In order to achieve the goals of the Paris Agreement, many countries have launched a carbon asset buy-to-buy model, how to seize the opportunity?

Most countries have set their first Nationally Determined Contributions (NDCs) target at 2030, and even 2025, which is imminent, especially when the target year is due next year. Whether NDC can be achieved on time, in good quality and quantity, is crucial to the success of all mankind in tackling climate change.

As with companies achieving their own emission reduction targets, there are two ways to achieve NDC, first, by reducing emissions themselves, and by using external tools for emissions that cannot be reduced. Two external instruments are mentioned in the Paris Agreement: ITMO in Article 6.2 and A6.4ER in Article 6.4.

For Article 6.4, because it is to establish a global carbon credit mechanism, it needs the consent of countries around the world, and the progress of the negotiations is slower than that of a snail, after all, it is difficult to reconcile. So I don't think there's a reason for this until the last minute (2028).

Article 6.2 of the Paris Agreement is different, it is a bilateral mechanism, as long as the two countries of the buyer and seller negotiate on their own, it is OK, so the current rules are clearer and more feasible is Article 6.2, this article will take you to understand the progress of Article 6.2 in the world.

Article 6.2 of the Paris Agreement allows countries to exchange mitigation outcomes (ITMOs) bilaterally, report on their transactions, and use them in their nationally determined contributions.

This is a way to improve overall international cost-effectiveness, because it is more difficult for developed countries to find opportunities to reduce emissions domestically when the technologies are already relatively mature. But the situation is different for developing countries and even least developed countries, where the potential for emission reductions is high and the cost of reducing emissions is relatively low. For example, in developed countries, $100 can reduce emissions by 1 tonne, and in developing countries or LDCs, it may be possible to reduce emissions by 3 tonnes.

The Article 6.2 mechanism of the Paris Agreement provides an opportunity for countries with greater or more urgent needs to reduce emissions to achieve NDCs at a lower cost. As of March this year, there were 81 bilateral agreements involving 9 buyer countries and 46 host countries and 141 projects worldwide. The mapping of some of the purchasing countries to the host country is as follows:

These more than 100 projects include many types, so the development potential of the host country is still very broad.

Let's take a look at the current NDC situation in the nine buying countries.

Of the nine buyers, Switzerland is the only country with an NDC target for 2025, and the need to reduce emissions is the most urgent. According to 2022 emissions data, Switzerland has a gap of 10 Mt CO2e from its 2025 target.

Switzerland currently has bilateral agreements with 16 countries and has published 21 projects, five of which provide estimated emission reductions totalling around 6 MtCO2e.

On December 15, 2023, Thailand transferred 1,916 units of ITMO (1916 tCO2e) to Switzerland, making it the first transfer under the Paris Agreement 6.2 mechanism. Both sides will also need to make adjustments to their respective GHG inventories to avoid double counting.

In addition to Switzerland, other countries are also taking action, and in addition to bilateral agreements, some purchasing countries have also introduced relevant incentives.

South Korea, for example, plans to allocate a budget of 10.9 billion won (US$8.09 million) to subsidize domestic companies that plan to develop emission reduction projects overseas this year, in a bid to obtain more international carbon credits.

Japan is soliciting business proposals under the Joint Credit Mechanism (JCM), with a total project budget of 12.8 billion yen (US$84.37 million) starting this year, aiming to increase the supply of carbon credits under a bilateral framework. It is important to know that 119 of the 141 current ITMO projects are from Japan's joint credit mechanism.

In order to facilitate carbon trading under the 6.2 mechanism, the voluntary emission reduction mechanism has also launched carbon credit labels for NDC, such as Verra published the "Article 6 Labelling Guidelines" in August last year and applied it for the first time in December, the guidelines stipulate that carbon units authorized by the host country for specific purposes under Article 6 of the Paris Agreement can obtain Article 6 labels, and another mainstream voluntary carbon credit mechanism Gold Standard (GS) has also launched a similar mechanism. It has to be said that the difficult birth of A6.4ER is a good opportunity for a voluntary emission reduction mechanism.

We can see that most of these ITMO buyers are economically developed countries but have small land areas, which leads to their high demand for emission reduction, but their own volume cannot meet their needs. China's situation is different, we are both a big emitter, but also a big emission reduction country, in terms of achieving national NDC, China did not consider buying foreign carbon credits to achieve, of course, did not consider selling carbon credits, so so many bilateral negotiations, whether it is a buyer or a seller, there is no shadow of China, but does this mean that we will not engage in it?

The answer is no. I believe that as more and more countries promote NDCs, international cooperation, transfer, and transactions will become more and more common. If China only considers NDC compliance in this process, then it can indeed consider not participating in this market, and I believe that China is fully capable of achieving its NDC goals by its own efforts.

But if China wants to have a say in the international carbon market, or if it wants to establish a global carbon market center, it must become the largest player in ITMO. As for how to become the biggest player in ITMO, in my previous articleHow can China seize the opportunity to internationalize the global carbon market under the Paris Agreement?There are detailed explanations, so I won't go into them here.

So, what are the opportunities for these changes for us?

I believe that as 2030 approaches, the international carbon market will become more and more mature, which is the biggest opportunity for small partners engaged in carbon trading. Although China has not yet signed a bilateral agreement under the Paris Agreement 6.2 mechanism, we can participate in the development and trading of carbon assets in line with the Paris Agreement abroad.

Therefore, if there are channels and resources corresponding to the country, you can consider going overseas to develop carbon assets, don't feel that this is very far away, just like China's wind power, photovoltaic, new energy vehicles, the domestic volume to a certain extent will inevitably go to sea, and the same is true for carbon asset development. As for whether you have that ability or not, it depends on how well you practice your internal skills.