The Economic Potential of Article 6 of the Agreement and Implementation Challenges

SEPTEMBER 2019 TECHNICAL REPORT 2019 (CC IGO) BY 3.0 This work is available 3.0 under the IGO Creative Commons license Attribution PERMISSIONS AND RIGHTS work. this in included data the of accuracy the guarantee not does CPLC The represent. authors the organizations the of views the reflect necessarily not do report this in expressed conclusions and interpretations, findings, The DISCLAIMER Shell, and the Swedish Energy Agency. Government of for the Global United Kingdom, Environmental the Institute Strategies, the Norway, of Government the , of Government the (EBRD), Development and Reconstruction for Bank European the Chevron, from contributions valuable (CPLC), and Coalition Leadership Pricing Carbon the from support with Maryland of University the (IETA) and Association Trading Emissions International the by prepared was report This ACKNOWLEDGEMENTS Trading Emissions (International Munnings Association) Clayton Trading Emissions de (International Clara Stefano Association) Laboratory) National Northwest (Pacific Clarke Leon (InternationalDirk Forrister Association) Laboratory) National Northwest (Pacific Edmonds Jae AUTHORS Page 17–18 photography: Max Thabiso Edkins, Connect4Climate, Connect4Climate, Edkins, Thabiso 17–18 Max Page photography: Shutterstock, image: Cover Editorial, Clarity design: and Editing CPLC. the by endorsed not are and adaptation, the of authors or author the of responsibility sole the are adaptation the in expressed opinions and Views CPLC. the by work original an of adaptation an is This attribution: the with along you create an of adaptation Adaptations—If this please work, add the following disclaimer CC IGO. BY 3.0 Attribution Commons Creative D.C. License: Washington, Paris Agreement Challenges”, and Implementation and ofCPLC. IETA, Maryland University the 6 of Article of Potential Economic “The follows: as work the cite Attribution—Please including for commercial under purposes, the following conditions: work, this adapt and transmit, distribute, copy, to free are you license, Attribution Commons http:// creativecommons.org/licenses/by/3.0/igo www.shutterstock.com www.clarityeditorial.net . Under the Creative Creative the . Under www.connect4climate.org

CONTENTS

ABSTRACT AND KEY MESSAGES 1

INTRODUCTION 2

METHODOLOGY 3

RESULTS 6

DISCUSSION 15

FUTURE RESEARCH 16

REFERENCES 19

LIST OF FIGURES

FIGURE 1: GLOBAL AND INDUSTRIAL CO2 EMISSIONS IN THE REFERENCE, I-NDC, C-NDC, AND E-NDC SCENARIOS 4

FIGURE 2: SHADOW PRICES OF CO2 IN THE I-NDC, C-NDC, AND E-NDC SCENARIOS 4

FIGURE 3: GLOBAL TOTAL GHG EMISSIONS IN 2025 AND 2030 UNDER DIFFERENT SCENARIOS 5

FIGURE 4: ENERGY AND INDUSTRY CO2 EMISSIONS (2015–2050) AND EMISSIONS MITIGATION BY REGION 2030, 2050 AND 2100 7

FIGURE 5: REDUCTION IN ECONOMIC COST (GLOBAL AND REGIONAL) 8

FIGURE 6: ENHANCED AMBITION ENABLED BY ARTICLE 6 9

FIGURE 7: SHADOW PRICES OF CO2 IN THE I-NDC-UCT SCENARIO 10

FIGURE 8: CO2 EMISSIONS TRADED AND THE SIZE OF CARBON MARKET 10

FIGURE 9: GLOBAL FOSSIL FUEL AND INDUSTRIAL CO2 EMISSIONS IN THE I-NDC AND I-NDC (NO U.S.) SCENARIOS 11

FIGURE 10: CO2 EMISSIONS AND CARBON MARKET WITHOUT U.S. PARTICIPATION 12

FIGURE 11: GLOBAL FOSSIL FUEL AND INDUSTRIAL CO2 EMISSIONS IN THE I-NDC-INCREASED AND C-NDC-INCREASED SCENARIOS 13

FIGURE 12: CO2 EMISSIONS AND CARBON MARKET WITH MORE

AMBITIOUS POST-2030 MITIGATION 14 2019 REPORT TECHNICAL 1 TECHNICAL REPORT 2019 T COP 25 in Chile. 25 in COP before address to useful be would that research the them. We gaps in conclude byfurther identifying and could implementeda framework well-designed the achievement of Paris goals,could while frustrate designed andA implemented poorly framework 6 is essential. ofdesign and Article implementation the both in framing careful however,We that note, cost. additional per year [GtCO year per dioxide carbon (~5 of emissions gigatonnes more 50 percent of removal the facilitate alternatively 2030), or in year (~$250 half than more by (NDCs) billion/ contributions determined nationally of implementing cost total the reduce to potential the has 6 Article that We find byunder consideration currently negotiators. of choices design implications and potential We go on real to discuss world considerations 6. Article of potential economic the quantify to model, assessment integrated an (GCAM), Model Assessment Change Global the We use parties. participating made between agreements the by and 25Chile in COP at held be to one next the particularly (COP) meetings, Parties the Conference of upon by in forthcoming negotiators agreed choices design by informed be will it, use they how and 6, Article use countries which to extent The ABSTRACT Paris Agreement by participating countries. countries. byParis Agreement participating the 6 of Article of use the with associated economic and environmental outcomes potential the investigates paper technical his 2 /year] in 2030), at no no 2030), at in /year]

