of different NDCs and sectors in Costa Rica, Morocco and Pakistan demonstrate how transformational impact can be designed and assessed at Article 6 activity level. Findings are used to identify implications for Article 6 design so that activities enhance their transformational impact. For instance, higher prices for internationally transferred mitigation outcomes (ITMOs) with transformational impact can enable the political will in host countries to undertake deep mitigation opportunities while achieving cost-efficient emission reductions with domestic means. Key conclusions and recommendations are that core carbon market principles such as of additionality and baselines-setting can be reinterpreted in order to promote transformational change aligned with the global 1.5°C temperature goal.