Towards net zero: making baselines for international carbon markets dynamic by applying ‘ambition coefficients’

This paper discusses options to increase mitigation ambition in crediting mechanisms that serve the Paris Agreement (PA), such as the Article 6.4 mechanism. Under the Clean Development Mechanism and other crediting mechanisms, baselines have been specified in the form of greenhouse gas (GHG) intensity factors and linked to business-as-usual developments. This means that with increasing production of goods and services through carbon market activities, absolute emissions may increase or fall only slowly. At a global level, such an approach widens the ‘emissions gap’. To enable continued use of emissions intensity baselines in crediting mechanisms while being in line with the PA’s goal to pursue efforts to limit temperature rise to 1.5°C, we propose to apply an ‘ambition coefficient’ to emissions intensities of technologies when establishing the baseline. This coefficient would decrease to reflect increasing ambition over time, and reach zero when a country needs to reach net zero emissions. Due to the principle of common but differentiated responsibilities and respective capabilities, the coefficient would fall more quickly for developed than for developing countries. The latter would be able to generate emission reduction credits well beyond 2050, while for the former, crediting would stop around 2035 or before. An ambition coefficient approach would generate certainty for carbon market investors and preserve trust in international carbon markets that operate in line with the agreed, long-term ambition of the international climate regime.Key policy insightsAn ambition coefficient can help to align carbon market activities with net zero GHG emission pathways at country level, and ensure that carbon markets will not lead to a lock-in of emissions in participating countries.The ambition coefficient approach can serve as a ‘bridging proposal’ for the operationalization of PA carbon markets. It may resolve negotiation gridlock between those who want to increase stringency in carbon market instruments and those who think mitigation ambition should be generated through more stringent NDCs, facilitated by cost savings and increased financial resources generated by international carbon markets.The use of an ambition coefficient can enable the alignment of existing methodologies with necessary ambition levels to implement the PA, while also keeping transaction costs low.