Key Takeaways

• Countries are piloting 68 projects that will reduce emissions and generate carbon credits under the rules of Article 6 of the Paris Agreement.  
• The World Bank’s Climate Warehouse seeks to prevent emission reduction double counting from climate projects by utilizing blockchain technology.  
• There is much potential for carbon market growth but countries need more confidence that climate financing will be available, developing countries need to develop capacity to administer carbon credits, and credit buyers need insurance to offset risk. 

ITMOs and Article 6

While the details of the Article 6.4 mechanism are still under development, countries have begun pilot projects that will generate internationally transferred mitigation outcomes (ITMOs). Some of these ITMOS, which are commonly called carbon credits, will be traded between countries under the rules of Article 6.2. There are differences between Articles 6.2 and 6.4, but 102 out of 124 countries indicate a willingness to use one or both of these parts of the Paris Agreement to achieve the goals of their nationally determined contributions (NDCs). Pilot projects for ITMOs are one of the first steps to creating new carbon markets under the Paris Agreement. 

Countries Piloting ITMOs 

According to the United National Environmental Programme’s Copenhagen Climate Centre (UNEP CCC) Article 6 pipeline, there are 68 active pilot projects. Canada, Japan, Germany, Norway, Sweden, and Switzerland plan on purchasing credits from these projects. In figure 1, we can see the number of projects from which each country expects to purchase ITMOs for achieving the goals of its NDC. 

The UNEP CCC Article 6 Pipeline groups together all of the Ministry of Environment Japan’s (MOE) bilateral agreements for what it calls Model Projects for its Joint Crediting Mechanism (JCM). The MOE has established agreements with 17 partner countries and has selected over 200 projects.  

Singapore has also signed memorandums of understanding with other countries to facilitate ITMOs. The country has been active in negotiations and capacity building for Article 6. According to Singapore’s Green Plan 2030, it wants to establish itself as a global hub for carbon trading. 

About half of the pilot projects are in Latin America, approximately a quarter are in Africa, and a fifth are in Asia. As can be seen in figure 2, the number of projects varies between countries. Many more developing countries have signaled they are open to selling credits, but they need to develop the capacity to authorize ITMOs and be more confident that they will find buyers for their ITMOs at prices that make projects financially feasible. 

Notably Absent Participants

A couple of countries have excluded ITMOs from their latest NDCs. Importantly, the United States and the European Union, which are two of the three largest emitters, stated they do not plan to use ITMOs. However, as seen above, individual countries within the EU do plan to purchase credits. The largest emitter, China, did not mention ITMOs or other market mechanisms in its latest NDC. This means it has not explicitly excluded ITMOs but it also has not signaled it is considering them. Under the Kyoto Protocol, China was the host country for the largest number of clean development mechanism projects. Whether it becomes a buyer or seller of credits under the Paris Agreement is unknown.  

Building An Infrastructure for ITMOs

To prevent double counting and ensure corresponding adjustments are applied, ITMOs will need to be tracked across multiple national and voluntary registries as well as the Article 6.4 mechanism.  The World Bank seeks to solve this problem with its Climate Warehouse. This is a global public meta-data layer built on the Chia blockchain. Its purpose is to connect registries through a decentralized blockchain, thereby making it possible to identify double counting risks. There have been three pilot stages for the Climate Warehouse. The last stage was completed in August 2022 and the public launch is slated for October 2022. 

The Climate Warehouse will have a second layer that it calls the service layer. It will enable public and private entities to provide their services for forecasting, credit ratings, and other secondary services. By doing so, it hopes to foster market growth. The Climate Warehouse hopes to see participation in the secondary layer within the first year of operation.  

The World Bank Climate Warehouse seeks to provide other tools to help build a market infrastructure. It has developed the Mitigation Action Assessment Protocol (MAAP) to help market participants evaluate risks and performance of climate projects. It fosters dialogues between countries involved in piloting projects and is building cooperation between multilateral development banks that can provide financing and support for climate projects. The Asian Development Bank created its own Support Facility for Article 6 that will provide capacity building and technical support to developing member countries. 

 What Is Needed to Facilitate Market Growth? 

Carbon markets have the potential to unlock billions of financial investments in climate projects that will help fulfill one of the key goals of the Paris Agreement: more ambitious target-setting by all countries involved. This potential could be realized if there was less uncertainty about the availability of climate finance. Countries and the private sector should work together to enable forward contracts, spot markets, and options markets. 

Even if financing is unlocked, developing countries will need to build the necessary capacity for ITMOS. For example, in an analysis of recent NDCs, only 22 countries explicitly addressed the issue of corresponding adjustments. Given the centrality of this issue to Article 6, any country engaging in market mechanisms should address it in their NDCs. There is a great need to build policy capacity related to Article 6. 

Finally, buyers of ITMOs will want insurance against the possibility that emissions reductions do not occur. There most likely will be a time lag between the purchase of credits and application of a corresponding adjustment. If the adjustment is not applied by the host country, then the credit should be nullified. There will need to be an insurance mechanism to protect credit buyers.