ITMO Marketplace

Design and build a software prototype for a global carbon marketplace.
Prompt NM1: The Paris Agreement allows for the international transfer of mitigation outcomes so that parties can collaborate on achieving their Nationally Determined Contributions (NDCs). Based on the specifications outlined in Article 6 of the Paris Agreement, design and/or build a software prototype for a global carbon marketplace.
This prototype should enable countries to transfer an emissions reduction from one country (the ‘host’ country) to another country for use toward the second country’s NDC. The transferred emissions reduction would be considered an ‘internationally transferred mitigation outcome’ or ITMO, and it may not be counted toward the host country’s NDC.
Prompt Hosts: Maggie Ferrato, Dylan Murray, David Paolella
Discord channel:
This prompt requires software development skills. All necessary background knowledge on the Paris Agreement and proposed carbon market specifications will be provided.

Background and Suggested Reading

  • What is the Paris Agreement?
  • What is the Paris Agreement ‘Rulebook’?
  • Why would countries want to collaborate to reduce emissions? Have countries previously collaborated to reduce emissions?
  • What does the Paris Agreement say about collaboration?
  • How does this effort dock into this evolving space? What sort of structure / terminal / online marketplace might be necessary to enable a small group of ambitious countries to exchange ITMOs?
  • Where do corporate pledges, purchases, etc. fit in?
  • What about emissions that sit outside the UNFCCC?
  • What do past international carbon transaction contracts look like? How will terms related to ITMOs build on these? (This might be more relevant for the ‘smart contracts’ prompt...)

What is the Paris Agreement?

In 2015, global leaders reached a historic agreement in Paris to address climate change. Countries pledged to hold warming to less than 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit warming to 1.5 degrees Celsius. Under the agreement, countries must each submit a national plan to curtail emissions, known as a ‘nationally determined contribution’ or NDC. And, to reach the agreement’s temperature goal, countries are required to report on and update these plans on regular intervals.The next round of NDCs are will be submitted to the UNFCCC in 2020.

What is the Paris Agreement ‘Rulebook’?

While the 2015 agreement laid out the broad framework for global action on climate change, its negotiators agreed to use the following several years to hash out the “fine print” of the agreement’s implementation. This additional guidance has come to be known colloquially as the Paris Rulebook.
Many commentators point out how “bottom up” the Paris Agreement is: countries determine how best to achieve carbon reductions within their borders, without reduction quotas or prescribed approaches from the UN. However, there are some “top down” rules regarding reporting, transparency, and other measures to ensure and accelerate climate action across countries.
For example, countries agreed in Paris to the broad guidelines of an ‘enhanced transparency framework’ that would govern countries’ disclosure of relevant emissions information. The rulebook then further specified that countries must report on their emissions (and their progress toward reducing these emissions) every two years, with the first report for most countries due by the end of 2024.
In 2018, negotiators finalized most of the rulebook’s procedures for governing the implementation of the agreement, with the notable exception of guidance on Article 6. Additional negotiations on Article 6 guidance will be held in December at COP25 in Madrid.

Why would countries want to collaborate to reduce emissions?

In contrast to environmental issues that are local in nature, carbon pollution has the same effect on the planet’s atmosphere regardless of where it originates. Therefore, a project that reduces emissions by one ton of carbon dioxide in Vietnam is equivalent to a project in Norway that yields the same emissions reduction. However, while the atmosphere does not differentiate between the origins of carbon emissions, not all emission reductions can be achieved at the same cost.
Carbon markets enable countries to exchange funding for verified emissions reductions (in Article 6 terms, ITMOs). This exchange effectively puts a price on carbon and allows countries to meet their NDCs more cheaply than they would otherwise be able to.
By facilitating the trade of ITMOs, carbon markets can help to align economic incentives and potential emission reductions. They can accelerate emission reductions across sectors that would otherwise not have acted on their own, and in doing so finance sustainable development activities in sectors ranging from energy to agriculture. By putting a price on carbon, governments and companies can efficiently shift resources away from polluting activities and towards sustainable ones, all on an accelerated time horizon.
Collaboration across national boundaries would accelerate this process all the more. In fact, recent research suggests that international cooperation under the Paris Agreement would result in up to $250 billion in savings each year by 2030. If these savings are reinvested in emissions reduction efforts, this could increase existing national commitments by up to 50% between now and 2030.
Have countries previously collaborated to reduce emissions?
Under the Kyoto Protocol (the precursor to the Paris Agreement), certain developed countries were responsible for reducing emissions, while developing countries were not. The Clean Development Mechanism was set up to enable developed countries to implement emissions reduction projects in developing countries, where projects were often cheaper. These projects earned certified emission reduction (CER) credits, which could be utilized to meet obligations under the Kyoto Protocol. Additional information on the Clean Development Mechanism can be found here.

What does the Paris Agreement say about collaboration?

