Is Article 6 negotiation failure an opportunity for revival of Carbon Market Clubs in a polycentric world?

December 20, 2023

Considering the Article 6 negotiation failure at COP28 we make the case for collective action in the shape of Carbon Market Clubs to address a global public bad.

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The outcome of COP28 for international carbon markets has resulted in disappointment at various levels, ranging from “it would have been good to have a decision on this” to “there will be no trust in Paris Agreement markets now”.

It is true that it would have been good to have had some decisions to clarify and standardize Article 6.2 elements for reporting purposes, and it would have been good to have had a decisive step towards the operationalization of the Article 6.4 mechanism. However, the no-decision at COP28 does not change a lot.

The Article 6.4 operationalization is delayed by a year or so, whatever consequences that may have, but Article 6.2 will continue as it is. More than anything else, the no-decision reminds that the Paris Agreement largely is a bottom-up system. Carbon markets are designed bottom-up and the global development of carbon markets demonstrate a great variety of domestic and international schemes.

The case for carbon market clubs

Pivotal work by the World Bank and others saw the reality of this and developed (or invigorated) concepts such as “networked carbon markets” and “carbon market clubs”. At the next COP, or the COP after that, will we see a strong push for centralizing Article 6.2 and eventually an agreement by all Parties on that? Maybe not. What we may see though is an increased interest in “carbon market clubs”.

Carbon market clubs can be established through the integration of emissions trading systems but could also entail other carbon market approaches. The idea is to gather a group of countries (or non-state actors), agreeing to accept each other’s mitigation outcomes, provided that all members of the club comply with the club’s standards for monitoring, reporting, verification, eligibility of type of activities, accounting, and infrastructure for trade.

The bottom-up approach of the Paris Agreement with the Article 6.2 guidance provides the basic foundations for the establishment of this. Thus, it would be practically possible, and in line with the Paris Agreement provisions, to establish a carbon market club that applies additional rules adapted to regionally specific circumstances. There are already examples of this. One example is the Climate Action Data (CAD) which is a global platform that links, aggregates and harmonises carbon credit data from project registries, currently involving 30 organizations and 11 countries. Furthermore, carbon market alliances have emerged in Africa and recently in the ASEAN to facilitate common approaches to carbon markets. Alliances of this type can be understood as the first step towards carbon market club formation.

Benefits of carbon market clubs

The benefit of a carbon market club is that it may apply rules and standards that can provide outcomes and impacts of high quality (the opposite is of course also possible). But would going ahead with proprietary standards and excluding non-members from participation undermine the basic principles of the Climate Convention and the Paris Agreement?

Accepting that the guidance and rules adopted at a future COP may not be stringent enough or not take regional circumstances into consideration, does not necessarily challenge the need for a global framework. But it does challenge the idea that the global governance framework will take us all the way. Those familiar with political science may now realize that this argument echoes the work of Nobel Laureate Elinor Ostrom.

Collective action to address a global bad

The atmosphere is a global public good, which means that everyone can access it, and no one can be restricted from using it. Climate change is a global public bad. The issue is how to collectively address the global bad. Ostrom states that to solve climate change, the actions of one country, even if it is a large and rich country, will not be enough. She also states that waiting for the one global solution is also problematic. The implication is that other levels of governance would be better suited to address climate change, which is captured by the concept of polycentric approaches. But collective action to address the global bad would still be needed. Polycentric approaches mean that groups of actors can take initiatives to address a global bad, without the involvement of an overall central governance structure that imposes actions. Thus, despite facing the possibility that others do not act, these actors will.

Actors are likely to cooperate if they share reliable information about costs and benefits of actions, if they see value in cooperation, and if cooperation contributes to their reputation as a trustworthy partner. Forming cooperation on this basis is of course easier than reaching consensus at the global level.

However, the key argument for looking at different levels and different governance structures might not be that it is easier to collaborate, but that “the benefits from reduced GHG emissions are not just global in scope” 1. For members of a carbon market club, benefits can aggregate cost savings (for instance by widened access to emission reductions) and liquidity, and possibly mutual guarantees that other members would not impose border carbon adjustments as well as sharing some of the costs for the infrastructure that enables trading. If mitigations only contribute to the global good, i.e. stabilizing the concentration of GHG in the atmosphere, then a global governance approach would be the best. Conversely, if there are many different types of actors involved, governance is exercised on different levels, and benefits are created that are not solely global goods, could there be better approaches? And if there are better approaches, why wait for the one global solution that maybe be characterized by the least-common-denominator?

Adapting to realities to reach Paris Agreement goals

Will carbon market clubs, groups setting the environmental integrity bar higher and bilateral (multilateral) cooperative approaches undermine the role of governance and rules at the global level? The answer is most likely no. What can be observed though is an adaptation to realities, (different layers of governance, national and local conditions, and the fact that reduced GHG emissions are not the only benefit of a carbon market cooperation) leads to international cooperation that can enhance the ability to reach the objective of the Paris Agreement.

While the Paris Agreement provides the overall objective and a common accounting and reporting rulebook, bilateral and multilateral approaches will provide opportunities for countries to establish cooperation, without delay, in ways that create benefits to participating nations.

1. Ostrom, Elinor (2009) A Polycentric Approach for Coping with Climate Change, Policy Research Working Paper 5095, The World Bank Development Economics Office of the Senior Vice President and Chief Economist October 2009