How international carbon markets work under the Paris Agreement

The Paris Agreement recognises that countries may cooperate for higher ambition on climate change and to promote sustainable development and environmental integrity.

Article 6 of the Paris Agreement sets basic parameters for the many ways countries can cooperate to reduce emissions and increase climate change action. For more information see The Paris Agreement [United Nations Climate Change website].

The Paris Agreement has changed the context within which international carbon markets operate. Markets under the Paris Agreement must operate differently to how markets operated under the Kyoto Protocol. Article 6 of the Paris Agreement puts clear responsibilities on participating countries to ensure that any trade of emissions reductions that may be used towards their NDC targets must have environmental integrity, and be authorised and accounted for by the countries involved.

Article 6 provides:

  • broad accounting and reporting rules for all cooperative approaches under Article 6.2
  • sets up a centralised mechanism for cooperation under Article 6.4
  • provides for a work programme on non-market approaches under Article 6.8.

Examples of the types of cooperation possible under Article 6 include:  

  • Bilateral or regional cooperation, including emissions trading schemes which link to each other or project based mechanisms which could provide crediting to other countries 
  • Cooperating through the centralised mechanism established by Article 6.4, which is not yet operational
  • Information sharing initiatives on non-market cooperative approaches to emissions reductions

For more on New Zealand and the Paris Agreement see the Ministry of Foreign Affairs and Trade website.

Environmental integrity in international carbon markets

Effective international carbon markets can help to scale up climate change mitigation action. Participating countries can take more ambitious commitments than their domestic reductions might achieve.

To be effective, international carbon markets must have environmental integrity. New Zealand champions environmental integrity at home and abroad.

Paris climate change negotiations (COP 21, 2015)

At the Paris climate change negotiations (COP 21, 2015), New Zealand led a Ministerial Declaration on Carbon Markets that has now been endorsed by 21 countries. The declaration sent a clear signal that cooperation through international carbon markets, has an important role in allowing for higher ambition by Parties to the Paris Agreement. It states that interested countries will work together to ensure the development of standards and guidelines for using market mechanisms that ensure environmental integrity and avoid any double-counting or double-claiming of emissions reduction units. Clear standards and guidelines can give countries and investors more confidence that carbon markets will be robust in future years.

We worked with the other signatory countries to develop ideas on standards and guidelines for environmental integrity, which have been shared as part of our contribution to Article 6 negotiations – see: Towards standards and guidelines on environmental integrity in international carbon markets.

Madrid climate change negotiations (COP25, 2019)

At the Madrid climate change negotiations (COP25, 2019) New Zealand was part of a group of 31 countries which endorsed the San Jose Principles for High Ambition and Integrity in International Carbon Markets [DCC website]. These principles constitute the basis upon which a fair and robust carbon market should be built.

New Zealand supports the development of effective regional and global carbon markets. This includes participating in forums like the G7-led Carbon Market Platform and the EU-led Florence Process (of ETS jurisdictions). We are also a technical partner in the World Bank Partnership for Market Readiness.  First held in 2011, we regularly convene the Asia Pacific Carbon Market Roundtable.

New Zealand and international carbon markets

The NZ ETS is closed to international carbon markets. New Zealand would need to work directly with partners overseas on ways to cooperate and to access international carbon markets, in line with Article 6 of the Paris Agreement  

The Government is working to identify options for accessing offshore mitigation as part of meeting our NDC commitments. Possible options include limited purchasing of offshore units by NZ ETS participants. The Framework for International Carbon Market Cooperation [PDF 473 KB] outlines how the Government would approach cooperating with potential overseas partners. 

If a decision was made to open the NZ ETS to international markets, only international units from sources approved by the Government could be eligible for use under the NZ ETS. Any international units used in New Zealand would be required to meet certain standards that demonstrate their environmental integrity, and legislation specifies that they must be subject to a volume limit. 

The International Carbon Markets Project

The Ministry for the Environment and the Ministry of Foreign Affairs and Trade are cooperating to:

  • contribute through international fora to building environmental integrity in international carbon markets under the Paris Agreement, so that the use of these markets will enhance and not undermine global efforts to reduce emissions 
  • assess and develop options for New Zealand to access international carbon markets as a contribution to meeting our NDC commitments. 

For further information about this work, please contact ICM@mfe.govt.nz.