What could COP28 mean for Article 6?
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Senior Research Analyst, Carbon
Head of Carbon Markets
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A truly global carbon market has been a long time coming. Carbon offsets have been around since COP3 in Kyoto in 1997, but progress has been slow. After years of negotiation, COP28 should finally see agreement on a proper mechanism for international carbon trading. So, what could that look like?
Don’t we already have a carbon offset market?
The Kyoto Protocol established the concept of carbon offsetting via the Clean Development Mechanism (CDM) before the turn of the millennium. The aim was to involve the private sector and developing countries in achieving emissions reduction targets.
However, the international carbon offset market could unlock greater emission reduction potential at an international scale, with enhanced offset quality, better transparency, accountability and prevention of double counting.
What is Article 6 and why does it matter?
Approved at COP26 in Glasgow, Article 6 of the Paris Agreement finally creates a proper rulebook for the operation of international carbon markets. Its more stringent offsetting rules are aligned with the targets laid down in Paris.
Specifically, Article 6 regulates voluntary cooperation among countries to achieve their Nationally Determined Contributions (NDCs) to reducing emissions. It incorporates both market mechanisms and non-market approaches, including cooperation in areas such as finance, technology transfer and capacity building.
However, several key aspects of Article 6 have still to be formally agreed – notably Article 6.4.
Why is agreement on Article 6.4 so important?
Designed to replace the existing CDM by 2025, Article 6.4 will be the main focus of negotiations at COP28. Importantly, it tightens up requirements to align with Paris Agreement targets. The aim is to prevent double counting, improve measurements and ensure a more holistic perspective is used to assess impact.
Article 6.4 introduces a new mechanism for global emission trading under the supervision of the United Nations Framework Convention on Climate Change (UNFCCC). This will incorporate some key elements which differentiate it from the CDM:
- A tool to assess project alignment with the UN Sustainable Development Goals (SDGs), which are increasingly important factors to consider for high credit quality.
- An appeal and grievance mechanism to raise concerns, ensuring delivery of co-benefits to local communities.
- Non-permanence risk requirements, to safeguard valid climate change mitigations.
- A mandatory percentage of credit cancellation to support adaptation and overall mitigation in global emission (OMGE).
- The ability for host countries to authorise carbon credits either to international trade or exclusively for local trade (mitigation contributions), according to national climate strategy.
- The credits generated under the new mechanism will be of two types: A6.4ERs are carbon credits intended to be traded internationally; while mitigation contributions A6.4ERs are exclusively for local trade.
What is the role of A6.4ERs and mitigation contributions A6.4ERs in the offset market?
A6.4ERs serve two roles. Firstly, they act as a compliance instrument, enabling countries to meet their NDCs. Companies will also be able to buy A6.4ERs to meet their obligations in domestic pricing schemes where these allow international carbon credits. Secondly, they serve to create a voluntary carbon offset market, with companies and individuals able to buy credits to compensate for their carbon footprint.
Mitigation contribution A6.4ERs perform a similar function, but limited to the country where the offset project is located. Host countries can use them to meet their NDCs, while companies can buy them to meet their obligations under domestic carbon pricing schemes – if the rules of the host country allow it. As with international credits, companies and individuals can also buy them to voluntarily offset their carbon footprint.
What type of projects will be accepted to generate A6.4ERs in the new mechanism?
Part of the negotiations will involve agreeing on acceptable carbon offset project types. We expect projects that either reduce or remove greenhouse gases to be eligible, and removals should include both nature-based and engineering-based solutions.
At COP26, the Conference of the Parties agreed on excluding avoidance carbon credits. That means projects assumed to prevent future carbon emissions will not be eligible. This shouldn’t change at COP28.
To issue A6.4ERs, project developers will need to request approval from the host country and register with the Supervisory Body. Existing CDM projects will be able to transition to the new Article 6.4 mechanism if they meet the necessary requirements.
We think it likely that COP28 will recognise the part registries play in the carbon offset market and allow them to contribute to the global climate pledges.
What role will independent registries play in the new system?
Over time, independent registries for carbon offsets have evolved according to market needs. For example, Gold Standard requires projects to be aligned with the UN Sustainable Development Goals (SDGs), while Verra is working on more robust methodologies for the forestry and land use sector.
We think it likely that COP28 will recognise the part registries play in the carbon offset market and allow them to contribute to the global climate pledges. If not, the new mechanism framework will at least provide guidance for independent registries.
Are there any potential issues with the Article 6.4 mechanism?
Under the new mechanism, every international transaction will impact the national inventory of the host country due to the corresponding adjustment required. Countries will therefore need to balance a desire to attract financing through authorising carbon offset projects for international trade with the need to meet its own NDCs.
According to Article 6.4, countries have the right to revoke authorisations for offset projects. For companies, this creates the risk that a host country struggling to meet its NCD targets could stop the sale of credits internationally.