Carbon Markets Under the Paris Agreement

The Paris Agreement, adopted in 2015, marked a global shift in the fight against climate change. Unlike its predecessor, the Kyoto Protocol, which focused only on developed nations, the Paris Agreement requires all countries to participate in reducing greenhouse gas (GHG) emissions.

A key mechanism enabling this global effort is the use of carbon markets, which allow countries and companies to trade emissions reductions and removals, fostering cost-effective climate action. These markets are primarily governed by Article 6 of the Paris Agreement, which establishes rules for international cooperation on emissions reductions.

The Role of Carbon Markets in the Paris Agreement

Carbon markets operate under the principle that reducing emissions is more cost-effective in some regions than in others. Instead of every country cutting emissions at the same cost, carbon markets allow cheaper reductions to be financed by those facing higher costs, creating an incentive for global cooperation.

Under the Paris Agreement, countries set their own Nationally Determined Contributions (NDCs)—climate action plans that outline their emissions reduction targets. However, many countries may find it challenging to meet these targets domestically, which is where carbon markets come into play.

Article 6 of the Paris Agreement provides the legal foundation for international carbon trading:

1️⃣ Article 6.2 – International Carbon Trading Between Countries

This provision allows countries to trade emissions reductions directly, using Internationally Transferred Mitigation Outcomes (ITMOs).

2️⃣ Article 6.4 – A Global Carbon Credit Market

This establishes a UN supervised global carbon credit market, replacing the Clean Development Mechanism (CDM) from the Kyoto Protocol.

3️⃣ Article 6.8 – Non-Market Approaches

For countries that do not wish to participate in trading, Article 6.8 encourages cooperation through non-market-based mechanisms, such as technology transfers, direct climate finance, and capacity-building programs.

How Carbon Markets Support Nationally Determined Contributions (NDCs)

Each country’s NDC serves as a roadmap for its climate strategy. However, many nations, particularly developing countries, face challenges in meeting their commitments due to financial or technological barriers.

Carbon markets help by: ✅ Lowering compliance costs – Countries can invest in cost-effective reductions abroad instead of only making expensive domestic cuts. ✅ Mobilizing private investment – Companies can finance low-carbon projects in developing nations. ✅ Driving innovation – Industries have a financial incentive to develop cleaner technologies. ✅ Increasing ambition – Countries can commit to more ambitious targets knowing they have market flexibility.

However, current NDC commitments still fall short of the 1.5°C target. The upcoming NDCs 3.0 (2025 update) will be critical in increasing ambition, and carbon markets will play a key role in bridging the emissions gap.