A new decade of carbon markets and the opportunity of Article 6

To incentivise Parties to take on more ambitious commitments over time, a transparency framework requires countries to report on their progress in achieving these mitigation targets. In addition, Article 6 of the Paris Agreement promotes international cooperation to facilitate the implementation of NDCs and to allow for higher ambition in Parties’ mitigation and adaption actions. Increased cost efficiencies resulting from such cooperation opportunities could be one of the triggers to convince countries to pursue deeper cuts in emissions in the next rounds of NDCs.

The EBRD is one of the key funders of a research project initiated by the International Emissions Trading Association (IETA) and the University of Maryland (UMD) to assess the potential global economic impacts and investment needs of Article 6 under different policy and collaboration scenarios. The Bank also commissioned a report that evaluates the potential impact of trading under Article 6 across the EBRD region and its countries of operation, which includes Turkey. The objective of this study was to evaluate the impact Article 6 collaboration can have on the cost efficiency of achieving the NDC goals of countries within this region and build on a quantification of investment needs under several alternative scenarios. Key findings from this study include:

  • significant cost reductions can be achieved if countries pursue international collaboration to meet their NDC targets. By the year 2100, annual accrued economic benefit reaches $131 billion for the EBRD region
  • when carbon markets are used optimally to achieve current NDC targets, the cumulative value of the carbon market is forecasted to reach $300 billion by 2100, implying a significant potential for carbon financing in regions that offer cost-effective abatement opportunities
  • by reinvesting the economic savings generated as a result of the use of markets into further abatement action, countries could realise increased ambition at no additional cost. For example, this could be achieved by increasing emission reduction targets in the carbon markets in five-year cycles, aligned with increasing NDC ambition

While Turkey was not evaluated as a separate economic region, its regional block (besides Turkey including Albania, Bosnia Herzegovina, Croatia, Macedonia, Montenegro and Serbia) offers a window of opportunity for cost-effective emission reductions in the period 2020 to 2030, during which regional abatement costs are simulated to be lower than the global average abatement cost. The observed relationship between this region’s average shadow prices and global shadow prices implies that under a full collaboration scenario, the region is initially incentivised to generate deeper emission cuts domestically.

Figure: Potential carbon market value per year until 2100 (Turkey results include broader region coloured in light blue)

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Source: Article 6 modelling report available here.