By Sara Tolonen, PhD Candidate
The emerging Article 6 carbon market architecture
The Subsidiary Body for Implementation (SBI-60) and Subsidiary Body for Science and Technological Advice (SBSTA-60) of the United Nations Framework Convention on Climate Change (UNFCCC) held their intersessional meetings in Bonn on 6-13 June 2024, with a continuing focus on making progress on Article 6.
Foreseen to lay the foundation for the new global carbon market under the United Nations’ oversight, Article 6 includes a complex set of rules for countries which wish to pursue voluntary cooperation to reach their climate targets. Article 6 applies to all countries that are Parties to the Paris Agreement and wish to engage in mitigation action through additional means.
Carbon markets are seen to be a cost-effective mechanism to incentivize climate action by enabling parties to trade carbon credits or internationally traded mitigation outcomes (ITMOs) generated by the reduction or removal of greenhouse gas (GHG) emissions from the atmosphere, for instance, by switching from fossil fuels to renewable energy or enhancing carbon stocks in ecosystems such as forests. In essence, Article 6 facilitates international climate action cooperation and mobilises financial support for developing countries in their transition. Carbon market is therefore supposed to be a temporary solution to lower the costs of mitigation before climate policies become mainstreamed.
Two subsections are of importance. Article 6.2 governs cooperative approaches and Article 6.4 establishes an international crediting mechanism. The former applies to carbon trading between Parties (i.e. bilateral agreements) where the latter is applicable to non-state actors, such as the private sector. Together these are presumed to form the basis for a new global carbon market.
The roots of Article 6 can be traced back to Kyoto Protocol’s Clean Development Mechanism (CDM) which was a mechanism to allow flexibility for industrialised Parties in meeting their emission reductions by supporting decarbonisation in developing countries rather than reducing emissions domestically. After numerous controversies, these Kyoto CDM credits, i.e. Certified Emission Reductions (CERs), are being phased out today and the aim is to align the new global carbon market with principles that are consistent with the Paris Agreement.
Partly due to their tumultuous and charged past, the negotiations for Article 6 have been progressing at a slow pace. A breakthrough moment was achieved at the COP26 in Glasgow, when the Parties agreed to the so-called Paris Rulebook as a part of the Glasgow Climate Pact. It laid out some preliminary rules for eligibility of projects, accounting standards and a transition plan for phasing out and carrying over CDM credits.
It is important to note that Article 6 is only a fragment of all the carbon markets, though an important one. Beyond this realm operate many others, such as the voluntary carbon market (VCM) which is guided by principles and guidelines of different certification authorities and project verification companies. Despite its independence, the VCM community is actively involved in the discourse around Article 6. In doing so, they are anticipating the potential impacts of the Article 6.4 rules on the voluntary market, such as creation of more uniform standards that could be followed in the fragmented market.
The controversial nature of international carbon credits
Carbon markets have been subjected to considerable criticism. This is why policy makers and experts alike have been cautious in designing the rules for a new global carbon market. The issues are both technical and moral in nature.
One of the most prominent issues has been that of additionality, i.e. whether the traded carbon credit actually incentivises a mitigation activity or whether it would have occurred without it. Since projects come in many shapes and sizes across multiple sectors, setting a specified baseline for additional mitigation activities is required. Even with the most advanced science available, this is a highly speculative practice which has been criticised heavily.
Furthermore, a vital concern is whether a market-based approach is preventing buyer countries’ motivation to push for more ambitious Nationally Determined Contributions (NDCs) and private sector’s commitments to value chain transition, if a cheaper and politically more feasible option for emissions reduction or removal is made available.
Another issue comes in the form of environmental integrity and social safeguards. CDM projects unfortunately have a poor record for adhering to high environmental and social standards. One way in which Article 6 is aiming to address this is through a sustainable development tool. Despite this, several environmental and human rights’ interest groups have pointed out that the Article 6 carbon markets in their current form do not have adequate safeguards and grievance mechanisms in place, especially when it comes to indigenous peoples’ rights to their lands.
Lastly, double-counting remains an ever-contested topic. This means the risk that two countries are counting the same emission reduction or removal in their own national inventories. Both Article 6.2 and 6.4 are trying to resolve this through a corresponding adjustment (CA) which is an accounting mechanism whereby the host country ensures that it does not count the transferred emission reduction in its national inventory whereas the buyer country does the opposite by adding it into their system. However, there are countries and regions, which have indicated that even if they engage in Article 6 projects, they will not count these projects toward achieving their own national objectives and NDC targets.
The requirement for CAs is not mandatory for voluntary markets. Many VCM actors are against it as they believe that this would necessitate additional bureaucracy and institutional resources for host countries and as a result lead to a diminished flow of carbon finance. Be that as it may, this begs the question on how to create standards that would be sufficiently robust, but easy to implement for countries as well as non-state actors.
Issues to be resolved at the COP29
In the June Climate Meetings, the Parties made some, albeit modest, progress in some of the Article 6 open issues ahead of COP29. The negotiations focused on carbon credit authorization, activity scope and the international carbon market registry.
The working documents included a draft decision text on the agreed electronic format for Article 6.2 for notifying the UNFCCC of authorised Article 6.2 activities. With respect to Article 6.4, a draft decision text concerned authorisation, registry issues, the eligibility of emissions avoidance and conservation enhancement activities, and national arrangements for implementing Article 6.4. The delegates agreed to hold workshops ahead of November, especially to finalize recommendations on methodologies and emission removals for Article 6.4. Finally, the Supervisory Body of the Article 6.4 mechanism also aims to finalise the aforementioned Sustainable Development Tool in the run up to COP29 to address the environmental and social safeguards.
For the outside observers it seems that there is no lack of ambition to have the Article 6 market up and running in due course. At the same time, there are still many unresolved disputes of the best approaches not only between the Parties but also between the UN regulatory scheme, private sector and civil society. Admitting the structural flaws and past mistakes will only take us so far. Understanding the politics behind the extremely technical discussion is a vantage point in making sense of the world of carbon markets. The making of Article 6 is a prime example of a political gridlock where a short-term vision could lead to catastrophic effects for global climate action but delaying an outcome can slow down the impetus to act. Now it remains to be seen if Parties are able to cultivate a cooperative spirit in order to achieve enough technical progress ahead of November in Azerbaijan.
Photo by micheile henderson on Unsplash