10 lessons learned from our experience supporting countries in designing national carbon market frameworks

10 lessons learned from our experience supporting countries in designing and implementing institutional and policy frameworks for international carbon market participation.

Listen to article

In this article, we share 10 lessons learned from our wealth of experience supporting countries around the world in designing and implementing institutional and policy frameworks for international carbon market participation. Our supporting activities include capacitybuilding workshops, international transfer readiness assessments, and comprehensive design and implementation of frameworks and procedures. Learn more about our work here

Background: What is a carbon market framework and why do countries need one?

With the agreements reached at COP26 and COP27 on Article 6 of the Paris Agreement, many countries are now actively putting arrangements in place to facilitate their participation in international carbon markets[1]. Indeed, the Paris Agreement has set a different scenario for developing countries: under the Kyoto Protocol, mitigation outcomes generated in developing countries could be transferred and used internationally without accounting implications for the host countries. However, under the Paris Agreement all participating countries have committed to emission reduction measures or targets through NDCs and any mitigation outcomes transferred or used must be accounted for within their NDC commitments. The shift to this comprehensive accounting has significant implications. Host countries must now implement carefully designed procedures for granting authorizations, applying corresponding adjustments, registering and tracking Internationally Transferred Mitigation Outcomes (ITMOs), and report on their participation in cooperative approaches.

Recent concerns about carbon market integrity[2] have further emphasized the need for robust national frameworks. Countries want to ensure that projects implemented within their territories adhere to high environmental, social, and economic integrity standards and contribute effectively to sustainable development.

These factors underscore the crucial role of effective national frameworks in guiding a country’s participation in international carbon markets. While specific implementation approaches may vary, our experience supporting numerous countries in this transition has identified several shared needs, concerns, and points for discussion, which are summarized in 10 lessons presented below.

Lesson 1: The framework structure should allow for flexibility and adaptability

Our experience shows that frameworks should offer flexibility and adaptability. An effective approach to achieve this is by structuring the framework into three key components and documents:
Establishes the legal basis for implementing the framework. The legal text refers to the framework document.
Outlines the overall participation strategy, key guiding principles, institutional arrangements, and description of the implementation processes. The description of the processes refers to the manual of procedures.

Provides detailed operational steps for each implementation procedure, easily adjusted as needed to reflect evolving requirements.

This structure allows for greater flexibility. While the carbon market participation strategy may guide the country for a few years, processes and their implementation procedures may require more regular updates. The legal text and the broader framework remain stable long-term documents, while the manual can be regularly updated to ensure ongoing relevance.

Lesson 2: A phased approach may sometimes be more suitable, depending on a country's potential and attractiveness for international carbon market participation

Participation in Article 6, particularly Article 6.2, of international carbon markets demands significant engagement, investment, and readiness. While countries with low GHG emissions reduction potential(or with sectors that may be unattractive to sovereign buyers) might find the required efforts daunting, they shouldn’t be discouraged from participating in international carbon markets. As part of the development of the strategy for participation mentioned in Lesson 1 a country is to decide in which spectrum of carbon markets options the country should focus. Countries should consider their sectoral emissions, NDC commitments, and how the county emitting sectors and potential mitigation activities align with the interest from sovereign buyers and private corporations, among others.

We’ve found that for many countries, a phased approach is advisable: initially focusing on result-based finance and establishing, facilitating, and promoting carbon finance through the use of high-integrity independent carbon programs (ICP) that allow them to finance mitigation activities without requiring a corresponding adjustment. These countries can at a later stage establish internal processes for managing Article 6.4 and Article 6.2. This may be a valid approach, for example, for a small emitting country with a large majority of emissions from the forestry sector and low contribution from the energy sector.

The Article 6.4 Mechanisms being developed under the management of UNFCCC will provide participants with established processes and requirements related to approved accounting methodologies, validation and verification processes, etc. Host countries still need to establish domestic processes for the eligibility of activities, the approval of projects and participants, authorizations, and corresponding adjustments.