§ § § Key messages § § § ~5 GtCO ~5 or 50 by percent Agreement Paris the additional abatement under could facilitate 6 Article then ambition, enhanced in savings cost these invest to inspired are countries If improved economic efficiency. are achievedimplementation through from cooperative reductions Cost 2030. in year per $250 billion about total of NDCs countries’ implementation overPotential independent reductions cost benefit. could parties all and large are 6 Article under NDCs the achieving in cooperation to benefits potential The current contributions and undercut progress. and progress. undercut contributions current meeting they could frustrate reductions additional emissions than facilitate rather then poorly, written If critical. are rules The 2 /year in 2030. in /year

TECHNICAL REPORT 2019 2

toimplement Article for6 COP 25. Themost recent negotiations in Katowice at COP 24 Programme Work Agreement Paris completedthe valuable provided which Rulebook, The yielded and elaborationseveral Articles for guidance and the of Article including Agreement, but not Paris Ministers 6. workedhard to find agreement on Article 6, but reached. be not could compromise TheRulebook does refer to Article in6 certain places, includingin Article which includes 13, sectiona on basicmarket accounting of transfer and use of ITMOs. Ultimately,the majority of work on Article must6 objective with an adopt to 2019, throughout continue guidanceat COP in Chile,25 where Article will6 presumablytake the mainstage. It will be crucial to successfullynegotiate Article in6 Chile, but it will also detractors few the since challenging be Katowice in legitimate concerns. brought Despiteintense focus by diplomats and analysts on howto implement Article 6, little work has focused on quantifying environmental and economic potential the opportunitiesoffered by Article analyze 6. We both aspectsby addressing two questions: What are thepotential cost savings from full cooperation in implementingNDCs? If those savings were applied enhanced to mitigation goals, much how additional discuss then We countries could ambition achieve? thereal-world challenges associated with realizing thispotential enhanced discuss finally ambition. We rules considerationsdevelop negotiators they for as , 2016); and, 2016); , ,2018). etal. etal. , 2016; Mani 2016; , e begine by providing background onthe Paris Agreement and Article to6 contextualize the current state negotiations of characterize and etal.

themain design choices being contemplated by negotiators.The Paris Agreement established a international new framework addressing to changerooted in bottom-upa process that relies on action. national Parties establish short-term domestic goalsthrough (i.e., in NDCs 2030) and report their transparency a progressthrough framework. Current pledgesare insufficient to limit average surface temperaturedespite increase (IPCCC, 2018) to 1.5°C theoverarching goal of the Paris Agreement, which pursuesefforts to limit the temperature increase to (United This 1.5°C Nations, gap highlights 2015). the importanceenhancing ambitionof time. quickly over Articleof6 the Paris Agreement allows parties to lowerthe costs of abatement by working together in “cooperativeapproaches” that create internationally transferredThese mitigation outcomes (ITMOs). efficiency achieve countries outcomesto enable gains bytaking advantage of their differing marginal costs of facilitate potentially thereby enhanced and abatement ambition(Aldy Articleallows6 for many cooperative systems, homogeneous policies among linkages including linkages multiple market-based policies); (e.g., amongheterogeneous policies carbon (e.g., tax and performancestandards) (Bodansky

potentially, other innovative approaches (e.g., regional regional (e.g., approaches innovative other potentially, carbonThe hope clubs) (Nordhaus, is that 2015). lower abatementcosts realized through cooperation may increasepolitical appetite for more ambitious targets whenNDCs are reviewed (Keohane and Oppenheimer, About half of the NDCs 2016). signal interest in using cooperation international Article formsof through 6 (WorldBank and Ecofys, 2018). W INTRODUCTION 3 TECHNICAL REPORT 2019 METHODOLOGY W facilitated by Article 6. 6. Article by facilitated ambition enhanced potential calculate we how and literature, the to relative calibrated well is model how scenarios, we ensure different the construct to model the use we how describes section This Fawcett in used one the as same the is study gcam-doc/) Github on available is GCAM of documentation full The regions. 32 geopolitical and has economy, systems and land-use agriculture, 2017 [JGCRI], 2018). and energy, Institute links It Research Change Global (Joint model assessment effort required to achieve their NDCs beyond 2030. 2030. beyond NDCs their achieve to required effort decarbonization of level same the at continue and 2030 through commitments NDC their meet countries that assume scenarios C-NDC and I-NDC The literature. the in used widely been has approach This report. this in compare with the mitigation scenarios described to scenario a counterfactual as serves scenario include The reference any of NDCs. implementation not does it Therefore, GCAM). of year calibration the (GHG) 2010 after emissions (i.e., reduce to actions or policies new no assumes scenario reference The (E-NDC). ambition enhanced and NDCs (I-NDC), cooperative implementation (C-NDC), a reference scenario, of independent implementation GCAM: using scenarios alternative four We simulate OF SCENARIOS CONSTRUCTION (http://www.globalchange.umd.edu/gcam/indc/) online available and (2015), documented fully is which We explore how the assumption that the U.S. does not participate affects our results in supplemental materials. insupplemental results our affects participate not does U.S. the that assumption the how We explore 1 This includes the U.S. 2015 NDC, though the U.S. has signaled its intention to withdraw from the Paris Agreement. Agreement. Paris the from withdraw to intention its signaled has U.S. the though 2015 U.S. NDC, the includes This . The version of the model used in our our in used model the of version . The an open-source, global integrated integrated global an open-source, is GCAM 6. Article of value potential the estimate to (GCAM) Model Assessment Change Global the e use (http://jgcri.github.io/ et al. et .

