Carbon market players would once again be disappointed that parties seem no closer to agreeing the rules needed to fully operationalise the two market instruments established by the Paris Agreement. Nine years on from adoption of the Paris Agreement, Article 6 is yet to see the light of day, due to debates over issues such as how to authorise the transfer of the mitigation outcomes under both Article 6.2 and Article 6.4. Despite 81% of countries having indicated their intention or willingness to use Article 6 in implementing their Paris Agreement commitments, and reporting and commitment deadlines coming up quickly, there is still no real sense of when the instruments will start to function to achieve the intended outcomes.
Flexibility mechanisms under the Paris Agreement
Article 6 on cooperative implementation of the Paris Agreement allows voluntary cooperation among countries in fulfilling their Paris Agreement commitments to address climate change, known as nationally determined contributions (NDCs). Building on the three Kyoto Protocol flexibility mechanisms of the Clean Development Mechanism (CDM), Joint Implementation and International Emissions Trading, Article 6 essentially creates an international compliance carbon market through two key instruments: Article 6.2 cooperative approaches and the Article 6.4 mechanism.
The Article 6.2 cooperative approaches allow bilateral or multilateral cooperation among countries, through trade in, or transfer of, mitigation outcomes - called internationally transferred mitigation outcomes (ITMOs). These cooperative approaches are similar in nature to emissions trading under the Kyoto Protocol but unlike the latter, cooperative approaches are open to both developed and developing countries, echoing the Agreement’s move away from that dichotomy. Countries that overachieve their NDCs can ‘sell’ the extra mitigation outcomes (authorised as ITMOs), which purchasing countries can then apply towards achieving their own NDCs.
The second carbon market instrument is the Article 6.4 mechanism, now known as the Paris Agreement Crediting Mechanism. It is a multilateral carbon crediting mechanism, similar in nature to the CDM and Joint Implementation. Under this mechanism, emission reduction or removal activities can be registered by the Supervisory Body, and then implemented in a host country. The resulting reductions can either be used by the host country itself or authorised as ITMOs and sold to other countries to support the achievement of their NDCs. Again, unlike under the Kyoto Protocol, there are no distinctions drawn in the roles of developed and developing countries – either category of country can be host/supplier or investor/buyer.
The third Article 6 instrument, which is in fact not a carbon market instrument, is the Article 6.8 non-market approaches. This allows international cooperation among countries in implementing their NDCs, but without any trade in, or exchange of, mitigation outcomes. These approaches can include any form of cooperation among countries, but without a market element. Country A can provide capacity building support, such as consultants and experts, or direct financial support, to help Country B implement a forest-management project, but Country A will not benefit from the emission reductions the project achieves. Country X could provide the technology that Country Y needs to implement a specific policy listed in its NDC, such as a rural electrification policy, but again, Country X will not receive in return, the emission reductions achieved by the policy implementation. Any emission reductions or removals achieved under Article 6.8 will count towards the NDCs of the beneficiary country, not towards the NDCs of the country providing the support. Therefore, as the UNFCCC put it, a non-market approach “can be anything and everything, provided it’s not market-based.”
Developing the Rulebook for Article 6
The Paris Agreement established the instruments and it was then up to parties to the Agreement to establish the rules that would govern the instruments to, among other things, ensure their environmental integrity. Since the adoption of the Paris Agreement in 2015, parties have been working on precisely this. Some progress was achieved in 2021 at the third session of the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement (CMA 3), with the adoption of some of the rules comprising guidance on the Article 6.2 cooperative approaches, the rules, modalities and procedures (RMPs) for the Article 6.4 mechanism, and a work programme under the framework for the Article 6.8 NMAs. These rules established the basic framework and structure for the three instruments and the expectation was that the Article 6 rulebook was now finalised and the instruments could begin to function to help countries achieve their NDCs.
Bonn Update
This expectation has unfortunately not materialised with parties continuing to struggle to agree on the outstanding issues without which the instruments cannot fully function. This stalemate continued at the recently-concluded UN Climate Change Conference in Bonn, Germany in June 2024, with parties making little progress towards finalising the outstanding issues and expected to continue negotiations in November 2024 at the UN Climate Change Conference in Baku, Azerbaijan.