Participation in Article 6.2 requires extra effort from participating countries in establishing additional processes for managing the mitigation activity cycle and managing the process for authorizations from the initial proposal by a project proponent of a project idea to the very final authorization of transfer of ITMOs after verification. Establishing this level of internal management processes may require an analysis of potential benefits for the country to participate.

Lesson 3: The framework should be developed through a co-creation approach, engaging different stakeholders throughout the process

Countries should conduct sufficient stakeholder consultations throughout the framework design process. These stakeholders may include government representatives from various ministries, civil society organizations (CSOs), project developers, private sector / industry, financial institutions, and other key experts. As key actors in promoting a country’s carbon markets, their inclusion throughout the design process is crucial to ensure their needs are properly addressed.

A successful approach to stakeholder engagement involves organizing various consultation sessions throughout the project implementation, such as:

Lesson 4: The framework should set institutional arrangements to involve key ministries throughout the process

International carbon markets generally require a multi-faceted approach that goes beyond the traditional climate change governance frameworks. Specifically, the involvement of the Ministry of Foreign Affairs often becomes critical due to the international nature of asset transactions and collaborative efforts envisaged under Article 6. The Ministry of Foreign Affairs, supported by the Ministry of Environment, can play a pivotal role in negotiating terms, ensuring compliance with international regulations, and fostering bilateral or multilateral partnerships that align with the country’s NDC goals and sustainable development objectives.

Moreover, the intricacies of implementing Article 6 often demand active participation from the ministries responsible for NDC implementation beyond the ministry responsible for the overall NDC development, normally the Ministry of Environment. These units are typically at the forefront of formulating and executing sectoral climate action strategies. Their involvement ensures that any international engagements or mechanisms under Article 6 are fully aligned with the national climate agenda and contribute effectively to the country’s emission reduction targets and each ministry’s planning processes.

This integrated approach not only streamlines efforts towards achieving NDCs but also underscores the importance of institutionalizing mechanisms that accommodate the cross-cutting nature of international carbon markets governance, thereby extracting valuable lessons for future institutional arrangements and policy frameworks.

Lesson 5: The framework implementation should focus on quick wins and building on the existing

Another identified need is for countries to prioritize cost-effective and time-efficient measures, leveraging existing structures whenever possible. For instance, many countries already have a governmental institution responsible for climate change, often composed of representatives from various ministries (e.g., Climate Change Council, Climate Change Inter-Ministerial Commission, etc.). Designating this existing institution as the country’s Carbon Markets Oversight Body often proves to be useful. This approach not only ensures effective inter-ministerial coordination but also establishes a high-level authority to oversee the long-term implementation of the framework.

Lesson 6: The importance of guaranteeing that the authorization of ITMOs is binding

One major concern is how to make authorizations of ITMOs binding, ensuring buyers that once an ITMO is authorized, the decision cannot be arbitrarily revoked. While guidance on this issue is addressed at the UNFCCC level, COP28 showed that the issue will take time to resolve; a potential short-term solution for countries may be to: 

Lesson 7: The importance of mapping options for Independent Carbon Programs (ICP), Article 6.2, and the Article 6.4 mechanism considering a country’s NDC commitments and how to maximize international finance flows

The co-existence of independent carbon crediting programs and compliance mechanisms means that there are different options for the generation of carbon units. Independent carbon programs serve both compliance and voluntary markets. These programs offer an activity cycle for the validation and verification of emission reductions, which can be traded with or without corresponding adjustments for voluntary contribution or offset purposes. Components of these independent programs, like accounting methodologies, serve bilateral agreements under Article 6.2, compliance for the international aviation offset scheme CORSIA, and domestic compliance as in the case of offsetting for the carbon tax in Singapore (also within the frame of bilateral agreements for Article 6.2).

With both voluntary and compliance buyers on the market, countries have different ways to attract additional funding and support for their climate initiatives. One possible leverage occurs when voluntary buyers not requiring corresponding adjustments contribute to emission reductions that support the achievement of the NDC.

