Paris Agreement Article 6: What you need to know

The primary goal of the Paris Agreement is to keep the increase in global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the increase to 1.5°C. The world came together in 2015 to adopt the Paris Agreement, setting the stage for the next phase of global climate action. The fact that nations around the world were able to reach consensus on such a wide-reaching agreement with global implications is truly remarkable. After reaching the agreement in 2015, the Pairs “rulebook” which offers guidance on how countries should report GHG emissions and sets out adaptation priorities, plans, and actions [1] was the next on the list. Most elements of the rulebook were agreed to in late 2018 and took effect on January 1 2020 [2].  However, nearly five years since the Paris Agreement was reached, a key section of the rulebook has still not been finalized: Article 6.

Article 6 sets the rules for how countries can reduce their emissions using international carbon markets and is considered one of the least accessible and complex concepts of the global accord [3]. Carbon markets are expected to play a significant role in reducing greenhouse gas (GHG) mitigation costs. However, without an effective mechanism to track and exchange global GHG reductions, tackling global climate change will be significantly more costly. Large industry is particularly interested in Article 6 given that it has the potential to reduce the costs of GHG reductions. This could lead to compliance cost savings in jurisdictions where carbon is priced. Given the transformative impact that Article 6 could have on global climate action, it is essential that offset market participants understand the section of the Paris Agreement.
 

Article 6 Is Important

Article 6 is important because global carbon markets are important. Global carbon markets allow for GHG mitigation to occur where it is most effective on a dollar per tonne of carbon dioxide equivalent basis. It is estimated that an integrated global carbon market could reduce the costs of climate action by billions of dollars every year [4]. If climate change goals can be met at a lower costs, this potentially opens the door to the acceleration of climate action. Industry understands the case for a functioning Article 6. Through organizations such as the International Emissions Trading Association (IETA), industry is seeking to ensure that global carbon trading is incorporated into international climate change agreements [5]. Governments however have not embraced global carbon markets. Only eight countries that have signed the Paris Agreement (Canada, Japan, Liechtenstein, Monaco, New Zealand, Norway, South Korea and Switzerland) explicitly state that they plan to use international credits [6]. 
 

Article 6 Mechanisms

Despite the fact that international GHG emissions credits are not currently permitted for use under most national and regional GHG pricing systems, it is expected that one day these credits will play an important role. Therefore, it is important to understand the three separate Article 6 mechanisms. Two of the mechanisms are based on “market approaches” while the third mechanism is based on a “non-market approach”.
 

Article 6.2

Under the Paris Agreement, countries must set their own climate targets. This climate target is referred to as a nationally determined contribution (NDC). For example, if Country A exceeds its own climate target, than it may sell any overachievement to other nations that need credits in order to meet their own climate target. This type of credit is referred to an Article 6.2 credit. In some countries, trades that could potentially qualify under the 6.2 mechanism are already occurring [7].

For the most part, a country’s NDC will be a GHG emission reduction goal. In these cases, the Internationally Transferred Mitigation Outcome (ITMO), would represent a tonne of carbon dioxide equivalent. In some cases however, the NDC could be a commitment to install renewable electricity capacity or plant a given area of forest. It is not exactly clear these alternative NDCs would create IMTOs as they would not represent a tonne of carbon dioxide equivalent. If alternative ITMOs were created, it is possible that no market would exist. All trades under Article 6.2 would require countries to make corresponding adjustments between buyers and sellers of ITMOs. This helps to ensure robust accounting and the avoidance of double counting.
 

Article 6.4

While Article 6.2 credits involve trading between countries, Article 6.4 credits are created through projects implemented by “public and private entities”. These credits would create a new internationally recognized carbon market. Credits could be created anywhere in the world and sold to other nations or directly to the private sector. In fact, Article 6.4 is the only section of Article 6 that directly refers to the private sector. The market would be governed by the United Nations Framework Convention on Climate Change.

