Is Latin America ready for Article 6?

August 2018 - GIZ Chile held a side event at the Latin American and Caribbean Carbon Forum (21st -23rd August) to discuss the question: “Is Latin America Ready for Article 6?”. The event was organised and hosted jointly with Perspectives Climate Group and with support from the Federal Ministry of the Environment, Nature Conservation and Nuclear Safety (BMU).

Marlen Goerlen from GIZ Chile opened the event by describing GIZ’s ongoing cooperation with Chile under the “Global carbon markets” programme aimed at strengthening capacities, involving the private sector and the general public in order to advance the establishment of carbon markets in different countries around the world.

Igor Shishlov from Perspectives Climate Group facilitated the event and set the scene for the ensuing discussion by presenting a general overview of Latin American experience with international and national carbon markets. While there are some similarities between the Article 6 mechanisms and the Kyoto Protocol’s CDM and JI, the new mechanisms will have to operate in an environment where all Parties have to fulfil their own NDCs, all of which have varying characteristics and thus lack comparability. Shishlov gave a quick overview of Latin American and Caribbean experiences with compliance and voluntary markets in the Kyoto world as well as the most recent developments in the introduction of domestic carbon market instruments. He also briefly introduced the ongoing regional initiatives for carbon markets, the Pacific Alliance working group on climate and environment, and the Carbon Pricing in the Americas initiative which promotes a regional carbon market through efforts to harmonize national MRV systems. Ongoing pilot activities that will inform the operationalization of the mechanisms were also presented. Shishlov concluded his presentation with some key considerations he feels must be taken into account when operationalizing Article 6. To preserve environmental integrity, the principles of additionality and the methodologies for baseline setting known from the Kyoto world should be adopted, he said. Robust MRV systems must be incentivized, while “hot air” entering the system through unambitious NDCs must be prevented. To guarantee the economic efficiency of the mechanisms, countries must formulate a smart ITMO sales strategy in order to keep the projects needed for own compliance in the domestic realm while using market mechanisms to implement more complex and expensive emission reductions in a cost-effective way.

Julio Cordano, Head of the Department of Climate Change and Sustainable Development at the Department of Environment in the Chilean Ministry of Foreign Affairs, shared his view on the status of negotiations on Article 6. He highlighted the key challenge of operationalizing the mechanisms in a way that they contribute to raising ambitions and the fulfilment of NDCs. The mechanisms will also bring new forms of implementation that go beyond the projects and programmes of activities known from the Kyoto Protocol, such as the linking of emissions trading schemes and direct transactions between carbon budgets or carbon clubs. Cordano also proposed that LAC countries should overcome the logics of the Kyoto Protocol: Rather than being a mere “seller” country to industrialized countries, they should consider the potentials for south-south, market-based cooperation and using markets for the own compliance commitments. A key challenge will be the establishment and harmonization of MRV systems, where regional discussions are already ongoing. Translating NDCs into carbon budgets could be an opportunity for the countries to enhance their readiness and meet the transparency requirements. Next, Cordano reported on the current status of the Chilean-Canadian bilateral cooperation project in the waste sector. The ongoing project aims to measure achieved emission reductions in a way that allows them to be translated into ITMOs, with the experience gained strengthening the capacities of the Parties involved and informing the operationalization of the Article 6 mechanisms.

Juan Pedro Searle, Head of the Climate Change Unit of the Chilean Ministry of Energy, outlined Chile’s current Partnership for Market Readiness (PMR) work. The “precio al carbono Chile” (Carbon Pricing Chile) project aims to introduce carbon pricing mechanisms linking both the planned diversification of the energy system and climate change mitigation goals. The first phase of the PMR programme has been finalized and a carbon tax package introduced. The objectives of phase 2 are now to evaluate options to strengthen the instruments in place through the extension of tax coverage, linking the carbon tax to an offset mechanism or establishing a national ETS. Also, monitoring, reporting and verification (MRV) are to be strengthened, including through the establishment of a virtual platform for mitigation activities in the energy sector. Searle also outlined other ongoing activities that enhance Chile’s readiness for Article 6. These include a pilot project with the World Bank to generate ITMOs with blockchain technology, a project with the Swedish Energy Agency to create virtual ITMOs from a mitigation plan and the development of an NDC investment plan.

Christian Patrickson, Managing Director and founder of the consultancy StratCarbon Ltda and advisor to the Confederation of Production and Commerce (CPC) in Chile, gave a private sector view on Article 6. He highlighted two prerequisites needed to engage the private sector in climate change mitigation activities: First, make economic growth compatible with the objectives of the Paris Agreement and second to finance such an economic growth, maybe also through Article 6.8. Patrickson emphasized that this issue is of particular importance to developing countries who together emit 40 percent of global emissions and need adequate financial instruments to sustain climate-compatible growth. First and foremost, he said, the private sector needs predictability and transparency, meaning that NDCs must be translated into sectoral objectives and baselines for sectors and industries must be set. In addition, a significant carbon price must be established in order to make climate-compatible investments profitable. Public policy will have to generate demand while allowing the private sector to trade emission reduction achievements and have access to international markets.

In the ensuing debate, participants and panellists discussed intelligent engagement of developing countries under Article 6, highlighting the potential to achieve higher ambition or contribute to the linking of national carbon markets. They also pointed to the important role that governments will have to play in incentivizing private sector participation. The role Article 6.8 could play as a complement to market mechanisms was also discussed.

Note: The presentations are available only in Spanish.