COP26 Updates to Article 6 Explained

This blog post was originally written by Bluesource in 2021, and has been been revised to reflect the new company name, Anew. 

Bluesource Chief of Advisory Services, Janet Peace, walks through recent updates to Article 6 and what it all means for the international carbon market.

Nearly all nations, represented by heads of state and 25,000 delegates, met in Glasgow, Scotland for the 26th Conference of the Parties between October 31 and November 12, 2021. This annual event stems from treaty signatures at the 1994 United Nations Framework Convention on Climate Change (UNFCCC). As more severe weather events have been attributed to our changing climate, global recognition has grown to accept the manmade role in the causes as well as the possible solutions for mitigation and necessity of adaptation. Nearly all eyes were on this two-week long event to see what level of international cooperation and measurable commitment could be achieved.

The “Glasgow Climate Pact” includes a variety of provisions/decisions to increase ambition, fund adaptation and create the overarching rules for international carbon transactions.  Specifically, the decisions urged Parties to come forward with further enhanced Nationally Determined Contributions (NDCs) in 2022, such that 2030 targets were aligned with the Paris Agreement’s temperature goals[1]. Globally, to avert the worst, we would need to ensure the planet does not warm above another 1.5 degrees. The Pact also calls on governments to “accelerate the development, deployment and dissemination of technologies, and the adoption of policies, to transition towards low-emission energy systems”, including by “accelerating efforts towards the phase down of unabated coal power and phase-out of inefficient fossil fuel subsidies”.

There were many notable accomplishments and new initiatives, including:

• The Glasgow Leaders’ Declaration on Forests and Land Use
• The Global Methane Pledge
• Beyond Oil and Gas Alliance
• First Movers Coalition
• Just Energy Transition Partnership
• International Aviation Climate Ambition Coalition
• Accelerating the Transition to 100% Zero-Emission cars and vans
• Clydebank Declaration for Green Shipping Corridors
• The Glasgow Financial Alliance for Net Zero
• Breakthrough Agenda
• Global Coal to Clean Power Transition Statement
• US-China Joint Glasgow Declaration on Enhancing Climate Action in the 2020s

While many of these outcomes will have a general continued positive impact to the demand for the critical work that we do at Anew, our eyes were particularly on Article 6 developments.

Article 6 sets the rules and governance structure for the international trading of carbon credits.

Importantly, the Glasgow Pact resolved some key outstanding issues within the Paris Agreement relating to international carbon markets under Article 6 of the Paris Rule Book. Creating these rules is important because, as many studies have shown–the international trade of carbon reduces the cost of addressing global climate change.  One recent study that examined the benefits of global trading by the University of Maryland, for example, found that international cooperation under Article 6 of the Paris Agreement could reduce costs by as much as $250 billion per year by 2030. This can provide revenue for countries, and critical sectors, where the necessary transitions to sustainable methods and conservation would be cost prohibitive.

Sections 6.2 and 6.4 of the Rule Book primarily address international carbon markets and the respective decisions are the primary focus of this overview.

Section 6.2 establishes the rules for “Cooperative Approaches and Credits for International Mitigation Purposes” that involve the use of internationally transferred mitigation outcomes (ITMOs) towards nationally determined contributions.”

Section 6.4 deals with creation of “a market mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development.”

Internationally Transferred Mitigation Outcomes (ITMOs) are measured in tons of CO2 and like all carbon credits, ITMOs are created by projects that either reduce emissions or remove gases in one place, with the payments coming from another entity.

Rules covered in Articles 6.2 and 6.4 provide increased clarity on:

• The general types of international carbon credits envisioned under the Paris Agreement and the requirements for “accounting” with respect to corresponding adjustments (CAs) that would be applied to each type of credit
• The use of credits from the Kyoto Protocol’s Clean Development Mechanism (CDM) and what will replace it
• The role of the voluntary carbon market.

Ensuring an accurate count: International Units and Corresponding Adjustments

The Glasgow Pact expanded understanding about the rules and how to “account” for several carbon assets that could be traded between entities in different regions.  These include:

• Emission reductions that could be used to help meet NDCs,
• Emission reductions that could be used for other mitigation outcomes (including unauthorized carbon assets), and
• A new crediting mechanism to replace the CDM.

A closer look at 6.2

The accounting framework adopted under Article 6.2 requires that two countries engaging in the transfer of authorized ITMOs must make opposite entries, referred to as “corresponding adjustments,” to their domestic emissions inventories.

The country selling units adds to their inventory, and the country acquiring such units makes a subtraction. This approach, like with any transaction, ensures that only the buyer country can “use” the transferred emission reduction and helps avoid “double counting.”

No future freebies: NDC carry-over rules tightened

The rules now prohibit the carry-over of carbon market units from one NDC period to another. This was intended to keep countries who can generate substantial amounts of carbon market units from carrying them over to achieve future climate targets and NDCs.  This was seen as important since each new NDC is intended to be more stringent than the last.

Cradle to grave credit authorization

In the new Glasgow Pact, the rules require countries to “authorize” both creation and use of credits created under the rules of 6.2.  Notably, many countries have identified the use of market mechanisms as part of their strategy to meet their NDCs.  ITMOs are effectively voluntary carbon reduction credits backed by corresponding adjustments.

