Executive Summary

The Paris Agreement marks a new era for international climate action in general, and specifically for international carbon markets. Though the agreement does not mention markets per se, Article 6 paragraph 4 establishes what has become to be known as the Sustainable Development Mechanism (SDM) which builds on and shares some features of the Kyoto flexible mechanisms namely the Clean Development Mechanism (CDM) and Joint Implementation (JI).

The SDM however will need to function in a radically changed world from its Kyoto Protocol predecessors. Importantly, it must deliver an overall reduction in greenhouse gas emissions and promote sustainable development within the 2030 Agenda. Significantly, the SDM must function in a world where all countries have contributions towards the overall goal of limiting global warming to 1.5 degrees, decarbonisation by the latter half of the century, and the UN Sustainable Development Goals (SDGs) outlined in the 2030 Agenda.

The CDM experience in particular provides lessons for the design of the new SDM. However, contributing to these goals in the new context calls for a fundamentally new approach to the role of markets, not a copy paste exercise from existing practices. This notably means a shift away from offsetting towards results based finance and an integration of the SDGs, human rights, transparency and public consultation as core principles into the activities of the mechanism.

This policy brief offers recommendations for the design of a robust and effective Sustainable Development Mechanism.