Article 6: The Impact on International Carbon Markets Explained

After years of negotiations, a significant milestone was reached at COP 26 in Glasgow in 2021. The Parties to the UN Framework Convention on Climate Change (UNFCCC) consented to a rulebook for carbon credit transfers, addressed under the Article 6 of the Paris Agreement.

 

This section is a pivotal element that underpins the framework for international cooperation in climate change mitigation.

 

These newly established rules are critical for ensuring that mitigation outcomes are genuinely impactful and uphold the principles of the Paris Agreement.

 

While the core of climate mitigation efforts is expected to occur within individual countries’ jurisdictions, Article 6 acknowledges that these endeavors can be effectively supplemented through international cooperation.

 

Article 6 outlines mechanisms for International Transfers of Mitigation Outcomes (ITMOs), introduces a new framework for mitigation and sustainable development, and addresses non-market approaches.

 

Join us as we delve into Article 6, exploring its mechanisms and understanding how Article 6 can work in practice. In this content, we will cover:

 

 

Good reading!

What is The Paris Agreement?

The Paris Agreement, adopted in 2015, is a critical global pact embraced by almost every country to combat climate change and mitigate its adverse effects. 

 

This pivotal agreement focuses on significantly reducing worldwide emissions of greenhouse gasses, aiming to keep the rise in global temperatures below 2 degrees Celsius compared to pre-industrial levels, while also exploring strategies to further limit the increase to 1.5 degrees.

 

Central to the agreement is the commitment from all Parties to reduce their climate-altering emissions and progressively enhance these efforts. The accord sets a framework for wealthier nations to support less developed countries in their endeavors to both mitigate and adapt to climate-related challenges.

 

Additionally, it establishes a comprehensive system for regular and transparent assessment, reporting, and elevation of individual and collective climate targets by the participating countries.

What is Article 6?

article 6

Article 6, a key component of the Paris Agreement, outlines strategies for nations to collaborate in reaching their targets for reducing greenhouse gas (GHG) emissions, as outlined in their Nationally Determined Contributions (NDCs) while addressing the concern of double-counting.

 

Acknowledging that most actions to mitigate climate change will occur within national borders, Article 6 also highlights the potential for enhancing these efforts through international partnerships. This collaboration can include various governments and entities working together to reduce emissions through carbon offset projects.

 

Following extensive negotiations culminating at COP26, the member states of the UNFCCC ratified a comprehensive rulebook. 

 

This rulebook governs the transfer of carbon credits and the Corresponding Adjustments needed on the part of the Host Country to avoid double-counting, marking a significant step towards establishing an emergent global public carbon market.

Mechanisms under Article 6

Article 6 is divided into distinct subsections, each addressing different aspects of greenhouse gas emission reduction. 

 

Article 6.2 lays the groundwork for inter-country trading of GHG emission reductions, also known as ‘mitigation outcomes.’ This facilitates a collaborative approach to achieving emission reduction targets.

 

Article 6.4, intending to be a replacement to the Kyoto Protocol’s Clean Development Mechanism (CDM), introduces a system where GHG emission reductions can be traded between countries. 

 

This system operates under the oversight of the Conference of the Parties, the governing body of the UN Framework Convention on Climate Change, ensuring a regulated and structured approach to emission trading.

 

Furthermore, Article 6.8 addresses the significance of non-market strategies in promoting both mitigation and adaptation efforts. It emphasizes collaborative initiatives involving finance, technology transfer, and capacity building, distinct from the market-based trading of emission reductions. 

 

This section highlights the importance of a multifaceted approach in addressing climate change, beyond just the exchange of emission credits. However, the specifics of how these will manifest are still uncertain.

 

Let’s go deeper into these mechanisms!

Article 6.2: A Way Toward an International Carbon Market

Article 6.2 of the Paris Agreement covers carbon credit transactions between governments, where the credits, known as Internationally Transferred Mitigation Outcomes (ITMOs), are recorded in a central registry. 

 

So far, there have been only one government-to-government carbon credit transactions under Article 6.2, involving Switzerland as the purchaser.

 

This agreement is more akin to bilateral cooperation agreements than typical market transactions. Switzerland has disclosed general terms, including bilateral dispute resolution processes, but specific details on carbon pricing have not been revealed.

 

However, there’s a positive development with nearly 130 bilateral pre-feasibility projects currently underway. These projects primarily focus on energy efficiency and renewable energy initiatives, formed through agreements between developed and developing countries. Some also explore the issuance of carbon credits for carbon capture and storage (CCS) projects between developed nations.

 

Nature-based carbon solutions like forest or peatland offsets have been minimal under Article 6.2. However, in a notable development in September 2023, Suriname announced its intention to sell forestry-based Internationally Transferred Mitigation Outcomes under Article 6.2, marking a significant step in this direction.

 

In contrast to the vast number of Voluntary Carbon Market (VCM) transactions, public carbon deals under Article 6.2 have had a modest beginning since some of the rules are yet to be defined, especially around how to ensure high-integrity ITMOs.

 

Nevertheless, we have started seeing how the VCM infrastructure is being leveraged to facilitate the transfer of mitigation outcomes. Countries like Malawi and Rwanda have already authorized the use of credits issued by projects in their jurisdiction to be used as ITMOs.

