Carbon markets

In order to achieve the Paris Agreement’s goal of limiting global warming to 1.5℃, the world needs to undergo an energy transition. The primary objective of this transition is to decarbonise all sectors of the economy. Decarbonisation is the reduction or removal of all human-made carbon emissions from the atmosphere.

In this FAQ document, the IPCC explains that not all emissions can be avoided. They state that achieving net zero CO₂ emissions globally requires deep emissions cuts across all sectors and regions, along with active removal of CO₂ from the atmosphere to balance remaining emissions that may be too difficult, too costly, or impossible to abate at that time.

Article 6 of the Paris agreement allows member states to voluntarily work together to achieve emission reduction targets set out in their NDCs. In simple terms, a country or organisation looking to make up for the greenhouse gases it has emitted can invest in projects that reduce/avoid the emission of or remove carbon from the atmosphere in another (host) country, in exchange of carbon credits. Carbon credits are tradable certificates that represent a GHG emission avoidance or removal from the atmosphere. Each carbon credit represents one metric ton of carbon dioxide (CO₂) (or an equivalent amount of another greenhouse gas).

Article 6.2 outlines the basis of trading carbon credits while article 6.4 introduces an international mechanism for trading GHG emissions that is expected to function similarly to the Clean Development Mechanism under the Kyoto Protocol. Negotiations to finalize the details of this mechanism are expected to take place at COP29, being held in Baku, Azerbaijan, from 11th to 22nd November 2024.

The following series of blog posts examines the carbon markets framework.