At the start of the Bonn Climate Change Conference, the Chair of the Subsidiary Body for Scientific and Technological Advice (SBSTA), issued an informal note setting out some expectations for the session and identifying some of the “crunch issues” that parties need to progress, including on authorisation of ITMOs and issues relating to registries. These and other issues were extensively debated by parties during the Conference often in daily day-long sessions divided among the three Article 6 instruments, but with little progress made.
Contentious Issues: Authorisation and Revocation
Whether parties can revoke an authorisation and if so, at what point, was one contentious issue during the negotiations. Under the Article 6.2 guidance, parties must authorise the use of ITMOs towards achievement of NDCs or for other international mitigation purposes. The question is whether these authorisations can be changed, that is, revoked. The language of the draft text in the SBSTA Chair’s informal note suggests that changes to authorisation are allowed before ITMOs are first transferred but after first transfer, are only allowed if the participating parties agree.
However, certain parties oppose any change to authorisation, stressing that once parties have authorised ITMOs, they should not be able to withdraw that authorisation. This is to ensure market certainty and confidence, because if investors know countries can withdraw their authorisation, it may make them less willing to invest in Article 6.2 cooperative approaches. Investors dislike regulatory uncertainty and the associated risk to their investments, and this could have a negative impact on the market. Permitting revocation would also potentially affect the environmental integrity of Article 6.2 and run the risk of double counting, as there is the possibility that purchasing parties would have applied such ITMOs towards their commitments before they are later revoked by the issuing party. One of the elements being considered therefore is how to keep track of revocations and prevent double counting, if revocation is permitted. While some countries oppose any type of revocation, others consider it should be allowed before the ITMOs are first transferred by the issuing party – as suggested in the draft text.
On the other hand however, some parties consider the issue of changes to authorisation as a national prerogative, as well as a contractual matter. They argue that as long as the parties to the cooperative approach agree on possible grounds for revocation in advance, then changes to authorisation should be permitted if those grounds materialise. Some possible reasons for revoking authorisations are upon the discovery of fraud or human rights abuses. Revocation should be permitted even after first transfer, argue these parties, provided it is based on previously-agreed grounds. There is a presumption that changes to authorisation are permitted, as the current Article 6.2 guidance requires parties to submit in their regular reports, information about authorisations, including any changes to earlier authorisations. It is on the basis of this that CMA 4 requested the SBSTA to develop recommendations on the authorisation process, including the scope of changes to authorisation and the process for managing such changes. It is this request that parties are working on.
Authorisation is also being considered in the context of the Article 6.4 mechanism, but here, the focus is on whether Article 6.4 emission reductions (A6.4 ERs) can be issued [as “mitigation contribution” ERs] without a statement from the host party confirming its status. There are two types of Article 6.4 ERs: “authorised A6.4ERs” for use towards achievement of NDCs and/or for other international mitigation purposes; and “mitigation contribution A6.4ERs” which are A6.4ERs not specified by the host party as authorised. The latter can be used for, among other things, domestic mitigation pricing schemes or domestic price-based measures. The RMPs require host parties to provide a letter confirming whether the A6.4ERs from an activity are authorised as defined above. The issue being considered is whether a decision needs to be made regarding authorisation before issuance of the ERs.
The proposal is that A6.4 ERs can be issued as mitigation contribution A6.4 ERs if the host party has not provided an authorisation statement at the time of issuance and can then subsequently be authorised. Parties that support this option argue that the authorisation or lack of it, does not change the quality of the ERs. Authorisation specifies what countries want to do with the ERs – it does not affect how the ERs are generated or their quality. Furthermore, the proposal is that any subsequent authorisation must be done before any transactions in, or transfers out of, the mechanism registry. This should consequently address any risk of double counting. However, parties could not reach convergence on this issue, and mostly restated their entrenched positions. Negotiations will continue in Baku.