However, this approach is not without its challenges and divergent perspectives. On one hand, there is a growing recognition of the potential for ICP activities without corresponding adjustments to finance NDC implementation, offering an opportunity to channel private sector investments into critical climate projects without having to enter the process of authorization and NDC accounting (corresponding adjustments) adding to a country’s emissions level. On the other hand, the NDCs are to be achieved with domestic measures reflecting a country’s contribution to measures for achieving the Paris Agreement goals.

The approach with “non-adjusted” units will help a country achieve its NDC, however, the approach should be applied with some caution. In addition to a reputational risk for the host country, for the buyer it is unclear what the value of a “non-adjusted unit” is when the host country counts the emission reductions towards its NDC. In relation to that, our findings indicate that voluntary buyers often ask for “adjusted units” and are willing to pay more for these. Critics argue that without stringent standards and clear linkages to NDCs, there is a risk of double counting, particularly in the form of double claiming, undermining the environmental integrity of climate actions.

Lesson 8: Developing a framework that ensures social and economic integrity requires careful consideration

Environmental integrity ensures the accuracy of reported emissions reduction and proper accounting. Social and financial integrity are the other two mainstays of good carbon projects.

Countries should incorporate in their policy framework provisions for ensuring social and financial integrity in their operationalization procedures. The approval of the activity under Article 6.4 implies the confirmation of contribution to sustainable development and should encompass the assessment of key social and financial aspects including, as appropriate, free, prior and informed consent, stakeholders’ consultation, benefits sharing with communities, etc. Countries with approval or preauthorization stages in the Article 6.2 processes can resort to similar provisions. Countries also have the opportunity to incorporate activities related to the assessment of the actual implementation of these integrity measures as part of the ITMO authorization process.

Lesson 9: Countries have the urge to develop national registries for registering and tracking ITMOs although in many cases it may not be necessary

One key requirement introduced by Article 6 is the need for countries to register and track ITMOs. To facilitate meeting this requirement, countries can use international registries or opening an account with the international registry under UNFCCC.

While these solutions offer several advantages such as ease of deployment, international recognition and low development costs, countries tend to opt for developing their own national registries, as their long-term solution. There are multiple factors contributing to this, including data and administration management, and notably, the ability to integrate it with other initiatives, such as a national carbon tax. However, we’ve found that in many cases the urge to develop a custom national registry may not be necessary. Deciding to build a bespoke system, despite the aforementioned benefits, should be thoughtfully balanced with the efficiency, affordability, and global alignment offered by available solutions.

There are emerging initiatives such as UNDP’s Platform for Voluntary Bilateral Cooperation, CAD Trust, an open-source metadata system designed to share information about carbon credits and projects across digital platforms facilitating the future integration of multiple registry systems, and commercial registries which provide intermediate (and more permanent) solutions. However, there is no overriding trend in how countries approach these registry solutions.

Lesson 10: Control over the authorization of ITMOs while reassuring project developers

The authorization of ITMOs triggers corresponding adjustments and thus, impacts the accounting of host country NDC achievement. This is why it is important for host countries to have control over the number of ITMOs that are authorized from each mitigation activity. To address this need, we have found that an effective approach is to authorize ITMOs only after they are successfully verified. In this way, host countries can be reassured about the exact number of ITMOs that are authorized. It also provides for authorizing of ITMOs with unique identifiers as required by Article 6.2 guidance.

However, project developers have also expressed their need for assurance before they invest. Incorporating an approval or “pre-authorization” step into the activity cycle is an effective way of addressing this need. This pre-authorization, based on a validated Mitigation Activity Design Document (MADD) means that if the activity adheres to its MADD during implementation, ITMOs will be authorized upon successful verification.

Final thoughts

To conclude, it is important to remember that there is no one-size fits all solution. The ideal approach will vary depending on national context and priorities. However, these lessons provide a starting point for countries to build robust carbon market frameworks that contribute to raising global climate ambition. 

Share the Post:

Related Posts

Carbon Markets under the UNFCCC

Carbon Markets under the UNFCCC

In this webinar, Johan Nylander takes you through the history of Carbon Markets under the UNFCCC, shows how this lead to the today’s Article 6 of the Paris Agreement and outlines the key elements of Article 6.

Read More