November 16, 2021

Post-COP26: What is Article 6 and how does it affect you?

Photo credits: UNFCCC
Photo credits: UNFCCC

COP26 ended on Saturday, a day after its official close with a last-minute scramble to get a deal over the line. After a hectic two weeks, with pledges and commitments from every country and sector being announced, we narrow in on Article 6.

What is it, what happened at COP, what has been agreed and what does it mean for the carbon market and your business? Read on to find out...

6 years in the making

After 6 years of discussion, 200 countries have finally agreed on the Paris Agreement Article 6 framework which was set to operationalize the functioning of international and voluntary carbon markets.

The framework under Article 6 will be comprised of two main parts: a centralised system open to the public and private sectors (Article 6.4), and a separate bilateral system that will allow countries to trade credits that they can use to help meet their decarbonisation targets (Article 6.2).

Double counting

As governments and companies seek to reach net zero, double counting has emerged as a key issue in the operationalisation of international and voluntary carbon markets - particularly across the "government CO2 market" and "voluntary carbon market".

Coming out of COP26, governments have agreed on measures to ensure that emissions reductions involving trading credits under Article 6 are not counted twice. In order to prevent this, when one country purchases credit from another country, the seller would need to make a corresponding adjustment to its emissions inventory to reflect that its mitigation activity has been internally transferred to the buyer country, and that claim can count towards its climate pledges or Nationally Determined Contributions (NDCs). Switzerland is an example of a country which has been active in CO2 bilateral pilots with developing countries ahead of the Article 6 finalisation. For example, in a recent Swiss-Peru deal, Switzerland purchased carbon credits (or also referred to as Internationally Transferred Mitigation Outcomes (ITMOs)) from Peru and added them to its inventory whilst Peru correspondingly adjusted those credits from its national inventory. Going forward, any bilateral or multilateral agreements between two countries will be governed under Article 6.2 and subject to corresponding adjustments.

Source: Ecosystem Marketplace
Source: Ecosystem Marketplace

When it comes to the voluntary carbon markets, a private company is buying offsets to create a product that it can market as “climate neutral” voluntarily rather than to meet any legal requirement. It is the buying of offsets from a private company in one country to create a climate-neutral product that will be sold in another country. Crucially, however, the emission reductions will be credited to the GHG inventory of the country where the reductions take place. The corporate here is, in a sense helping another country reduce its GHG emissions and it should communicate that is contributing to the country's mitigation initiatives. In the absence of a corresponding adjustment, it can not claim this project as an offsetting project for its climate-neutral product and services under Article 6.4.

Zombie credits

One of the major concerns going into COP was the transfer of millions of old 'zombie' credits to be allowed into the new system under Article 6.4. Many of these credits, created out of the Kyoto Protocol are considered to be poor quality with dubious claims to actually having any real and verified climate impact.

Negotiators had to strike a compromise with old credit heavy countries of Brazil, India, and China to transfer pre-2013 Clean Development Mechanism (CDM) credits developed under the Kyoto Protocol, into a new international market which is estimated as an estimated 300 million credits (according to industry watchdog Carbon Market watch). Countries and corporates will be able to use any credits in the new market to claim against their own national climate pledges to cut emissions.

Following the agreement however, a group of nations, including European countries, has vowed to take a stronger line on carbon credits than those agreed at the Glasgow COP26 UN climate talks, pledging not to use pre-2020 CDM credits and to apply corresponding adjustments to voluntary market units. These nations have committed to the San Jose Principles, suggesting that pre-2020 CDM credits do not deliver the clarity, robustness, and integrity needed to guide international market-based approaches towards the goals of the Paris Agreement.

This shows a positive trend which many more countries are likely to follow which goes above and beyond what was agreed at Glasgow.

Paying for it

As part of the Glasgow COP26 negotiations, developing countries have been focused on ensuring the costs of their mitigation activities could be covered by resources coming from the developed markets.

The new rules for Article 6.4 will introduce a 5% transaction fee on traded credits which will be used to finance the 'Adaptation Fund' to help developing countries adapt to climate change and also pay for the administrative expenses of running the market.

Another 2% of the credits will automatically be cancelled in order to facilitate an overall reduction in emissions, rather than the units simply balancing out emissions. Neither this mandatory cancellation, nor the mandatory 5 per cent levy, will apply to credits in the bilateral system under Article 6.2. Instead, countries doing bilateral or multilateral trades will be 'strongly encouraged to contribute resources' whether through financing the Adaption Fund or voluntarily retiring credits.

Over but not out

The first step in agreeing on a functioning international carbon market has been established. Rejoice! However, this market, national carbon accounting and inventory frameworks still need to be established and there are no clear ideas about how this will be done and what standards of reporting it would adhere to...yet.

This is a complex issue that not all companies, certifiers and carbon credit brokers understand. There is a danger it could lead to false offsets or carbon neutrality claims that do nothing to help combat climate change and create a real impact on our atmosphere. Companies will have to pay special attention to this when deciding which offsets to purchase and the claims they are then able to make.

Abatable helps you navigate the complexities of voluntary carbon markets and achieve credible net-zero goals. If you need help demystifying this space or have some questions you would like to ask us then feel free to get in touch at hello@abatable.com.

Until next time.