an emission limit following the method the following limit emission an into NDC country’s each translate we scenario, this In 2030. after own their on economies their decarbonize their NDC goals and independently continue to implement countries that assumes scenario I-NDC The 6 will be underestimated. of Article implementation idealized from gains potential the and estimates cost utilized, arepolicies our inefficient economically that To extent the programs. and policies of variety wouldcountries reduce their through emissions a reality, in whereas, sectors, across carbon on price a uniform through mitigations post-2030 and NDCs their achieve countries that assume we addition, In of countries. costs and abatement emissions implementation) cooperative independent vs. affect (i.e. mechanisms different how explore and met are goals these that assume we goals, NDC their achieve to track on are countries whether assessing of Instead to reduce emissions on emissions their own. The actual than costs abatement lower with countries other with trade to effective cost more is it countries some for widely, vary costs abatement marginal the Because paper.) this in later discuss will we that step non-trivial a is ITMOs and NDC between step translation (The goals. decarbonization their achieve to NDCs, implied mitigation emissions by represent actual accurately to assumed are which ITMOs, sell and InAgreement. this purchasescenario, can countries Paris the 6 of Article under 2030 beyond emissions reduce and goals NDC their implement cooperatively countries that assumes scenario C-NDC The Fawcett in as ambition” “continued 2100 to 2030 From assume we emissions). industrial and fossil on tax (i.e., carbon policies limitemissions through efficient economically (2015). 1 Each country is assumed to achieve its NDC NDC its achieve to assumed is country Each (2015). (2015). al. et

of Fawcett Fawcett of

et al. et

TECHNICAL REPORT 2019 4 ,2016). etal. emissions. efficient The (2016). Since we etal. (2016). 2 emissions from energy and and energy emissions from 2 in the I-NDC, C-NDC, and E-NDC scenarios 2 e in 2025 in Rogelj ine 2025 2 Shadowprices of CO FIGURE 2 industryin the I-NDC and C-NDC scenarios, the total different emissions are GHG these two under scenarios underlying the differences to and due energy the in land-usesystems and non-CO enhance ambition (Figure 1). Meanwhile, the shadow Meanwhile, 1). ambition enhance (Figure priceof carbon would also increase, compared with C-NDC,2). ambition higher reach (Figure to CALIBRATION WITH OTHER MODELS Targetsestablished in NDCs come in varietya of forms andmodeling them requires translationa of each absolute an NDCinto target. specificOur translation consistent largely is with obligations NDC other of translationsperformed in the literature. In Figure 3, wecompare our estimates of GHG emissions resulting fromNDC obligations for the period to 20302025 withthose reported by Rogelj onlyconstrain global CO allocationof resources in the C-NDC scenario leads to lessGHG emissions than in the I-NDC scenario. The E-NDCscenario, because of its higher ambition, has lowlevels of GHG emissions; GHG in 2025 emissions in theE-NDC scenario fall within the range of achieving 2°C(46—50 GtCO emissions in the 2 Global fossil fuel and industrial CO reference, I-NDC,reference, E-NDC C-NDC, scenarios and FIGURE 1 ofcountries are different between I-NDC and C-NDC scenarios,although each country keeps the same level ofambition in these two scenarios. Note that double- counting,issue key a negotiations, inCOP 24 does not occurin our modeling framework. explore the To degree to which Article could6 be used toenhance ambition without increasing the economic participants, Agreement Paris on burden create we anE-NDC scenario that assumes that the cost each countrywould have incurred had it implemented its NDCindependently reflects its willingness to pay to country’s mitigateeach use carbon emissions. We I-NDCcosts recalculate to additional ambition that efficiency economic if achieved be could gains mechanisms. cooperative through harnessed are with implementation independent Compared the of NDCs,cooperative more implementationbe would efficient, reduce costs, and allow countries to achieve morewith the same costs. The E-NDC scenario be ambitioncould additional much how explores cooperative through implementation enabled of mitigationcommitments, same the maintaining while globalmitigation cost as that in the I-NDC scenario. Becausecooperative implementation more is efficient, with the same mitigation costs, cooperative mitigation and more implementationachieve could 5 TECHNICAL REPORT 2019 and use such units. Such a practice would conflict with with conflict would a practice Such units. such use and would that—presuming buyers be willing to purchase byfrom transferred seller countries the amounts targets the weaken simply would sales unaccounted such and modelers, analysts with In discussions adjustment. a6.4 require corresponding not would from issued units that proposed have parties Some Agreement. Paris the of spirit the and letter the both to counter are but modeled, be can transactions Such Some could rules proposed result in double counting. transactions. all in integrity environmental We assume thatsomething is prohibited by the Paris Agreement. model. For example, we do not allow double counting, explicitly not do we that choices design some are There SCOPE OF OUTSIDE ASPECTS (2016) al. et Rogelj from obtained were literature inthe emissions GHG global *The FIGURE 3 including revenue (or payments) from net sales (or purchases) of emissions from the global carbon market. carbon global the from (or emissions of revenue (or net sales purchases) from including payments) C(r,t) W of the original NDC equivalent to the net cost of emissions mitigation with the global carbon price, P(t), price, carbon global the with mitigation net emissions of cost the to equivalent NDC original the of e then calculate the transfer payment needed in order to make the cost of independent implementation independent of implementation cost the make order to in needed payment transfer the calculate e then different scenarios different under 2030 and 2025 in emissions GHG total Global ENDC ENDC We begin by calculating total global cost of emissions mitigation for the I-NDC scenario, GC(t). scenario, I-NDC for the mitigation emissions of cost global total calculating by We begin E(r,t) = cost of emissions mitigation in region r when that regions faces a carbon price P(t) t. price acarbon faces inperiod regions that r when inregion mitigation = cost of emissions The net transfer of ITMOs to other parties (or purchases if negative) is ET(r,t) is negative) if (or purchases parties other to ITMOs of net transfer The E(r,t) ENDC ENDC ET(r,t) INDC INDC = emissions in region r when that region faces a carbon price P(t) t. price acarbon faces inperiod region that rwhen inregion = emissions The value of net sales of ITMOs to the market are CT(r,t) are market the to ITMOs of net of sales value The ENDC ENDC C(r,t) = emissions in region r associated with that region’s NDC in period t. region’s that with inperiod rassociated NDC inregion = emissions Finally, the increase in ambition is calculated as the sum: the as calculated is ambition in increase the Finally, = emissions sales by region r at a carbon price P(t) t. price acarbon rat inperiod region by sales = emissions INDC INDC P(t) A(r,t) = cost of implementing region r’s NDC in period t. r’s inperiod NDC region = cost of implementing ENDC ENDC GC(t) = GC(t) ENDC ENDC CT(r,t) CT(r,t) = the global carbon price in period t. inperiod price carbon global = the We then find We find then P(t)that: such ET(r,t) = E(r,t) = ∑

