It may take years for enough governments to ratify the new Paris Agreement for it to come into force, or to agree on the rules underpinning the new emissions trading mechanism enshrined by it, but any parties wanting to link up their carbon markets under the pact need not wait.

The agreement approved by 195 governments in the French capital on Saturday carried provisions effectively setting up two tracks for the use of market-based mechanisms in meeting nations’ emissions reduction pledges, now officially known as Nationally Determined Contributions (NDCs).

Article 6.4 of the agreement takes a centralised approach, establishing a market-based mechanism akin to the Kyoto Protocol’s CDM or JI, which is to be developed by countries between now and 2020. It will create a new type of carbon unit that, similar to those generated under Kyoto, can be used by governments that have ratified the agreement.

Articles 6.2 and 6.3, on the other hand, allow for decentralised ‘cooperative approaches’ that let countries and other jurisdictions with markets bilaterally and multilaterally link them together, in what many now refer to as ‘carbon clubs’.

These clubs will now be able to trade units, recognised under the Paris Agreement as being “Internationally Transferrable Mitigation Outcomes”, or ITMOs, that are backed by robust accounting measures and not counted more than once towards a country’s target.

These cooperative approaches, says Jeff Swartz, director of international policy at IETA, “set up the framework for a much deeper world of cooperation” on carbon markets.

“It says ‘here’s a framework, some basic rules of the road’. It’s different from Kyoto’s top-down approach in that it lets countries drive,” added Nat Keohane, vice president for global climate at US-based Environmental Defense Fund (EDF). Both spoke to reporters on Tuesday in a conference call hosted by the two organisations.

LIGHT TOUCH

Kyoto, and later the Copenhagen climate summit of 2009, represented failed attempts at using a top-down approach to get the world’s largest emitters to commit to reducing their GHG output.

Negotiators have changed tact, re-angling their strategies towards an international pact that would instead cultivate bottom-up efforts from national and sub-national jurisdictions.

And those countries that support or already have emissions trading schemes also adopted this tactic, seeking in Paris a basic framework that would let them grow their carbon clubs while maintaining environmental integrity and transparency, rather than hunting an overarching global carbon market.

“[Cooperative approaches] is the UN taking a ‘light touch’ role. Countries don’t need to ratify to be part of it … Everyone expects the UN will come up with further guidance, but they don’t need to wait for that to get started,” Keohane said.

“Coalitions of countries that want to move faster and farther will start coalescing and connecting … You can’t put a halt to market activity in a decentralised world.”

The Paris Agreement requires at least 55 parties collectively accounting for at least 55% of total global GHG emissions to ratify or accept it in order for it to enter into force.

Some observers predict that joining a carbon club under cooperative approaches could also become the next step in a natural progression for developing nations that utilise the Paris Agreement’s centralised mechanism to first generate offsets and then build their own domestic carbon markets.

POLICING

While carbon club members, with the help of other international organisations including the World Bank, are responsible for organising the actual groupings, they are also in charge of policing them.

Kyoto’s JI featured a similar self-regulating system under its Track 1, which many blame for the hundreds of millions of carbon credits issued under the scheme that, according to a study published earlier this year, may not have represented actual emissions reductions.

The Paris Agreement’s centralised mechanism is expected to be designed based on the most effective elements of JI and the CDM.

However, the decentralised approach and subsequent carbon clubs may instead borrow from the lessons learned across the world’s national and regional carbon markets.

“We are relying on the big countries with an interest in environmental integrity to be at core of these emerging coalitions,” Keohane said.

He, along with IETA president and CEO Dirk Forrister, said countries that want to use international markets to meet their NDCs will have to abide by the accounting rules.

“It’s like joining an exchange, where you have to meet certain qualifications and criteria to join. Once you’re in, life is a lot simpler because trading is eased, but if you fall out of compliance, you can lose your access,” Forrister said.

He added that carbon clubs will likely instil these rules in their agreements.

“Other provisions from the UN would be great, but the job to uphold standards lies with club members.”

By Mike Szabo – mike@carbon-pulse.com