A Report on InFiNe Knowledge Sharing Event with GGGI

A Report on InFiNe Knowledge Sharing Event with GGGI

International Carbon Trading Under The Paris Agreement

International carbon trading must play a key role in the global effort to reduce greenhouse gas emissions and prevent the worst-case scenario impacts of climate change. Under the Paris Agreement, countries can pursue international co-operation on a voluntary basis to achieve their climate targets, including the possibility of transferring carbon credits earned from the reduction of greenhouse gas emissions to help other countries meet their goals. Microfinance could play a potentially important role in the development of carbon credit schemes by unlocking financial support to help projects come to fruition in developing countries.

InFiNe’s Knowledge Sharing Event on June 5 – International Carbon Trading under the Paris Agreement – was hosted by Fenella Aouane, head of carbon pricing and a director at the Global Green Growth Institute (GGGI). The in-person and online event, staged at Luxembourg City’s Maison de la Microfinance, is part of a series organised by InFiNe to expand expertise among its members. 

The GGGI is a treaty-based international, inter-governmental organisation dedicated to supporting and promoting strong, inclusive and sustainable economic growth in developing countries and emerging economies, which make up most of its 48 members, along with regional integration organisations.

The role at the GGGI of Ms Aouane, who has more than 25 years’ experience in financial and commodity markets, is to create the strategy and vision to use carbon pricing to help countries access finance and increase their climate ambitions through carbon market mechanisms. Her team of global experts offers technical assistance to help governments ready themselves for international carbon trading, as well as to originate pipelines of emission-reducing activities in line with their long-term development planning.

Ms Aouane noted that the concept of carbon pricing originated from the US Clean Air Act of 1990, in which legislators seeking to reduce the impact of acid rain decided on a change from the traditional approach of simply taxing pollution in order to limit it. Polluters such as coal-fired power plants were given an allowance and allowed to trade credits if they emitted less contaminating emissions than their allowance stipulated. The success of the scheme gave rise to the cap-and-trade approach now applied to carbon markets.   

She pointed out the differences between cap-and-trade schemes, in which companies have legally binding limits and can trade allowances, and voluntary schemes for emission reductions or offsets, in which organisations are not seeking to comply with legal limits but to fulfil goals such as businesses aiming for net zero emissions.

Under the Paris Agreement’s Article 6 carbon crediting mechanism, countries are encouraged to increase their climate ambitions and implement national action plans more affordably. Countries can adopt cross-border exchanges of credits, known as Internationally Transferable Mitigation Outcomes (ITMOs) under Article 6.2, which sets out a system of national accounting for greenhouse gas emissions.

In January 2024 the first agreement on an Article 6 scheme was concluded between Switzerland and Thailand. The Zurich-based KliK Foundation purchased the first ITMOs from the Energy Absolute Public Co. for the Bangkok E-Bus Programme, under which the Thai capital’s fleet of buses is switching from internal combustion power to electric vehicles. Countries such as Switzerland in this case can count the resulting emission reductions toward their own domestic targets, known as Nationally Determined Contributions (NDCs), or they can be sold to other countries toward their own NDCs.

The system is complex, and GGGI is working with its members to facilitate schemes that will bring about emission reductions and produce positive development outcomes.

The paperwork involved to verify emission reductions, as well as to eliminate the possibility of  double counting and ensure only one of the two countries is credited with the emissions cut towards its NDCs is massive, Ms Aouane admitted. But she says the Paris Agreement framework offers far more robust compliance guarantees than voluntary carbon markets, which have given rise to extensive controversy about the correct accounting of reductions and offsets.

In addition, she said: “It is necessary to show that the finance flowing into the developing country is essential to make the project viable in the first place.”

Ms Aouane says the Article 6 process is still in its infancy and costs remain high. The validator of a project typically commands a fee of $50,000, and verifying organisations are likely to charge $20,000 a year. “It’s a bit like when a pharma company is developing a new drug – the costs are high, and you need large deals to make it worthwhile at the beginning,” she said. “But it will become quicker and less expensive once the set-up procedures become established.”

GGGI is working directly with 18 developing countries on carbon pricing to build readiness for future schemes, offering institutional strengthening, market awareness and understanding, knowledge-sharing and transaction support by establishing links with donors and carbon trust fund partners. 

Microfinance has a big role to play, Ms Aouane argued. She offered the example of farmers in a developing country being supplied with solar-powered irrigation devices to improve their harvests while reducing emissions – microfinance will be essential to enable the famer to afford the relatively expensive equipment.