A bigger issue, which was not discussed at the June meeting but is nevertheless holding back the Article 6.4 mechanism, is the continued failure by parties to adopt two sets of recommendations prepared by the mechanism’s Supervisory Body: the requirements for developing and assessing the mechanism methodologies; and recommendations on activities involving removals. The former in particular is essential for the mechanism to begin to function as without methodologies, which cannot be developed without adopted requirements, there is no way to, for instance, determine the baseline scenario for activities under the mechanism. Parties are dissatisfied with the recommendations, particularly the removals recommendation, and have consequently refused to adopt both sets of recommendations, instead requesting the SBSTA to continue its consideration of the matter at the June talks – but that did not happen. Baku will present another opportunity for parties to consider, and hopefully adopt, the much-needed methodologies recommendations.
These are just three examples of the several issues still to be resolved to fully operationalise Article 6. Other issues include whether carbon pricing and other fiscal instruments should be eligible as non-market approaches under Article 6.8.
Was any progress made?
The Bonn Conference was not completely lacking in progress on Article 6. Parties did manage to move some issues off their plate, even if only to postpone consideration of these issues until a later time. One of the most important was deferring negotiations on the inclusion of emission avoidance under Article 6.2, and emission avoidance and conservation enhancement activities under Article 6.4. Emission avoidance, according to the proposal by the Philippines, entails displacing or preventing emissions expected to be generated from planned activities, such as energy, transportation or human-induced deforestation. At its essence, credits would be generated by countries for not going ahead with their planned activities that would worsen climate change. The argument by the Philippines is that to properly address climate change, emissions should be avoided altogether, rather than reduced or removed after the fact. This proposal received near-universal opposition due to its hypothetical nature and difficulty with, among other things, establishing a baseline. Although emission avoidance doubtless has a role in mitigating climate change and perhaps there is even a place for providing financial support for such “avoidance” it really has no place in a carbon offsetting scheme. If allowed under Article 6, whatever emissions are “avoided” would be available for use by other parties to meet their NDCs – and given the hypothetical nature of such avoided emissions and the impossibility of accurately calculating them, would be clearly counter-productive. Most parties, with the exception of the Philippines, therefore wanted to conclude definitively that Article 6 would not include such activities.
Conservation enhancement, on the other hand, refers to increasing the protection of natural forests and other ecosystems. Some parties, while not directly opposed to this type of activity, consider that current guidance is sufficient as such activities could result in emission reductions or removals, and are therefore eligible if they meet the requirements. They consequently opposed singling out such activities for separate definition or treatment.
Ultimately, parties agreed to postpone further consideration of this issue to 2028, and agreed that current guidance will continue to apply in the meantime; and that emission avoidance is not included in the current guidance and RMPs (for Articles 6.2 and 6.4), and conservation enhancement is not a separate category of activity in the current Article 6.4 RMPs. While this decision simply puts off the debate, it as least provides parties with the time and headspace to focus on other critical issues needed for operationalising Article 6.
What is next?
With these ongoing discussions, Article 6 continues to stall at the starting point – it has not managed to take off yet, nine years after its creation. The next stop on the road to operationalising Article 6 is the UN Climate Change Conference in Baku in November, when parties will continue their consideration of these issues. But will they begin to achieve convergence or stand their ground and rehash their views? This remains to be seen.
Parties are due to submit their first set of biennial transparency reports (BTRs) by 31 December 2024, which should demonstrate, among other things, progress towards achievement of NDCs. It would no doubt be a disappointment that they could not actually use Article 6 to support implementation of their NDCs. They are also due to submit updated NDCs by February 2025 which should set out their commitments and how they hope to achieve them. In their initial NDCs, parties had indicated their intention or willingness to use Article 6 towards achievement of the NDCs and will most likely do the same for the new or updated NDCs. The question is whether they will have the opportunity to do so, given the delay in operationalisation with no clear end in sight: in fact, some parties do not appear to be particularly optimistic about an imminent resolution of the outstanding issues noting it is unlikely the mechanism will begin to generate income by next year. And if the parties themselves are not optimistic, should carbon market players expect a change soon?
