The rules governing carbon markets agreed at the COP26 in Glasgow have sparked significant interest and confusion. If you are among the perplexed, this handy Carbon Market Watch guide provides answers to frequently asked questions about Article 6 of the Paris Agreement.
What is Article 6?
Article 6 of the Paris Agreement consists of nine paragraphs providing principles for how countries can “pursue voluntary cooperation” to reach their climate targets.
These high-level principles were intended as a basis for countries to develop detailed rules on how to implement Article 6 in practice. However, they proved contentious, leading to years of delays.
At COP 26 in Glasgow in 2021, following several years of inconclusive negotiations, countries agreed on a package of rules to govern and implement international carbon market mechanisms under the United Nations Framework Convention on Climate Change (UNFCCC).
What is the difference between the Article 6.2 and 6.4 market mechanisms?
Article 6.2 allows countries to trade emission reductions and removals with one another through bilateral or multilateral agreements. These traded credits are called Internationally Transferred Mitigation Outcomes (ITMOs). They can be measured in carbon dioxide equivalent (CO2e) or using other metrics, such as kilowatt-hours (KWh) of renewable energy.
Article 6.4 will create a global carbon market overseen by a United Nations entity, currently referred to only as the “Supervisory Body”. Project developers will request to register their projects with the Supervisory Body. A project must be approved by both the country where it is implemented, and the Supervisory Body, before it can start issuing UN-recognised credits. These credits, known as A6.4ERs, can be bought by countries, companies, or even individuals.
Are Article 6 carbon markets up and running?
Internationally Transferred Mitigation Outcomes (ITMOs), the carbon credits under Article 6.2, can already be traded between countries. Countries such as Japan and Switzerland already have concrete projects in place to buy this variety of credits and count them towards their so-called nationally determined contributions (NDCs). However, it is typically a lengthy process for countries to conclude 6.2 bilateral agreements, so it may still be some time until ITMOs are widely traded.
As for the credits created under Article 6.4 (A6.4ERs), it will likely take two to three years or longer before they can be issued and traded. This system will be overseen by the UN Supervisory Body mentioned above. A6.4ERs cannot be traded until this regulatory body and a centralised registry are in place.
Detailed rules still need to be hammered out. These include rules to govern how projects will be assessed before being registered, how emission reductions will be measured, how the system can generate finance for adaptation, and more. Significant work is still needed.
Are the new rules good enough to prevent double counting?
The rules largely reduce the risk of double counting, but are not completely airtight.
The main tool for avoiding double counting is to apply “corresponding adjustments”, which are required for all authorised carbon credits. Rather like in double-entry bookkeeping, this involves the country selling carbon credits to deduct them from its own greenhouse gas inventory so that the country (or airline) buying them can count them towards its own climate targets. This clearly signals that double counting will not be tolerated in the official system.
However, “voluntary” credits purchased by private companies do not have to go through the Article 6 system. This means that largely unregulated private schemes can still allow double counting, even though this defies logic and environmental integrity. It remains unclear whether buyers will even want double-counted credits when properly adjusted credits will be available.
In addition, the way in which these adjustments will be applied to some varieties of credits is problematic. This is primarily the case when it comes to accounting for ITMOs under CORSIA, the carbon offsetting scheme for aviation. Countries with a single year target for their nationally determined contribution (NDC) – e.g. reducing emissions by x% by 2030 – which is the case of most countries, will apply adjustments in the target year as an average of all credits sold and purchased over the entire NDC period. Take a country that sells 0 credit over the first nine years of its NDC period, and then sells 100 credits to an airline for compliance under CORSIA during the 10th and last year of its NDC period. The airline will count 100 credits, but the selling country will only correct for the average quantity of credits sold over its NDC period, i.e. 100/10=10 credits. 90 credits are double-counted.
What happens to the Kyoto Protocol’s Clean Development Mechanism?
The Clean Development Mechanism (CDM), which was established under the Kyoto Protocol, will continue for a transitional period under Article 6:
- CDM project transition: the Article 6 deal allows CDM projects to transition to the 6.4 mechanism if it is approved by the country where the project is located, and if the project meets the new rules, with the exception of rules on methodologies. Projects can continue to use the same old, and often deeply flawed, CDM methodologies until 31 December 2025, or the end of their current crediting period, whichever comes first. From 2026 on, they must be fully compliant with Article 6, but hundreds of millions of junk CDM credits could be rebranded as 6.4ERs, i.e. carbon credits under Article 6.4, up until that date. Up to 2.8 billion credits could become eligible for issuance if all CDM projects were to transition.
- Use of CDM credits: CDM credits (known as CERs) from projects registered on or after 1 January 2013 can be used towards countries’ first nationally determined contributions (which ends in 2030 for most countries). This could lead to the transition of 300 million CERs. No credits from the Kyoto Protocol’s Joint Implementation mechanism (ERUs) are eligible under Article 6.
