Impact of US exit from Article 6.4 on global carbon markets

Hindustan Times

3 days ago

The Paris Agreement, adopted in 2015 under the United Nations Framework Convention on Climate Change (UNFCCC), represents a historic effort to combat the climate crisis through collective global action. Its central objective lies in limiting global temperature rise to below 2°C" above pre-industrial levels, with an aspirational target of 1.5°C. The agreement, ratified by 196 parties, relies on Nationally Determined Contributions (NDCs), which outline each country's climate action plans and commitments.
To facilitate cost-effective emissions reductions, the Paris Agreement incorporates market-based mechanisms under Article 6. These mechanisms are designed to promote international cooperation and investment in sustainable projects by allowing countries to trade carbon credits. Article 6.2 enables bilateral trading through Internationally Transferred Mitigation Outcomes (ITMOs), while Article 6.4 establishes a UN-regulated global carbon market, fostering private and public sector participation in emissions reduction initiatives. These frameworks are crucial for ensuring transparency, preventing double-counting, and driving investments in low-carbon technologies.
However, the effectiveness of these mechanisms has been repeatedly tested by political shifts, particularly in the US. The country's decisions to enter, exit, rejoin, and now re-exit the Paris Agreement have created significant uncertainty for global carbon markets. As the world's largest economy and a major emitter, US engagement plays a pivotal role in shaping the future of international climate policy. The latest withdrawal under the newly elected Trump administration raises fresh concerns about the stability of global carbon trading systems and the broader fight against the climate crisis.
Unlike the Kyoto Protocol, which imposed binding targets on developed nations, the Paris Agreement requires voluntary commitments from all countries. Each signatory submits an NDC detailing its emissions reduction strategy, with a commitment to increasing ambition over time. Provisions for five-yearly reviews ensure continued global cooperation.
A crucial element of the Paris Agreement is the use of market-based mechanisms to achieve emissions reductions more efficiently. Article 6 provides a framework for international collaboration, allowing nations to trade carbon credits, thereby reducing emissions at a lower cost. This includes two key components: Article 6.2, which enables countries to transfer emission reductions through ITMOs, and Article 6.4, which establishes a global carbon market under UN oversight. This market incentivises emission reduction projects, such as renewable energy and reforestation, by allowing credits to be bought and sold internationally.
The US's engagement with the Paris Agreement has been inconsistent, influenced by shifting political priorities. President Obama led the country into the agreement, marking a significant commitment to global climate action. However, President Trump withdrew in 2017, arguing that the agreement placed unfair economic burdens on American industries, particularly fossil fuel sectors. This withdrawal created uncertainty about the US's role in international climate policy and weakened global momentum.
Upon taking office, President Biden re-entered the Paris Agreement in 2021, reaffirming US commitment to emissions reduction. He set an ambitious target of reducing emissions by 50-52% by 2030, compared to 2005 levels. However, most recently, the newly-elected Trump administration has once again withdrawn the US from the Paris Agreement, dealing another blow to global climate cooperation.
This inconsistency in US policy has raised concerns about the reliability of its commitments and the stability of global climate action efforts. The withdrawal and re-entry cycles have made it difficult for other nations and businesses to plan long-term investments in emissions reduction projects.
The US's exit from Article 6.4 specifically has had notable consequences for carbon markets. As one of the largest economies, the US plays a crucial role in shaping global demand for carbon credits. Uncertainty over its participation has undermined confidence in carbon trading schemes and deterred investment in emissions reduction projects. Trump's withdrawal slowed the development of global carbon trading markets, while Biden's re-entry provided a temporary boost, yet this latest exit further disrupts carbon markets, creating new uncertainties for international efforts to curb emissions and meet global climate targets.
The instability of US climate policy has broader repercussions for global carbon markets. Article 6.4, designed to create a robust and transparent international carbon market, relies on major economies' participation to function effectively. The absence of the US disrupts market dynamics, reducing liquidity and weakening investor confidence. The fluctuation in US engagement also affects carbon credit pricing, making it harder for developing nations to attract funding for emission reduction projects.
Beyond market implications, the US's wavering stance impacts international climate diplomacy. The Paris Agreement was built on a foundation of collective ambition, and the unpredictability of US participation challenges that cohesion. Other major emitters, such as China and even India, may hesitate to make more ambitious commitments if they perceive the US as an unreliable partner. Developing nations, which depend on financial and technological support from developed economies, face uncertainty in securing resources for their climate adaptation and mitigation efforts.
Looking forward, a stable and sustained US commitment to the Paris Agreement and Article 6.4 is essential for fostering trust and driving investment in global carbon markets. Policy certainty from major economies encourages businesses and governments to participate in emissions trading, ultimately enhancing the effectiveness of carbon markets as a climate solution. If the US continues its pattern of policy reversals, it risks undermining international efforts to limit global warming to 1.5°C.
The US's shifting stance on the Paris Agreement, particularly regarding Article 6.4, highlights the challenges of achieving cohesive global climate action. As a major economy, its participation significantly influences carbon markets, investment flows, and international climate cooperation. While Biden's administration attempted to restore US leadership in climate policy, the return of the Trump administration and the subsequent withdrawal from the Paris Agreement once again cast doubt on global efforts.
For the Paris Agreement to remain effective, long-term commitment from all major economies, especially the US, is crucial. The success of carbon markets hinges on policy stability, investor confidence, and international collaboration. Without a consistent and engaged approach, the world risks losing critical time in the fight against climate change. As nations continue to strengthen their climate commitments, the US's role will be pivotal in ensuring carbon markets function as a reliable mechanism for reducing global emissions. Unfortunately, the current US dispensation considers it a waste of time and a waste of money — as if there is another Planet B. However, this also presents an opportunity for India and like-minded countries to keep the fight against the climate crisis alive.
This article is authored by Anil Trigunayat, former ambassador and currently distinguished fellow, Vivekananda International Foundation and Kaviraj Singh, CEO & director, Earthood.