ENDC ENDC ENDC ENDC ENDC ENDC C(r,t) ENDC ENDC = C(r,t) = = P(t)*ET(r,t) = = CT(r,t) = INDC – E(r,t) – = INDC INDC We begin by defining several variables. several defining by We begin scenario. E-NDC our underpins that process multi-step a is A(r,t)ENDC, t, r, period, each in regions, world’s the of each by ambition enhanced of calculation The potential. this calculate we how regarding specific be of this paper.contribution to It is therefore important empirical and a key conceptual 6 represents Article by achieved gains efficiency from result could that ambition enhanced potential the Showcasing AMBITION ENHANCED OF POTENTIAL CALCULATION future research. research. future could make inelements addressed for topics useful design these of Each integrity. more offer would it then werethese allowed adjustments, corresponding with if Conversely, transfers. the in involved parties the of contributions the weakening of effect same the have would it adjustments, corresponding for use without allowed were these If Kyoto units. pre-2020 of use the Finally, accounts. emissions we do not contemplate their in adjusted correspondingly and quantified are that sectors from only transfer countries that assume The models of “inside NDCs. or outside” transfers avoid double counting. In addition, we do not model to aim that Agreement Paris the in references many ∑ ENDC INDC INDC - C(r,t) - C(r,t) /P(t) – ET(r,t) – ENDC ENDC ENDC . ENDC E-NDC . E-NDC

TECHNICAL REPORT 2019 6

($0 to 2 in 2050, 2 in 2100). The large in 2100). 2 /yearin 2030, 2 in 2030, $52/tCO 2 in 2100. Regional emissions consistent Regional 2100. in 2 emissions for each of the GCAM 32 regions 2 in 2050; $16 to $209/tCO in $16 2050; 2 variationin shadow prices implies large potential gains collaborative from actions. Thecommon shadow price of carbon from the C-NDC scenariois shown in solidred in Panel ofC Figure 4 withvalues of $38/tCO and$107/tCO withthe common carbon shadow price are shown in PanelofB Figure 4. Theregional differences between C-NDC and I-NDC areshown in Panel of D Figure 4. The sum of positive with valuesincreases (regions mitigation)in represents thesize of the virtual physical opposed (as to financial) carbonmarket, about 4.3 GtCO from 2015 to 2100 are displayed to 2100 in fromPanel ofA Figure 2015 4. Forseveral regions China, Europe, (e.g., and the U.S.), steadily declining implies ambition continued emissions.Shadow prices for the I-NDC are shown in PanelofC Figure 4. In 2030the shadow prices range fromzero for minimal ambition to $101/tCO ECONOMIC AND SAVINGS POTENTIAL ENHANCED AMBITION I-NDCCO $111/tCO roughly half of total roughlyhalf of global mitigation. cooperatively A efficient implemented, mitigation emissions effort emissions in of percent redistribute would 10 roughly 2030,growing to about 30 percent in 2100.

n thisn section, we first estimate economic savings thatArticle could6 potentially provide in meeting NDCsas currently registered. then We investigate threealternative modeling assumptions. First, we investigatethe effect of an alternative land-use policy assumptionto understand the impact of this sector cost-effectiveness. overall on scenario, base our In assume we that non-agricultural protected are lands againstdeforestation, we make no however, attempt toexpand forest areas for the purpose of increasing carbonstorage. land-use our In sensitivity scenario, weallow for policies to expand forest areas to increase carbon storage in land systems. Second, we investigate theimpact of the withdrawal of the (U.S.) fromthe Paris Agreement. Third, we explore continued andincreased abatement efforts post-2030.