Overall, the CDM will eventually expire, even if there is no formal end date yet. It can no longer accept requests for registration, for crediting period renewals, or for issuance of CERs, relating to emission reductions from after 31 December 2020. However, in the meantime, it can inflict significant damage to the credibility of Article 6 and to efforts to achieve real-world emissions reductions. The CDM’s underlying infrastructure and remaining funds will largely be repurposed for the future Article 6.4 mechanism.
What implications do Article 6 rules have for the voluntary carbon market?
Any project seeking to register under Article 6.4 will need to comply with all 6.4 rules regardless of who buys the credits (company or country). All credits authorised by countries must be accounted for, including when sold to private companies.
However, the 6.4 text is unclear regarding the possibility of issuing credits that are not authorised, and hence not accounted for. If such credits were to be issued, it would amount to greenwashing for private companies to make offsetting claims from these “non-authorised” units. However, the vagueness of the text could be exploited in this way until countries clarify the situation. That said, such credits could legitimately act as be an avenue for companies to provide climate finance to support mitigation in developing countries, but not to claim ownership of those reductions and/or use them to advertise “net zero” claims.
In addition, other decisions will send a signal to voluntary carbon markets. Actors in these markets should take note that all countries who have ratified the Paris Agreement have agreed that, simple offsetting is no longer acceptable (2% of all A6.4ERs will be cancelled without anyone using them), and that credits must deliver climate adaptation finance (5% of all A6.4ERs will be given to the Adaptation Fund, which can re-sell them to generate revenues).
Do “avoided emissions” qualify under the new Article 6 rules?
Avoided emissions – whereby a project makes assumptions about how its existence could lead to future emissions being avoided – do not qualify as a basis to generate any kind of carbon credits under Article 6, just as they did not qualify under the Kyoto Protocol’s Clean Development Mechanism.
A technical UN body has been tasked with assessing whether avoided emissions could be considered as a basis for generating credits in the future, but this is unlikely to change because several countries firmly oppose this, for good reason, owing to the numerous well-documented issues associated with issuing credits from avoided emissions.
What are the key positive and negative aspects of Article 6.2 and 6.4?
6.2 & 6.4:
- Corresponding adjustments are required for all carbon credits authorised by host countries, regardless of whether they were generated in “sectors or GHGs” covered in the host country’s NDC or not.
- All authorised credits have a de facto expiration date, since they must be used (and adjusted for) in the NDC period in which they occurred.
- Provisions for the baselines used to determine the number of carbon credits a project can issue appear strong (further methodological work needs to be done).
- Provisions for additionality, i.e. that a project leads to emission reductions that would otherwise have not occurred, also appear to be acceptable (further work to be done).
- Mandatory “in-kind” and monetary levies on each carbon credit traded under Article 6.4 (6.4ER) support climate adaptation in developing countries.
- Possible grievances flagged by peoples and communities negatively affected by carbon crediting projects will be overseen by an independent body.
6.2 & 6.4:
- Human rights and rights of indigenous peoples are referenced, but not strongly enough.
- Internationally Transferred Mitigation Outcomes (ITMOs) can be in “non-GHG” metrics (e.g. kWh of renewable energy, hectares of forest), which is methodologically complex and vague, potentially leading to abuses. However, reporting on the non-GHG trade will have to include information on how it can be converted to CO2e.
- Mandatory partial cancellation of each A6.4ER trade so as to help deliver an overall mitigation in global emissions (OMGE) – but 2% cancellation rate is too low.
6.2 & 6.4:
- Inclusion of nature-based emission removal projects, which do not lead to permanent emissions removals.
- ITMOs can be generated by certain countries on the basis of quantifying “policies and measures” in CO2e terms, which remains vague and is potentially subject to abuse.
- Double counting not fully ruled out (see above question about double counting).
- No mandatory partial cancellation of ITMOs (“OMGE”) – it is purely voluntary.
- No mandatory levy on each ITMO to support climate adaptation in developing countries.
- No guarantee to secure free, prior and informed consent from indigenous peoples and local communities.
- Clean Development Mechanism (CDM) projects transitioning to the 6.4 system can continue to use outdated and flawed methodologies until as late as 2025 in some cases. If all projects transitioned, the world could face the nightmare scenario of up to 2.8 billion largely dud credits being issued.
- About 300 million CDM credits (CERs) could be used to reach countries’ NDCs until as late as 2030 (see above question about the CDM).
Gilles Dufrasne, Policy Officer, [email protected]
Jonathan Crook, Policy Officer, [email protected]
This guide was produced thanks to support from:
* This post was updated on 10 February 2022.