 

This means that they are committing to applying the Corresponding Adjustment by subtracting the emissions reductions or removals from their NDCs. 

Article 6.2 and COP28

The potential of Article 6.2 of the Paris Agreement in fostering an international carbon exchange integral to climate mitigation remains uncertain. 

 

In the aftermath of COP28, there remain unresolved questions surrounding the international carbon trading rules, particularly those influencing Article 6.2 of the Paris Agreement.

 

A key issue under discussion is the degree of control and supervision the UNFCCC should exert over Article 6.2 activities.

 

Another area of contention is the potential for rescinding Corresponding Adjustments. This aspect would permit nations selling carbon credits to revoke their Corresponding Adjustments under certain conditions. The debate at COP28 was divided: some Parties advocated for this option to combat fraud, while others resisted, fearing it could destabilize market trust.

Article 6.4

article 6 paris agreement

The second main component of Article 6, known as Article 6.4, was initially seen as the most promising part of the Paris Agreement’s carbon market regulations.

 

The role of Article 6.4, along with its Supervisory Body, is to establish standards, guidelines, and methods for carbon markets and credits. Over the past two years, this body has been diligently working to fulfill this mandate.

 

Article 6.4, set to be operational by 2024 or 2025, is the successor to the Clean Development Mechanism, which approved over 3,300 projects.

 

So far, the 12-member Supervisory Body for Article 6.4 has made significant strides, especially in defining the conditions under which carbon removals from natural ecosystems like forests, grasslands, and peatlands can contribute to carbon credits.

 

Currently, the guidance for removal projects does not specify technology but it has been contentious.

Article 6.4 and COP28

The completion of specific rules by the Supervisory Body is eagerly awaited, with guidelines on additionality being particularly crucial, especially since the negotiations on the agreement for the Article 6.4 text at COP28 failed.

 

The current interpretation of additionality by the Supervisory Body encompasses various aspects: 

 

  • Revenue generated from carbon credits (financial additionality)
  • Influence of legal and industry standards (regulatory impacts)
  • Shifts in common practices (common practice additionality)
  • Comparisons with industry or sector benchmarks (performance additionality)

 

Given that additionality relies on hypothetical scenarios, it is expected that the carbon market’s regulations on this concept will evolve based on both practical developments and guidance from the Supervisory Body.

 

Furthermore, leading up to COP28, the Article 6.4 Supervisory Body released two pivotal documents – one providing guidance on methodologies and the other on removals.

 

However, these documents became points of contention among the negotiating parties, leading to a stalemate where neither document was approved for implementation. 

 

Additionally, there’s a significant deadlock regarding the interoperability between the Article 6.4 registry and the international registry utilized for Article 6.2, with considerable resistance to the idea of making them interoperable.

 

Also, COP8 failed to agree on whether and how REDD+ activities should be incorporated into the Article 6 framework, as well as on acceptable removal methodologies.

Article 6.8

Article 6.8 focuses on non-market international cooperation for emissions reduction and has received relatively little attention so far. 

 

However, this is beginning to change as Article 6.8 starts to delve into various significant and innovative international climate cooperation methods. Notably, technology transfers have been emphasized as a crucial element of this component since the Paris Agreement in 2015.

 

2023 witnessed a huge investment in low-carbon technologies such as solar, wind, heat pumps, and electric vehicles. Article 6.8 paves the way for leading technology manufacturers to supply clean technologies to developing nations at costs below the market rate, in return for carbon credits.

 

Moreover, governments are now considering debt-for-climate swaps under Article 6.8. In December 2023, key multilateral development banks established a task force to enhance climate finance access for developing countries, including through such swaps.

 

Possibly the most promising aspect is the potential of Article 6.8 to secure funding for intact natural areas, a topic of discussion in recent sessions of the Subsidiary Body for Scientific and Technological Advice.

What Is The Impact of Article 6 on Carbon Markets?

carbon offset

Article 6 focuses on setting up global compliance carbon markets under the Paris Agreement’s guidelines, allowing nations to exchange carbon credits. 

 

This provision ensures that emission reductions authorized for transfer by a country can be sold internationally, with the crucial stipulation that only one country can apply these reductions to its Nationally Determined Contribution (NDC). 

 

A vital aspect of this system is preventing double counting to accurately reflect global emission reductions. To address this, Article 6 introduced a mechanism known as “corresponding adjustment” to prevent any overlap in emission reduction claims.

 

This concept of corresponding adjustment might also impact the Voluntary Carbon Markets, increasingly influenced by the private sector’s commitment to reducing emissions. 

 

Stakeholders in the VCM have been keenly observing the developments of Article 6. With its establishment, key concepts like Corresponding Adjustments and Mitigation Contributions have been integrated into the VCM, now playing a pivotal role in shaping the trends of credit utilization and market demand.

 

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About the author:

Mariana Marins is Content Marketing Manager at Viridios AI. Mariana has 9 years of experience in marketing across different markets and companies, both in the non-profit and private sectors. Her background includes marketing and GTM strategies, CX, inbound marketing, SEO, and content production.She holds a Bachelor’s degree in Communications/Marketing, a MBA in Business Management and Design Thinking, and an Innovation Leadership Program Certificate from The Hebrew University of Jerusalem.