International emissions trading under Article 6 will be in the spotlight again in this year’s United Nations’ COP26 in Glasgow. This November, policy makers from all over the globe will be meeting to discuss, among other topics, Article 6 of the Paris climate agreement, which still remains to be finalised.
What does article 6 say?
Article 6 lays out international trading rules, allowing countries to trade emission reduction units between them, as well as mobilising the private sector’s climate action involvement in emission reduction activities. Article 6 contains three frameworks for climate cooperation. The first two are market based and the third revolves around non-market based cooperation.
- Article 6.2: allows countries to trade with other countries, so a country that has overachieved its Nationally Determined Contributions (NDCs) targets could sell its “beyond target” emission reductions to another country.
- Article 6.4: provides rules for a voluntary emission reduction mechanism, in order to enable raising of the global ambition. It will be supervised by the UN, and emission reductions can be traded across the public and private sectors. This new sustainable development mechanism (SDM) would replace the UN’s current Clean Development Mechanism (CDM).
- Article 6.8: is the framework for non-market based action. It allows cooperation between countries without trading; and also promotes the application of taxes to discourage emissions.
What are the current issues?
The complexity of the negotiations lies in several aspects, such as the diverse development stage of climate policy in different countries, country priorities, agreement on how the allocation of the reductions should work or various opinions on eligibility of emission reductions achieved under the Kyoto Protocol for compliance under the Paris Agreement. Looking into the detail, there are 2 main issues to finalise the rulebook:
- During COP25 in Madrid, it was proposed that emission reductions achieved anytime before December 31st, 2020, could be used by countries for compliance until 2025. From 2026 onwards, the reductions could only come from reductions achieved after 2020. But, should a country be allowed to use the emission reductions achieved during the Kyoto Protocol to meet their Paris Agreement commitments?
- Countries agree that double counting must be avoided on the basis of “corresponding adjustment”. This term means that when one country sells emission reductions to another, it must adjust its country emission inventory accordingly (reduce the amount of reductions they account for). The opposite adjustment would be done by the buyer country. However, it remains unclear how the rules would work in practice and when corresponding adjustments would be required. How can we avoid double counting?
Will the new rulebook impact the Voluntary Carbon Markets?
The purpose of Article 6 is to accelerate emission reductions globally and provide a framework for international climate cooperation with high environmental integrity. Nevertheless, the precise design of the Article 6 rules will certainly have an impact on voluntary carbon markets. How it will change remains to be seen. If designed well, the rules will help add clarity and integrity to the market and will enable participating states to raise their climate ambition. However, if countries agree on vague rules for Article 6, it could cause a high risk of counterproductive climate efforts globally.
In summary, finalising Article 6 is essential to reduce global emissions and could boost the support for climate action as well as the actual impact to the planet, helping increase ambitions worldwide. We will keep you posted with the conclusions after COP26.