RESULTS I 7 TECHNICAL REPORT 2019 in the next section. section. next the in Fujimori of those to similar policies mitigation emissions land-use alternative of implications the explore We 6. Article under mitigation change land-use regarding assumptions alternative to traces likely price lower The (2015 (2016) al. et billion $58 of estimate Fujimori the than greater 2018) significantly is Ecofys, but and Bank (World 2030 in billion $100of $400 to billion estimate Bank’s World the of range the within falls 2100. in estimate Our $1.2 reaching trillion/year and 2050 in $347to billion/year about is $167increasing in 2030, market carbon billion/year virtual the of size financial The zero. is differences of sum the emissions, global identical have scenarios C-NDC and I-NDC Since transaction. the of through period 2100,every and 17 less, mitigate four would consistently times on regions side either are at different in mitigation emissions their increase 11 would are that there regions scenario C-NDC the in I-NDC, with Compared Panel A: FIGURE 4 Panel C: C: Panel Global I-NDC scenario CO scenario I-NDC Global Shadow prices of CO of prices Shadow Energy and industry CO industry and Energy 2 I-NDC and C-NDC I-NDC 2 emissions 2 emissions (2015–2050) and emissions mitigation by region 2030, 2050 and 2100 and 2050 2030, region by mitigation emissions and (2015–2050) emissions 2100 $) in 2030, though aggregate physical carbon transfers are roughly equal. equal. roughly are transfers carbon physical aggregate $) though 2030, in Panel D: Panel Panel B: Global C-NDC scenario CO scenario C-NDC Global Change in CO in Change 2 emissions C-NDC less I-NDC 2 emissions et al. al. et (2016) (2016) TECHNICAL REPORT 2019 8

$) $/year)

Climatepolicy cost (billion 2015 PanelD: Net annual GDP change (I-NDC less C-NDC;billion 2015 Panel B: $) per percent), $) year (63 percent), $345 billion per and year (41 $/year) ($) Reduction economic cost in regional) (global and Global I-NDC mitigation costs (billion 2015 Reduction policy cost FIGURE 5 PanelC: Panel A: Panel $988 billion $988 per year percent), (30 respectively in 2030, and2050, 2100 (Panel ofB Figure Annual 5). undiscounted I-NDCmitigation costs are shown in Panel ofC Figure and5 net reductions in cost are shown by region in Panel D PanelofA Figure shows5 the global emissions mitigation costs under I-NDC and C-NDC, where economic costis measured as the integral under the marginal abatement supply Compared schedule with (JGCRI, 2018). I-NDC,C-NDC reduces costs billion (2015 by $249 ofFigure 5. Benefits accrue to all parties. 9 TECHNICAL REPORT 2019 of the century exceeds 520 GtCO exceeds century the of Fawcett per as ambition 6, continued with of Article implementation perfect by enabled mitigation additional cumulative The more mitigation compared to I-NDC. to compared mitigation more scenario enables mitigation 50emissions percent Panel B: Panel A: GtCO 5 annual is mitigation roughly emissions global carbon In 2030 period. commitment first the in region each for ambition additional the and scenarios E-NDC and I-NDC the under emissions global total 6 shows Figure A of Panel I-NDC. and E-NDC comparing 6 by Article through ambition enhanced potential the estimate We implementation. ambition through cooperative increased facilitate to 6 is Article of goals the of One FIGURE 6

Shadow Price of CO of Price Shadow Global CO Global 2 /year greater under E-NDC than under I-NDC. I-NDC. under than E-NDC under greater /year Enhanced ambition enabled by Article 6 Article by enabled ambition Enhanced 2 emissions from energy and industry and energy from emissions 2 for the C-NDC and E-NDC scenarios E-NDC and C-NDC the for (2015), al. et course the over 2 . The enhanced enhanced . The redistributed under C-NDC. redistributed be about 4.4 GtCO 4.4 about be would scenario E-NDC the under regions between trades emissions physical implied The scenario. E-NDC the in 6 transactions Article implement to created be would that ITMOs of value the to equivalent are These 6. Figure C of Panel in shown are scenario I-NDC the in as cost total identical with region each leave to transfers financial requisite The levels. I-NDC at constant region by costs mitigation annual net keeps but scenario, C-NDC the to compared 2030 in carbon of cost marginal the doubles roughly scenario E-NDC Panel B of Figureunder the 6. Enhanced ambition in shown is ambition enhanced enables that price carbon common The 6 mechanisms. Article absent are unavailable ambitions enhanced scenario, those E-NDC the under ambition increase regions all While price of carbon in the E-NDC scenario E-NDC the in carbon of price shadow E-NDC the at valued scenarios, I-NDC and E-NDC the in region C: Panel Potential first commitment period enhanced ambition enhanced period commitment first Potential Financial transfers necessary to equate mitigation cost in each each in cost mitigation equate to necessary transfers Financial 2 /year in 2030, similar to emissions emissions to similar 2030, in /year TECHNICAL REPORT 2019 10 emissions traded and the size of carbon market 2 CO Buyers and sellers under Article 6 (UCT) Emissions trading market size

