# 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**.