Article 6 of the Paris Agreement establishes a broad framework for voluntary cooperation among countries in the implementation of their nationally determined contributions (NDCs). The Article sets out three approaches, which are outlined in Article 6.2, 6.4, and 6.8:
  1. 1.
    “bottom up” bilateral or regional cooperative approaches via ITMOs,
  2. 2.
    a centrally-governed UNFCCC mechanism to contribute to mitigation and support sustainable development, and
  3. 3.
    non-market approaches.
Each country can determine its preferred approach in this new architecture and choose whether to participate in any or all of the approaches. A number of countries are considering using international market-based approaches to meet their NDCs.
Article 6.2: The effective implementation of Article 6.2 could stimulate efficient, bottom-up, voluntary cooperation between countries to implement existing NDCs and strengthen the ambition of mitigation actions over time. Approaches may take the form of emission trading or similar mechanisms.
Until countries receive additional guidance on Article 6 in the Paris Rulebook, there are few guidelines for how countries can link. Despite this, various coalitions of countries view the Paris Agreement’s language as sufficient to begin collaborating, and they are actively considering the implementation of 6.2 without formal guidance. In fact, some countries are beginning to conduct “pilot ITMOs” (see here for one example).
This prompt asks participants to work off of what was agreed in Article 6.2 in 2015: that “no double counting” of emission reductions between countries can occur, and activities must be pursued between countries with “environmental integrity.”
Article 6.4: This provision of the Paris Agreement could effectively establish a successor to the Clean Development Mechanism. The new mechanism will similarly allow for emissions reductions to be transferred between countries. The future of this new mechanism, like the rest of Article 6, remains to be negotiated.
Article 6.8: Under Article 6.8, countries can cooperate through non-market related mechanisms. A ‘work programme’ to detail how countries might support each other outside market mechanisms has been proposed.
Additional information:

What sort of structure/terminal/online marketplace might be necessary to exchange ITMOs?

This prompt asks participants to create a platform that can remain nimble and serve the needs of global cooperative efforts as they evolve.

Prompt Scope

Example ITMO Transaction

A basic prototype of the ITMO marketplace should be able to execute the following example decision flow:
[Note: buyers are countries seeking to meet their NDCs]
Action: The seller comes to the marketplace with an ITMO
Decision Flow:
Decision Points
Is the emissions reduction verified? (if yes, continue)
Does the seller own the ITMO? (if yes, continue)
Has the ITMO been retired? (if no, continue)
Has the host country granted the right to transfer ITMOs? (if yes, continue)
Is the host country a party to the agreement? (if yes, continue)
Does the emissions reduction project comply with sustainable development guidelines (developed by participating parties or facilitating organization)? (if yes, continue)
Has the host country signaled to the UNFCCC its intention to transact ITMOs? (if yes, continue)
Does the ITMO have price and quantity information? (if yes, continue)
Action: The buyer initiates a transaction request for an ITMO.
Decision Flow:
Decision Points
Has the buyer registered its intention to transact ITMOs with the UNFCCC? (if yes, continue)
Does the buyer agree to the price and quantity? (if yes, continue)
Settlement: Seller and Buyer have met all requirements. Execute the following actions.
  • Subtract ITMO from seller account
  • Add ITMO to buyer account
  • Notify or otherwise record the transaction with the appropriate settlement authority to avoid double counting.

Prompt Tasks

  1. 1.
    Read prompt and engage in the discord channel.
  2. 2.
    Leave a comment on the prompt in the gitbook asking clarifying questions or contributing new ideas.
  3. 3.
    Create more tasks.
  4. 4.
    Suggest other information requirements for executing an ITMO trade.
  5. 5.
    Identify key information needed to develop a software prototype for the marketplace.
  6. 6.
    Expound on considerations for how decision hierarchy and emission reduction attribution is conducted for non-state and subnational entities that seek to trade ITMOs, and propose jurisdictional best practices for dispute settlement.

Additional Info & Background

Where do sub-national government and corporate pledges, purchases, etc. fit in?

An increasing number of “non-state actors” (e.g. multinationals, sub-national governments, etc.) increasingly wish to participate in market mechanisms as well. While Article 6 negotiations are amongst nation states, how do these non-state actors fit in?
When it comes to sub-national governments, there are clear “nested” accounting methodologies that can be followed. For example, the states of California and Quebec currently have linked carbon markets, and their accounting and reporting will link with their respective national governments under the Paris Agreement.
What might prove trickier is how the world will count voluntary carbon trading from companies and others who wish to go beyond what regulations mandate. How are carbon credits sold by a Korean project and purchased by a Chinese company, for example, supposed to be counted in the international accounting exercise in the UN? This continues to be negotiated in UNFCCC negotiations.
For additional reading on the role of corporate action, see here.

What about emissions that sit outside the UNFCCC?

Not all climate emissions are handled by the UNFCCC. Years ago, the UN decided that emissions from international aviation and shipping would be handled by their respective UN agencies (the International Civil Aviation Organization and International Maritime Organization, respectively).
Unfortunately, UN agencies have not always moved in sync on tackling climate change or ensured that measures to do so work in tandem. For example, the International Civil Aviation Organization will begin an international offsets scheme in 2020 that will require airlines to offset any post-2020 growth in emissions. These offsets will not come from within the aviation sector but rather from within sectors overseen by UNFCCC processes. As you could imagine, transparent accounting systems that ensure that carbon credits are not counted towards progress in both regimes will be critical. However, proper and timely setup of these systems remains far from assured.
Read more about this issue here.
There is a long history of structured approaches to transferring carbon credits at scale across international borders. Some of the more recently developed approaches involve:
  1. 1.
    The Forest Carbon Partnership Facility (methodology here and example contract here)
  2. 2.
    Japan’s Joint Crediting Mechanism (website here)
  3. 3.
    California’s Tropical Forest Standard (website here and methodology here)
As we enter Paris Agreement implementation post-2020, additional considerations on top of those outlined in these approaches’ methodologies will need to be applied in order for international transfers to conform to Paris requirements. Ensuring that results are not double counted, for example, or that “environmental integrity” of the emission reductions are assured, will need to be addressed.