While the primary concern for the private sector at this point lies with the uncertainty of how national governments will treat the voluntary carbon market, it remains of paramount importance for countries to put in place the infrastructure and processes that ensure market mechanisms support NDC goals while delivering a just transition.
Article 6 of the Paris Agreement recognises that countries may choose to cooperate in meeting their nationally determined contributions (NDCs). This cooperation may take the form of internationally transferred mitigation outcomes (ITMOs) under Article 6.2, the generation of greenhouse gas credits under the centralized Article 6.4 mechanism, or non-market approaches under Article 6.8.
At COP27, countries made progress on further operationalising international cooperation under Article 6:
- Under Article 6.2, countries adopted guidance related to Party tracking and reporting, review by Article 6 technical experts, and the electronic infrastructure for recording information on international transfers. In 2023, countries will continue discussions on the timing and sequencing of reporting and reviews; the process for authorising mitigation outcomes for international transfer, including the scope of changes to authorisation; processes for addressing data inconsistencies; as well as other operational details. The scope of changes to authorisation is a particularly important area of ongoing negotiations, as some Parties think this scope should be limited to changes to the end use (e.g., if a country authorises an international transfer for use toward an acquiring Party’s NDC, how to change the original authorisation to allow the mitigation outcome to be used under the international aviation-carbon market instead); whereas others are interested in the option to revoke or withdraw authorisation, particularly in cases of unintended overselling. Discussions on some of the more technical issues were pushed to 2024, including the elaboration of further guidance on applying a corresponding adjustment for multi-year versus single-year NDCs, as well as consideration of whether ITMOs could include emission avoidance. The adoption of detailed guidance for tracking, reporting and review under Article 6.2 is an important step for further operationalising Article 6, as this infrastructure facilitates the mandatory accounting step of a corresponding adjustment.
- Under Article 6.4, countries agreed on the requirements and process for transitioning Clean Development Mechanism (CDM) activities to the Article 6.4 mechanism and charged the Supervisory Body with operationalising the process over the next year. They also adopted the processes for using CDM Certified Emission Reductions (CERs) units from 2013 or later toward the first NDC period, whereby the Party acquiring and using CERs toward the first NDC period must subtract the volume of CDM mitigation outcomes from its emissions balance, similar to the process for accounting for ITMO transfers under Article 6.2. However, the host country in which the CERs were generated is not required to apply a corresponding adjustment, as these units pre-date the NDC period. In the Article 6.4 decision, two types of Article 6.4 units (A6.4ERs) emerged—units authorised for use toward the achievement of an NDC or for other international mitigation purposes (“authorized A6.4ERs”) and units not authorised for use toward the achievement of an NDC or for other international mitigation purposes but may be used for results-based climate finance or domestic carbon pricing policies (“mitigation contribution A6.4ERs”). Both types of A6.4ERs are subject to the Share of Proceeds and Overall Mitigation in Global Emissions requirements at issuance. Countries also agreed on the form and function of the mechanism’s registry, though work is needed over the next year to connect the mechanism registry to international registry. Next year, countries will consider whether the Article 6.4 mechanism can include activities from emission avoidance and conservation enhancement and the Supervisory Body will continue to develop guidance for activities from removals, as well as broader methodologies.
- Under Article 6.8, countries agreed on the schedule for implementing the work programme on non-market approaches as well as the specifications for a web-based platform to record and exchange information on non-market cooperation.
Countries made significant progress during COP27 to accelerate the operationalisation of Article 6 of the Paris Agreement; however, additional elements will require further work over the next year(s). Reaching agreement on the Article 6 rulebook, adopted in Glasgow, took six years of arduous negotiations; whereas, comparatively, the mood within the negotiations on Article 6 in Sharm el Sheikh was much less combative, which demonstrated a marked shift in the tone and pace of Article 6 negotiations. Outside of the negotiation rooms, there were numerous announcements of new carbon-market related deals (such as new Article 6 deals between countries, including Ghana’s landmark announcement of the world’s first authorisation of ITMOs, under its bilateral Article 6.2 deal with Switzerland), initiatives (such as the Blue Carbon Institute launched by Conservation International, Amazon and the Government of Singapore) and collaborations (such as Japan’s newly launched Article 6 Implementation Partnership) – exemplifying the tenacity of players to pursue collaborative market mechanisms despite some elements of uncertainty.
Outlook for 2023
Sunset at COP27
The rules under Article 6 will impact government-to-government transactions, as well as other international compliance scenarios, such as the international aviation carbon market.However, Article 6 rules may also impact the voluntary carbon markets—whether directly, should a government choose to require national authorisation under Article 6 for the voluntary use of carbon credits generated within its borders, or indirectly, where decisions under Article 6 influence the buying preferences of voluntary actors.
As negotiations on Article 6 continue, there are a few elements worth following in 2023:
- The hottest topic for next year, in our view, relates to the process for authorising mitigation outcomes for international transfer, including the scope of changes to authorisation. For example, if a country authorises an international transfer for use toward an acquiring Party’s NDC, there is implicit agreement that the authorised use could be changed to an “other international mitigation purpose” instead, such as the international aviation carbon market. However, the debate on “scope of authorisation” gets much more heated and complicated when discussing whether countries should be allowed to revoke or withdraw authorisation for international transfer. While changing the use of an authorised ITMO from NDC achievement to other international mitigation purposes provides market flexibility, the ability to revoke or withdraw authorisation poses significant concerns for market predictability and stability.
- The introduction of two types of Article 6.4 units at COP27 is an interesting development, as “mitigation contributions A6.4ERs” will likely fall in the same category as mitigation outcomes achieved in the host country that are not authorised for international transfer, but may have international private sector financing in a voluntary market context, which market norms may shift towards a contribution claim model. The global debate on appropriate claims continues, including in stakeholder processes such as the Voluntary Carbon Market Integrity initiative, so it will be important to track how this new type of Article 6.4 units fits into the debate on about how to use and communicate about non-authorised, non-adjusted mitigation outcomes in an NDC era.
- The Article 6.4 Supervisory Body’s continued work on removal activities over the next year also warrants attention, as the methodologies to be developed and adopted will impact the viability of and demand for removal activities under the Article 6.4 Mechanism. Additionally, the decisions on removals under Article 6.4 may have implications for Article 6.2 and the voluntary carbon market, particularly if the final methodology is overly restrictive or deviates from market best practice.
While some of the details of Article 6 guidance remain unresolved and the Article 6.4 mechanism requires further work before being operational, these guidance gaps should not stall market-based climate cooperation under Article 6.2 or the voluntary carbon market. The world is in an implementation phase, so the next steps for operationalising Article 6 (beyond the set-up of the Article 6.4 mechanism) have shifted from the UN negotiating rooms to national capitals. Countries must establish the national frameworks necessary for international cooperation under Article 6 with urgency to enable the flow of carbon finance at the scale required. While the primary concern for the private sector at this point lies with the uncertainty of how national governments will treat the voluntary carbon market, it remains of paramount importance for countries to put in place the infrastructure and processes that ensure market mechanisms support NDC goals while delivering a just transition.