It is estimated that the private sector will contribute some 85 to 90 percent of the total cost of funding the Paris Agreement, through investing in green technologies and turning on us onto low carbon pathways. However, it is also acknowledged that this investment is currently not happening, neither at the pace nor at the geographical scale we need.
Currently, the majority of private sector investments are happening in the minority world, where the wealthiest live, and not in the majority world, which is home to around 5 out of 7.6 billion people on earth. An accelerated shift of investments into these nascent markets is urgently needed to put the world on a low carbon trajectory.
And yet, climate negotiators have been unable to agree on the text on Article 6 in the rulebook at COP24 in Katowice, Poland last week, with the disagreement remaining on basic accounting rules to prevent ‘double counting’ of emission reductions.
Article 6 of the Paris Agreement, which is widely seen as a key entry point for private sector engagement, details a host of market-based mechanisms by which countries can cooperate on implementing their pledges and climate action plans – their NDCs – as well as raising the ambition of these pledges. Article 6 can therefore form the foundation of a legal framework for market-based climate change mitigation mechanisms, such as carbon markets and carbon trading.
A mobilisation of the private sector needs to take place at the national and international level. Through Article 6, private sector actors and investors have the opportunity to engage at the international level, either through cooperative approaches, led by countries under Article 6.2 or through a centrally governed market mechanism established under Article 6.4.
Although interlinked with several other key facets of the Paris Agreement, such as sustainable development, transparency and environmental integrity, Article 6 is seen as key for attracting private investment and spurring adoption of clean technologies. A variety of institutions and think tanks are ready to provide policy recommendations that will allow an eager number of private sector actors to operationalize the Paris Agreement under favorable regulatory conditions.
Almost all developing countries have asked for technical and financial support to achieve the actions and targets outlined in their NDCs. Through cooperative approaches and the provision of market approaches in Article 6, such support can be provided: through direct collaboration between Parties (Article 6.2) emission reduction measures are implemented in one country, and these certified reductions - or a specific percentage of them-, can to be transferred to another country for compensation, these emission reductions can count towards the climate targets of the receiving country. This provides an incentive for the receiving countries to accelerate private investment in NDC implementation through results-based financing approaches.
Even more so, the Sustainable Development Mechanism (Article 6.4) can promote private sector engagement through its centrally and independently overseen delivery of mitigation outcomes which will ensure regulatory long-term certainty, transparency and comparability of results.
However, with unfavorable investment environments in the majority world such as high costs of debt financing, currency and political risks, in addition to project risks, it is critical that direct financial incentives are available so domestic investors and international investors can access lower cost finance.
According to discussions during a webinar on Article 6 mechanisms, which was organized by the UNDP NDC Support Programme, the following key issues need to be addressed in order to successfully unlock private sector finance:
(1) a definition of mitigation outcomes in tonnes of CO2equivalent;
(2) a common accounting standard to ensure compatibility;
(3) seller reliability through an internationally accepted legal instrument to avoid retraction of Internationally Transferred Mitigation Outcomes (ITMOs) by a country; and
(4) long-term certainty for investors and commitments from Parties to avoid ex-post changes.
If such key private sector requirements are fulfilled, key contentious points overcome and rules agreed at COP25 in Chile in 2019 to provide sufficient certainty to international capital markets, these incentives could quickly drive investment into the nascent markets of the majority world at a scale needed to halt climate change.
Ultimately, for a successful roll-out of Article 6 mechanisms, sufficient demand is needed. If the majority world turns their unconditional targets into conditional targets – which they themselves can fund – and the minority world is ready to significantly increase current ambitions of their NDCs, there will be sufficient demand for cost-effective, private sector driven market instruments, stimulated through Article 6 rules and regulations.