Again, to use ITMOs for an NDC under 6.2, the host country must “authorize” these credits and both the host country for the project and the country using the credit must apply corresponding adjustments to their national inventories. Selling an authorized ITMO, however, makes achieving the host country’s NDC that much more difficult since they must increase their countries emission inventory by the amount sold. Because of this, there is speculation about how many countries will authorize and sell ITMOs but certainly there was enough interest at the country level among negotiators to create the rules for this type of credit.

Countries engaging in the exchange of these ITMOs, and the “corresponding adjustments” were also encouraged to contribute a portion of the project credits to the Adaptation Fund and were also directed to communicate these adjustments in their biennial transparency reports (BTRs) under the Paris Agreement. These BTRs are to begin at the latest in 2024. But ITMOs are not the only international carbon assets.

A closer look at 6.4

In this section comprehensive rules for a new carbon crediting mechanism to replace the Clean Development Mechanism (CDM) were established and directed to be operational by the end of 2023. While it doesn’t seem to have a name yet, there are many similarities between this new crediting program and the CDM, including a reference to previous quantification methodologies, establishment of an overarching “Supervisory Body”, requirement for a share of proceeds to cover administrative costs, emphasis on sustainable development and the general process of generating credits.  One area of divergence, however, is that the new program requires each project to contribute a small portion (2%) of the credits to the global atmosphere (referred to as overall mitigation in global emissions or OMGE). In addition, 5% of the credits must be transferred to the Adaptation Fund to support adaptation efforts.

Project crediting period changes

The project crediting period for emission reduction projects was identified as five years, renewable twice (for a total of fifteen years). For removal type projects it is fifteen years, renewable twice (for a total of forty-five years).

What about corresponding adjustments for these credits?

Credits created under the 6.4 program do not require corresponding adjustments unless they are intended to be transferred to another country for application to their NDC or for other “mitigation outcomes” like CORSIA.  For these uses, the host country must “authorize” them, and corresponding adjustments must be made by both parties.

But while authorization for such credits is not required, they must be created and tracked under the rules and methodologies established by the Supervisory Body and in accordance with each national authority identified as responsible for the domestic program.

In some ways, such units are like credits in the existing voluntary market in that they can be used by anyone without a corresponding adjustment (unless authorized for use towards an NDC or programs like CORSIA).  These credits were described as originating from domestic activities that could help the host country meet its NDC goals, but they can also be used to help other entities meet their voluntary carbon goals, like carbon neutrality.

Credits created under 6.4 can be used by any entity, no matter their location, to reduce its own footprint. The country where they are used, however, cannot claim that reduction towards its own NDC (any reductions in greenhouse gas emissions from the project is reflected in the activities of the host country where the credit originated). Because of this, a credit without an authorization would not likely be allowed for use to meet legal requirements in another country.

Credits created under 6.4, however, do not replace the existing domestic voluntary carbon markets, but rather they supplement them and provide a mechanism to transact and account for carbon transactions across borders.

In 6.4 it was also formally decided that the Executive Board of the CDM would not register any new projects or renew projects occurring after December 31, 2020.  Projects created after 2020 must now be under the rules established for the new mechanism.  Recognizing that these new rules would not be available right away, a transition period for the existing CDM program was established whereby projects and their resulting Certified Emission Reduction (CERs) credits registered after January 1, 2013, could be used by any entity or by any country to meet a country’s first NDC or first adjusted NDC until 2025.  These older credits require no corresponding adjustment since the CDM came before the Paris Agreement. Any new project that started in 2021 or later, however, must now be under the Paris Agreement Article 6.4 mechanism.

Outstanding questions

While the Glasgow Climate Pact created greater clarity on many issues, questions remain.  For example, Article 6.2 suggests that all international transaction should have corresponding adjustments and yet, credits created under 6.4 do not require corresponding adjustments (unless they are authorized for use towards another countries NDC).

Negotiators also identified several technical issues that needed more review, and these were assigned to the Subsidiary Body for Scientific and Technological Advice (SBSTA).  They will be looking at issues such as,

1. What about corresponding adjustments after 2030?
2. How should the contributions to the Adaptation Fund from the share of proceeds change over time?

And of course, now the hard work begins on implementing these rules.  Who will “authorize” the trading of ITMOs?   How will the methodologies in the existing CDM be modified?  How will the grievance process be organized?  And when will these programs be operational?

Nevertheless, these rules are helpful and we appreciate the hard work that went into establishing them.  Without a doubt, these help to clarify how carbon reductions and removals should be quantified and international transactions accounted for.

What does this mean for our work at Anew?

Stepping back and looking at the bigger picture, six years of negotiating these rules provide affirmation that carbon credits are important to the global effort to address climate change.  Both emission reductions and carbon removals are identified as valid carbon assets that can be used by governments and other entities. We also appreciated the emphasis on sustainable development, environmental integrity, and transparency—all qualities that we believe are essential to enhancing and expanding the carbon market to drive investment into real and measurable climate solutions.

Anew is extremely well positioned in the diversity of our portfolio of work that we will be able to support clients across private, nonprofit, and governments to meet their goals and targets, however those may end up being measured or traded internationally in the future.

[1] Regarding Nationally Determined Contributions, Parties were requested “to revisit and strengthen the 2030 targets in their nationally determined contributions as necessary to align with the Paris Agreement temperature goal by the end of 2022, taking into account different national circumstances”