Article 6 of the Paris Agreement on greenhouse gases enables countries to cooperate in implementing their nationally determined contributions (NDCs) towards emission reduction. Current national policies may fail to deliver on the “well below 2℃” climate goal & international cooperation through carbon markets under Article 6 is expected to enhance flexibility in mitigation options, make it cost-effective and enhance mitigation ambition overall. As countries prepare for the Glasgow Conference of Parties (COP26), the rules for such mechanisms are expected to be finalized. We analyze three questions: What is the aggregate & spatial distribution of economic efficiency gains & financial flows between Global North & South with Article 6? What is the impact of limits on inclusion of nature-based solutions? What are the multisectoral dynamic effects on technology deployment & capital investment in the Global South? We use the GCAM (Global Change Analysis Model) integrated assessment model & an 8-scenario matrix with two emission trajectories achieving carbon neutrality based on equity principles. In each case, we measure the geographic distribution of economic gains till 2050 between a pathway where countries move independently or participate cooperatively in a global carbon market. We analyze the spatial and multisectoral impacts on electricity asset stranding & investments in different mitigation options, including CCS (carbon capture & sequestration), electric vehicles, energy efficiency & renewable energy technologies. Employing limits on land area engaged for mitigation from fossil fuel sources, we showcase the sensitivity of these results to nature-based solutions. We find that in contrast to the popular notion that the Global South will inevitably gain through such global carbon market transfers, the story is more intricate. There is also a noticeable impact of limiting nature-based solutions for countries in Latin America & Sub-Saharan Africa. Further we show differences in deployment of low-emissions technologies in the near term. This has implications for technological growth & incentives for mitigation. This study provides insights for design of future global markets or regional carbon clubs & shows equity tradeoffs in achieving economic efficiency in climate change mitigation.

Financial institutions’ investment and lending portfolios could be affected by both physical climate risks stemming from impacts related to increasing temperatures, and from transition climate risks stemming from the economic consequences of the shift to a low-carbon economy. Here we present a consistent framework to explore near term (to 2030) transition risks and longer term (to 2050) physical risks, globally and in specific regions, for a range of plausible greenhouse gas emissions and associated temperature pathways, spanning 1.5-4oC levels of long-term warming. We draw on a technology-rich, regionally disaggregated Integrated Assessment Model representing energy system, agricultural and land-based greenhouse gas emissions, a reduced complexity climate model to simulate probabilistic global temperature changes over the 21st century, and a suite of impacts models to estimate regional climate-related physical hazards and impacts deriving from the temperature change pathways and their underlying socio-economics. We consider 11 scenarios to explore the dependence of risks on both temperature pathways, as well as socio-economic, technology and policy choices. This builds and expands on existing exercises such as the Network for Greening the Financial System (NGFS). By 2050, physical risks deriving from major heatwaves, agricultural drought, heat stress and crop duration reductions depend greatly on the temperature pathway. By 2030, transition risks most sensitive to temperature pathways stem from economy-wide mitigation costs, carbon price increases, fossil fuel demand reductions and potential stranding of carbon-intensive assets such as coal-fired power stations. The more stringent the mitigation action, the higher the abatement costs and sector-specific transition risks. However, such scenarios result in lower physical climate hazards throughout the century. Our study also explores multiple 2 deg C pathways which demonstrate that scenarios with similar longer-term physical risks could have very different near-term transition risks depending on technological, policy and socio-economic factors. As such, “a single scenario will not answer all questions”.