FIGURE 8 Panel B: Panel Panel A: Panel in

2 2

2 , 2009)., The etal. emissions from land land emissions from 2 , 2007; Wise 2007; , emissions from fossilemissions from fuel and in the I-NDC-UCT scenario 2 2 etal. emissions from the terrestrial the emissions from system are 2 Shadow prices of CO (2016). The physical amount etal. (2016). of carbon FIGURE 7 andenergy systems in the UCT scenario is the same asthose in the I-NDC scenario, but the I-NDC scenario assumes“protected lands” whereas the UCT scenario assumesuniversala carbontax applied equally to all origin. their emissionsof regardless integrating terrestrial of approach comprehensive The andenergy systems could lower the cost of meeting thesame mitigation target, consistent with findings of otherstudies (Tavoni valuedequally with CO IMPACT OF RESTRICTING OF IMPACT LAND-USE SECTOR Land-usepolicies are important for the cost- We mitigation. change effectivenessclimate of developan alternative scenario that constrains CO industrialsources. The total CO theUCT scenario (Figure similar 7), to the estimate of Fujimori tradedin the virtual market is roughly 5.4 GtCO inpercent 2030, 25 bigger than that in the I-NDC scenario.because However, of the lower shadow price, thefinancial size of carbon market is much smaller in2030, about $43 billion (Figure Meanwhile, 8). the potentialsellers and buyersin the virtual carbon marketalso change. Brazil and Africa become the largestsellers before as2050, shown in other studies and China, one of the major 2016), sellers (EDF, in thefirst half of the century under the I-NDC scenario, becomesbuyera in the UCT scenario. emissionswith policies in both land-use change and energyand industry. In the universal (UCT) CO scenario, shadowprice of carbon in 2030 is as low as $8/tCO 11 TECHNICAL REPORT 2019 I-NDC (No U.S.) and C-NDC (No U.S.) scenarios. U.S.) (No scenarios. C-NDC U.S.) (No and I-NDC the in same the are 21st the century throughout and industrial CO industrial and energy of aggregate The collaboratively. goals decarbonization achieve to ITMOs sell and purchase can they Agreement, Paris the 6 of Article Following 2030. beyond emissions reduce and NDCs their implement collaboratively U.S. the except countries that assumes U.S.) (No scenario C-NDC The U.S. emissions. and global I-NDC on bound upper an 9 is Figure in shown scenario 2018). Pledge, U.S. No The (America’s emissions on U.S. impact a significant have could which actors, and non-government governments and local states toof reduce bymeasures emissions undertaken effects the include not does It markets. commodity through other countries international energywith and only by moderately interactions reference trajectory, its on remains U.S. the that assumes It scenario. a bounding is design scenario this that noting worth is It scenario. I-NDC the in as mitigation of level same the to held are countries 2010, other while after emissions GHG reduce to effort mitigation no takes U.S. the scenario, this In 2030. beyond NDCs their achieve to required effort decarbonization of level same the at continue and 2030 through commitments NDC their meet U.S. the except countries that assumes U.S.) (No scenario I-NDC The 6. Article of for the implementation ofimplications this action potential the to assess scenarios alternative two 2017. in Agreement Paris the We developed have from withdraw to intention its announced U.S. The WITHDRAWAL IMPACT U.S. OF FIGURE 9 in the I-NDC and I-NDC (No U.S.) scenarios U.S.) (No I-NDC and I-NDC the in Global fossil fuel and industrial CO industrial and fuel fossil Global 2 emissions from these countries countries from emissions these 2 emissions emissions

