Under the United Nations Framework Convention on Climate Change (UNFCCC), countries have created international market mechanisms to provide an economic incentive to reduce emissions in countries which (before the Paris Agreement) had no climate target. The next generation of global carbon markets has its foundation in Article 6 of the Paris Agreement.
One of the biggest global carbon markets is the Kyoto Protocol’s UN Clean Development Mechanism (CDM), which is now set to be phased out. The idea was that rich countries could finance climate projects in developing countries in order to compensate for continuing to pollute at home. The CDM was riddled with problems. It has not reduced emissions globally and projects funded under it have been linked to human rights violations and environmental destruction.
As opposed to the Kyoto Protocol that required emissions reductions only from rich countries, the Paris Agreement markets must function in a world where all countries make contributions towards the overall goal of limiting global warming to 1.5℃.
At COP 26 in Glasgow in 2021, following years of inconclusive negotiations, countries agreed on a package of rules to govern and implement two international carbon market mechanisms based on Article 6 of the Paris Agreement. The first mechanism, Article 6.2, allows countries to trade emission reductions and removals with one another through bilateral or multilateral agreements. The second mechanism, Article 6.4 (often called the successor to the CDM), will create a global carbon market where credits can be directly purchased by businesses.
While the overall frameworks for these markets were hammered out at Glasgow, many technical details and rules remain to be finalised. As an official observer at UNFCCC negotiations, Carbon Market Watch campaigns for full transparency in these markets and strong social and environmental safeguards to ensure that any climate project upholds human rights, protects the environment and benefits local communities.”