Opportunities for mobilizing private climate finance through Article 6

Abstract

The ambitious long-term target of the Paris Agreement (PA) can only be achieved if private sector action on climate change is scaled up and global finance flows are reoriented towards low-carbon development and climate resilience. Governments will need to trigger climate-compatible investments through targeted national policy instruments. International market mechanisms introduced by the PA in Article 6 are expected to play a critical role in creating the right incentives for mitigation activities financed and managed by the private sector. The upcoming Conference of the Parties (COP) in Chile is to deliver a final rulebook for Article 6, which will define the framework within which the private sector can operate and will define how generated mitigation results can be brought to market. While the price level achieved for internationally transferred mitigation outcomes (ITMO) or Article 6.4 Emission Reductions (A6.4ERs) will be the key driver for private sector engagement in market mechanisms, several other parameters will be relevant: the level of transaction costs, the degree of government interference, the scope of eligible activities, and the stringency of additionality determination and baseline setting. Balancing the delicate trade-off between private sector costs and assurance of environmental integrity is vital if new market mechanisms are to trigger private sector participation in climate change mitigation and adaptation activities at scale. This study seeks to answer the overarching question: How can Article 6 market mechanisms be designed to incentivize mobilization of private financing and contribute to support Article 2.1c in the Paris Agreement? While a wide definition of climate finance would cover finance triggered by market mechanisms; a narrow definition consistent with Article 9 PA would not cover market mechanism financing that aims to generate market mechanism units (ITMOs/A6.4ERs) for compliance with NDC targets. It should however be noted that no consensus on definitions has been achieved internationally so far.