also increases, from 2.2 GtCO 2.2 from increases, also market virtual the from purchased China carbon of amount The participation. U.S. with 2060 in happens seller to a potential buyer, whereas this change potential a from in 2045 changes China significantly. change purchases it carbon of amount the and role China’s both participation, its Without globally. emitter GHG largest second the is U.S. The substantial. is China on impact the but participation, U.S. without and with similar are buyers and sellers potential The 2100. in $164 2030, in billion $855 2050, and in billion $15 smaller, about much billion also is market carbon virtual the of size financial The participation). U.S. $0 to $94/tCO to $0 shadow are of prices also carbon lower, ranging from The and U.S. smaller participation. without different is market carbon physical virtual the of size the as scenarios, C-NDC and I-NDC the between changes from differ U.S. participation without scenarios implementation independent and cooperative The changes in for emissions each region between scenario. I-NDC the with 2100), in compared 32 percent and 2050 in (18 2030 in 9 percent by percent increase industry in the U.S., the global CO global the U.S., the in continueemissions to effort no rise.mitigation With U.S. whereas scenarios, I-NDC the as ambition of level same the keep 31 regions other The B. A and 10, Figure panels in shown are scenarios U.S. No the and $13and $185/tCO to participation to 3.3 GtCO 3.3 to participation —$7/tCO efficiency economic its to due price shadow the would reduceimplementation Cooperative mitigation. in collaboration potential implies regions across in The variation case. shadow implementation prices CO 6. in underthe trading emissions Article participate not does and U.S.) (No scenario 2010 C-NDC the in after actions mitigation any take not does U.S. The participation. 2.1 GtCO 2.1 much the U.S. smaller participation—only without is market carbon physical virtual the of size The 2100in 10, C). (Figure Panel 2 emissions for each of the 32 GCAM regions under under regions 32 GCAM the of each for emissions 2 2 in 2030, $40/tCO 2030, in /year in 2030 (4.3 2030 in GtCO /year 2 in 2030, $0 to $100/tCO to $0 2030, in 2 in 2100 in the independent 2100 in independent the in 2 2 emissions from emissions energy and /year in 2100 without U.S. U.S. 2100 in /year without 2 in 2050, and $88/tCO 2050, and in 2 /year in 2100 with U.S. U.S. 2100 in /year with 2 /year in 2030 with with 2030 in /year 2 in 2050, 2050, in

2

TECHNICAL REPORT 2019 12 emissions 2 Buyers and sellers under Article 6 (No U.S.) C-NDC (No U.S.) scenario CO PanelD: Panel B: Panel emissions 2 (No U.S.) 2 emissions and carbon market without U.S. participation 2 CO Shadow prices of CO I-NDC (No U.S.) scenario CO FIGURE 10 PanelC: Panel A: Panel 13 TECHNICAL REPORT 2019 global COglobal reduce scenarios ambition increased the ambition, continued with scenarios main the with Compared Fawcett in scenario Ambition Paris-Increased the with consistent is year, which per 5 percent of rate decarbonization minimum higher their economies at rate—a an accelerating decarbonize countries that we assume scenarios, ambition increased the In 2030. beyond effort decarbonization of level the increase then and scenarios, C-NDC and I-NDC main our as same the are which 2030, through commitments NDC their meet countries that assume scenarios Both afterwards. and of commitments NDCs implementation which indicate independent and cooperative and C-NDC-Increased, —I-NDC-Increased ambition increased with scenarios two We examine 2030. after ambitions their increase countries 6 when Article of value the assess to scenarios alternative develop we Here time. over ambitions their increase to need countries Agreement, Paris the by set goal temperature long-term To the meet (Fawcett 2°C below well rise temperature global limit to sufficient not are NDCs in commitments Current AMBITION POST-2030INCREASED probabilities of rise). temperature (see Fawcett 2100in 26 by percent 2°C exceeding change temperature of probability 2100 in 11) (Figure percent the 83 decrease and FIGURE 11 et al. et 2 emissions by 34 percent in 2050 and and 2050 in percent 34 by emissions I-NDC-Increased and C-NDC-Increased scenarios and C-NDC-Increased I-NDC-Increased Global fossil fuel and industrial CO industrial and fuel fossil Global , 2015; Rogelj et al. et (2015). (2015). al. et , 2016; 2018). IPCC, 2 emissions in the the in emissions for the the for al. et

