COP26: Paris Article 6 can generate $1 trillion/year of capital flows by 2050: IETA

Article 6 of the Paris Agreement on climate change, which deals with international carbon markets, can generate up to $1 trillion per year in financial flows by 2050 to achieve the treaty's climate goals, the International Emissions Trading Association said Oct. 26.

Article 6 is a key outstanding element of the Paris "rulebook" that has yet to be agreed by countries and could be a breakthrough item at the UN Climate Change Conference in Glasgow running Nov. 1-12.

Agreement on the rules could bolster interest in the market for voluntary carbon offsets and unleash a wave of investment and liquidity in the market, which is tipped to grow by a factor of at least 15 by 2030.

"Robust international emissions markets developed by Parties to the UNFCCC could stimulate up to $1 trillion of new capital investment towards developing countries, improve local sustainability results, and provide incentives for further technological innovation," IETA said in a joint report with the University of Maryland, USA.

The report studied how a strong global network of linked carbon markets can drive down the cost of cutting greenhouse gas emissions and generate savings that could be reinvested into emissions abatement that would help countries to achieve the main goal of the Paris Agreement – keeping global temperature increase to no more than 1.5 degrees Celsius by 2100.

"This new round of modelling work re-emphasizes the immense value of cooperative mechanisms and explores pathways to achieve global net-zero in a more fair and equitable manner," said IETA CEO Dirk Forrister.

"In addition to lowering mitigation costs, Article 6 could stimulate new investment in selling regions, improve local sustainability results, and present incentives for further technological innovation," he said in the statement.

Much of the flow of capital would go to developing economies in the form of clean technology investment, assisting them to reach sustainable development goals, IETA said.

The study included a variety of scenarios including a "staggered net-zero" option in which countries reached net-zero emissions at different times.

The modelling showed that countries responsible for 97% of 2020 emissions would reach net-zero by 2060.

The Voluntary Carbon Market is primarily driven by the private sector's desire to demonstrate sustainability, meaning it is likely to continue expanding with or without agreement at the UN.

However, agreement on Article 6 among countries is likely to open up government demand for emissions credits, creating a further boost for the market.

"With Article 6 rules in place and an operational global marketplace, the staggered net-zero scenario would see financial flows rise to $1 trillion per year by 2050 from $300 billion per year in 2030," IETA said.

The delayed net-zero target dates under the staggered net-zero scenarios also substantially change the buyer and seller dynamics in the lead-up to 2050, the study found.

"For example, China and India shift from being buyers to sellers, while the US becomes a large buyer to achieve its increased ambition," IETA said.

"Latin America and the Caribbean become sellers along with most of Africa. On the other hand, Canadian, Russian and Brazilian sales are greatly diminished before 2050," it said.

Carbon credit prices have shown a strong uptrend in 2021 amid growing interest in the market.

S&P Global Platts assessed CORSIA-eligible carbon (CEC) credits at $7.45/mt CO2 equivalent at the close Oct. 26, while nature-based credits were assessed at $8.50/mt.