The rules governing carbon markets agreed at the COP26 in Glasgow need to be implemented at COP27 in Sharm el-Sheikh in a way that is transparent and benefits the climate. This handy Carbon Market Watch guide explains Article 6 of the Paris Agreement, how it works and main the issues at stake.
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).
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, referred to as the “Article 6.4 Supervisory Body” (6.4SB). 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.
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 frameworks 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 and additional requirements for reporting and country authorisation still need to be hammered out, so it may still be some time until ITMOs are widely traded.
As for the credits created under Article 6.4 (A6.4ERs), it is unlikely any will be issued or traded until 2024 at the earliest. This system is 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.
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) – such as 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.
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 remaining funds will largely be repurposed for the future Article 6.4 mechanism.
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 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 the voluntary carbon market. 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).
More and more voices are calling for the voluntary carbon market to get in line with Article 6 by adopting this mandatory minimum 2% cancellation of credits (referred to as overall mitigation in global emissions, or OMGE), and this mandatory minimum 5% share of credits to support adaptation (referred to as share of proceeds, or SOP). Two UN negotiating groups representing 85 countries that are highly vulnerable to climate change, the Alliance of Small Island Developing States (AOSIS) and the Least Developed Countries (LDCs), have publicly called on the voluntary market to adopt mandatory minimum 2% OMGE and 5% SOP rates.
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.
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 most countries firmly oppose this, for good reason, owing to the significant risk associated with issuing credits from avoided emissions. For example, under the guise of emission avoidance, a fossil fuel extracting country or company or project developer, could potentially claim to pump less oil and gas (or to do less exploration) in order to sell carbon credits, which could in turn be used by another country or company to “reach” a climate target, even if such credits were environmentally worthless.
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 to to be governed by the right principles, and these will need to be implemented accordingly and transferred into concrete technical provisions.
Provisions for additionality, i.e. that a project leads to emission reductions that would otherwise have not occurred, also appear to be based on the right set of principles, and these will need to be implemented accordingly and transferred into concrete technical proposals.
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 addressed by an independent body.
Stakeholders, like civil society organisations and local communities, have the right to appeal decisions of the Supervisory 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.
Possible inclusion of emission removal projects with short-lived storage (such as most nature-based activities), 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.
Possible inclusion of emission removal projects with short-lived storage (such as most nature-based activities), which do not lead to permanent emissions removals and should not be used as offsets.
No specific requirement to obtain 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).
For a list of CMW’s more technical recommendations regarding key Article 6 topics up for discussion/decision at COP27, please see: CMW COP27 recommendations on key Article 6 topics (28.10.22)
For a less technical summary, please see the answers below to questions regarding Article 6 items up for discussions/decision at COP27.
Countries that decide to trade carbon credits under Article 6.2 are required to report information about these trades, which is then reviewed by a review team. This in turn is made public, unless a country considers certain information to be “confidential”. The rules governing “confidentiality” have not yet been agreed but will be discussed at COP27.
Many countries are in favour of transparent reporting in Art 6.2, because they correctly don’t see a case for what information could justifiably qualify as confidential, given the high-level and non-controversial nature of the information to be reported about Article 6.2.
However, some countries have suggested this provision for confidentiality should cover a lot of information. For example, the like-minded developing country negotiating group (LMDC) has suggested that all information submitted to the UNFCCC by a party should be considered confidential. This is a highly unconvincing argument. If such a blanket exemption to transparency were permitted, it would obscure the market, causing observers and market actors to justifiably distrust it.
For the mechanism to have credibility, transparency must be the priority. Hence, all information about Article 6.2 should be public. Countries have an opportunity to make sure Article 6 sets a high bar on transparency, which would clearly set it aside from the lack of transparency on the voluntary carbon market.
The Article 6 rules are clear that any proposed project or activity for carbon crediting will be subject to a specific review and reporting process.
In the past, some negotiating groups raised the possibility of exemptions to this process, such as for ‘Reducing emissions from deforestation and forest degradation’ (REDD+) results under Article 5 of the Paris Agreement. However, allowing any exemption to the Article 6.2 reporting and review process would be very detrimental to the integrity of the mechanism.