market is much smaller now—about 3.8 GtCO 3.8 now—about smaller much is market carbon physical virtual the of size the scenarios, ambition continued the with 12. Figure of Compared C Panel in shown is efforts mitigation cooperative and independent between difference The region-by-region and 2100 respectively. prices of carbon are $110/tCO are carbon of prices scenario, the common shadowIn the C-NDC-Increased I-NDC-Increased scenario range from $95/tCO from range scenario I-NDC-Increased the in carbon of prices 12, Figure shadow B of the Panel in shown As efforts. mitigation robust more have regions all as regions, across consistent more are higher much and scenarios ambition increased the in carbon of prices shadow the scenarios, of Figure 12). ambition continued with Compared century. century. the of end the towards a seller becomes U.S. also the and century, the throughout market carbon virtual the in seller biggest the is China costs, lower at emissions carbon reducing and switching fuel of flexibility more and system energy a large-scale With century. the of half second the in especially change, also sellers and buyers $1.6 2100. in potential The reaches trillion $419 and about is in 2050 billion values financial in size market The carbon. of price shadow higher the to due significant more is flow financial However, the 32 regions. the of each in efforts mitigation ambitious $159/tCO have in CO a reduction significant regions, NDCs, including robust regions less all with actions, mitigation post-2030 ambitious more With 2050 and 5.3 GtCO 5.3 and 2050 2 in 2050 and $281/tCO and 2050 in 2 /year in 2100—because of more more of 2100—because in /year 2 and $304/tCO 2 to $338/tCO 2 emissions (Panel emissions A 2 /year in in /year 2 2 in 2050 2050 in 2 in 2100. in to to TECHNICAL REPORT 2019 14 2 Shadow price of C0 Panel B: Panel Emissions trading market size PanelD: emissions 2 C-NDC increased scenario CO emissions 2 Buyers Sellers emissions and carbon market with more ambitious post-2030 mitigation 2 CO Buyers and sellers under Article 6 I-NDC increased scenario CO FIGURE 12 PanelC: Panel A: Panel 15 TECHNICAL REPORT 2019 S La Hoz Theuer, 2018; Theuer, Hoz La Peters credible NDCs (Mehling (Mehling NDCs credible have that countries from import or link only will they that say countries many since emerge, clubs climate as insofar pressure peer provide also 6 might Article programs leading to an increase in overall emissions. of linkage the avoid to necessary be may This mechanisms. ratcheting of phase-in the or emissions, actual to proportion inverse an by sales ITMO limiting guard this could against include options such as Höhne Becker,2002; 2000; DISCUSSION 2018; Rose 2015; (Das, 2017; Soo, and NDCs Hood Mehling across policies and targets in heterogeneity the 6 given Article under ITMOs of trade and creation the facilitate to how obvious not is It difficult. proved has rules the writing just term, near the In remains a formidable challenge. potential that Achieving period. commitment first Calvin Calvin 2011; Weisbach, and (Metcalf pledges initial achieve countries after ambition rewarding of lack further than simply rather into ambition, enhanced translate savings cost these that essential is it 1.5°C 2°C, or to change To climate limit periods. commitment subsequent and second in enhanced be to need commitments initial goals, Paris the meet to order In counting or leakage. emissions while schemes, avoidingor regulatory double- taxes and carbon such as systems trading emissions programs, disparate between linkages establish (e.g, Bodansky literature economics the of vein active an initiated et al. et Agreement or increase their ambition in the the in ambition their increase or Agreement of achieving their under pledges the Paris costs the lower either 6 to Article via together work to parties for exists potential ubstantial et al. et , 2015; Ostrom, 2010; Lutter and Shogren, Shogren, and , 2015; 2010; Lutter Ostrom, et al. et , 2018). Metcalf and Weisbach (2011) Weisbach , 2018). and Metcalf , 2016) that investigates how to to how , 2016) investigates that et al. et et al. et et al. et , 2018; Iyer , 2017). to Rules , 2017). 2017). , et al. et , 2015; 2015; , et al. et

, the performance of the Paris Agreement. Paris the of performance the could rules frustrate whilemitigation, written poorly enhanced into translate that savings cost substantial in result could rules written Wisely 6. Article including toneeded operationalize the Paris Agreement, guidance and implementation rules the elaborate to expected 25, COP is at adoption for due and The Paris Agreement Rulebook, under development sectors. across to leakage explore including differential important Rockström Rockström (Calvin, scales macro at differently very behave can scales project at effective seem that rules that demonstrated been has It scales. across of and the interactions feedbacks understanding a clear for essential 6 is Article implement to rules of implications the test to tools modeling Using ambition. highest the with away from regions investments infrastructure and capital mitigation, shifts also it But mitigation. for emissions and infrastructure investment capital with along advantage a comparative with places to mitigation emissions will tendCooperation to shift evaluated. be to need effects investment capital and technology dynamic Furthermore, zero. net to mitigate to ability the without parties from emissions remaining out balance to net-negative go to capacity excess with parties incentivize to necessary be likely 6 will trading residual Article emissions, unabatable of amounts and emissions net-negative different for capacities different have will parties Since zero. approach to are NDCs if tool a necessary become 6 may However, Article underestimated. be not 6 should Article of ambition enhanced and savings cost potential full the realizing of challenges The et al. et , 2017). The issue of leakage will be be will , 2017). leakage of issue The et al et . 2015; 2015; . FUTURE RESEARCH

here is a plethora of future research topics to The rigorous analysis of how market access through explore on Article 6 and the Paris Agreement, “carbon clubs” could encourage use of specific some of which are amenable to quantitative ratcheting mechanisms, intended to incentivize methodologies, including integrated enhanced ambition over time, would likely be Tassessment models, while others are better suited particularly helpful as negotiators continue their work for qualitative analysis. As an extension to this paper, to fill the well-known emissions gap. Characterizing the role of the land-use sector under Article 6 of the these combinations of clubs and ratcheting Paris Agreement would benefit from more quantitative mechanisms then modeling them in a quantitative analysis via an integrated assessment model. However, framework is a promising area for future research and a qualitative analysis that describes protocols for offset will facilitate the identification of actionable strategies quality related to the land-use sector and assesses that negotiators can incorporate into negotiating text. strategies for addressing leakage of emissions would complement further quantitative analysis.

This paper explored a scenario that assumes that cost savings from international carbon trading were reinvested back into enhanced ambition. Further quantitative explorations regarding the implications of this assumption and potential mechanisms to encourage that outcome could be useful extensions. In particular, an elaboration on the extent to which cost savings from international trading under Article 6 increases the probability of achieving a 2ºC or lower target would provide insights on how to fill the well- known emissions gap between current pledges and climate targets. In addition, a qualitative analysis that contemplates the extent to which countries will choose to reinvest cost savings into enhanced ambition, rather than simply keeping those savings, would test an underlying assumption of this paper and provide a starting point for creating incentives and rules that encourage countries participating in international carbon trading to assertively enhance their ambition. TECHNICAL REPORT 2019 REPORT TECHNICAL

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19 TECHNICAL REPORT 2019 REFERENCES 11 14 13 12 10 9 8 7 6 5 4 3 2 1

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