The new international carbon market enabled through Article 6.4 would replace the Clean Development Mechanism (CDM), which was created under the Kyoto Protocol (the predecessor to the Paris Agreement). CDM credits were designed to be used towards a countries Kyoto emissions target. The compliance period for the Kyoto agreement was from 2008 to 2012. CDM credits are still used today in some compliance markets. For example, the European Union still permits the use of CDM credits under its Emissions Trading System, but their use will be phased out at the end of 2020 [8]. The new international carbon credits created under the Paris Agreement are often referred to as the “Sustainable Development Mechanism” (SDM). There is currently a divergence of views between countries on allowing CDM methodologies, projects, and carbon credits into the new Article 6.4 credit market.

In addition to being used to meet a countries NDC, Article 6.4 credits may also be used for other purposes. We mentioned above that the private sector could purchase Article 6.4 credits. One of the ways this might happen is through the International Civil Aviation Authority (ICAO) Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) [9]. Under this program, airlines must hold their GHG emissions flat relative to a 2019 baseline. To meet this target, airlines may use carbon offset credits. It is expected that Article 6.4 credits will be one of the eligible offset credit types under CORSIA once the rules for the mechanism are finalized.

It is important to note that when these credits are transferred to a purchaser, they must not also be used be the nation where the project is hosted (this stipulation is outlined in Article 6.5). This ensures that double-counting of emissions by both the host nation and the offset purchaser is avoided. Under the Kyoto Agreement, CDM host nations were developing countries that did not have a GHG reduction target. Under the Paris Agreement, all nations have a GHG reduction target (and have the ability to host Article 6.4 credit generating projects) so provisions are needed to address the issue of double-counting. Article 6.4 also requires that projects must result in an “overall mitigation in global emissions” (OMGE). This means that mitigation should be additional (i.e. go beyond what would have happened if the trading scheme had not been in place) and should avoid carbon leakage (i.e. the shifting of activities and GHG emissions to another location or country).  
 

Article 6.8

The third mechanism is a “non-market approach” and is defined under Article 6.8. This mechanism is not well defined, but would provide a framework for cooperation between countries without trading emission reduction benefits. This mechanism is likely to include development aid with an emission reduction benefit. For example, lending funds to finance the build out of a renewable-powered electricity grid. This mechanism potentially could overlap with the “share of the proceeds” provision (stated in Article 6.6) where a portion of the value of any Article 6.4 credits would be paid into an Adaptation Fund that supports climate change resilience-building efforts in developing countries. The rules governing the “share of the proceeds” provision are still to be determined.
 

Conclusion

In this newsletter we provided and overview of the Article 6 mechanisms of the Paris Agreement. The mechanism that is likely to be the most relevant to the private sector is Article 6.4. Article 6.4 will create a new international carbon market that can be used by both countries and the private sector. Crucially, large emitters may be able to use these credits to meet GHG compliance obligations under domestic or regional carbon pricing regimes. Given that these international carbon pricing mechanisms can drastically reduce the cost of meeting global climate goals, it is critical that domestic and regional carbon pricing regimes allow for the use of these credits. The stakes are high for getting climate policy right. Governments should act now.
 

References

[1] https://www.wri.org/paris-rulebook
[2] https://www.carbonbrief.org/cop24-key-outcomes-agreed-at-the-un-climate-talks-in-katowice
[3] https://www.wri.org/blog/2019/12/article-6-paris-agreement-what-you-need-to-know
[4] https://ieta.org/resources/International_WG/Article6/CLPC_A6%20report_no%20crops.pdf
[5] https://www.iisd.org/sites/default/files/publications/status-article-6-paris-agreement.pdf
[6] https://www.carbonbrief.org/in-depth-q-and-a-how-article-6-carbon-markets-could-make-or-break-the-paris-agreement
[7] https://carbon-pulse.com/65667/
[8] https://ec.europa.eu/clima/policies/ets/credits_en
[9] https://www.icao.int/environmental-protection/CORSIA/Pages/default.aspx