At COP27, countries are supposed to agree on a high-level definition of greenhouse gas removals, including setting out provisions to address monitoring, permanence (whether the carbon is stored on a “permanent” basis), and reversals (when the carbon is re-released into the atmosphere, such as due to a forest fire).
Non-permanence in land-based activities is particularly problematic. Institutional processes to try to address this, such as establishing buffer pools or insurance mechanisms, are either too short (for example, less than 100 years) or unrealistic (such as guaranteeing the existence and operation of a buffer pool for over 100 years), and sometimes both.
Tonne-year accounting is a particularly dangerous idea whereby storing 100 tonnes for 1 year could create a credit equivalent to storing 1 tonne for 100 years. From a carbon-budget perspective, storing carbon for a short amount of time has no benefit. Storing carbon for a medium amount of time (several decades) could have benefits but should not be seen as equivalent with emission reductions. Tonne-year accounting must not be included as a possibility in the definition of removals in 6.4.
The definition of removals to be agreed at COP27 will have significant implications for Article 6.4, and even beyond in terms of sending a signal to the voluntary carbon market. Therefore, it is crucial that countries properly define removals.
A removal must: i) lead to a net reduction of GHGs in the atmosphere; ii) actually absorb carbon out of the atmosphere; iii) be comprehensively accounted for, including all emissions generated through the removal process; and iv) be stored for a climate-relevant timescale (at least 200-300 years). These are principles based on a paper by Tanzer and Ramirez.
At COP27, countries are supposed to agree on high-level principles on requirements for developing/assessing potential future Article 6.4 crediting methodologies.
As a rule, methodologies should focus on activity types that are compatible with a 1.5°C future, and in sectors that are suited to carbon crediting. It is important to recognise that some sectors are not suited for this, such as those where there is a high risk of non-permanence or a high level of uncertainty when it comes to quantifying impact.
There should be no carbon crediting methodology for fossil-fuel related activities, such as increasing the efficiency of fossil-fuel powered energy generation, or reducing leaks from fossil fuel transport.
Instead of “filtering” all existing methodologies, the 6.4 Supervisory Body should instead focus on identifying key elements that should be extracted from these, i.e. the best practice elements, and construct new methodologies on the basis of the best elements of the existing ones.
The Article 6.4 Supervisory Body (SB), which will set most Article 6.4 rules and govern the mechanism, is tasked with establishing an independent grievance process but no timeline has been set. It is expected (or at least hoped) for work to start on this in 2023.
In addition to this, the agreement at Glasgow states that SB decisions can be appealed by stakeholders, but a timeline was not set for this either.
While the grievance mechanism can be established at a later stage – but of course still before any project/activity starts seeking registration – the appeals process should be defined and communicated as a matter of urgency, given that the SB is starting to take decisions, and stakeholders have currently no way to appeal these if they wish to.
To deliver overall mitigation in global emissions (OMGE), the Article 6 agreement requires the mandatory cancellation of a minimum 2% of Article 6.4 credits.
This only delivers a benefit to the atmosphere if a “corresponding adjustment” is applied to these credits, since this ensures the credit is not counted by anyone. For all authorised credits, this is already required, and so there is no problem here.
However, since “non-authorised” credits may be possible under Article 6.4, some countries have argued that corresponding adjustments do not need to apply to the 2% OMGE portion levied for non-authorised credits. In practice, this would mean that OMGE would not happen, which is unacceptable.
Therefore, it must be a requirement to apply a corresponding adjustment to the minimum 2% OMGE portion levied for all credits, including “non-authorised” ones.
Emissions avoidance is not currently permitted as a way to issue carbon credits under Article 6, but negotiators have been tasked for COP27 to assess whether it could be permitted.
Emissions avoidance should not be eligible as a way to issue Internationally Transferred Mitigation Outcomes (ITMOs) or Art6.4 credits, since this term is inconsistently and poorly defined, with potential interpretations that could lead to very questionable crediting.
The Philippines appears to be the only country pushing for inclusion of emissions avoidance in Art 6.2 & 6.4, such as in its official submission as well as presentations in technical workshops. It is unlikely that emissions avoidance would ever be allowed in Article 6, since most countries are aware of the problems it would create.
That said, to ensure emissions avoidance is not allowed now or in the future, countries should close the door once and for all by clearly agreeing at COP27 that it is not an eligible category for issuing carbon credits under Article 6.