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Article 6 of the Paris Agreement provides a high-level approach to creating global carbon markets, envisioning three main approaches: cooperation between parties to the Paris Agreement; the establishment of a centralised mechanism to support sustainable development, where credits could be traded, with participation from both public and private sectors; and “non market” approaches.
Carbon markets are a vital tool in mobilising resources to help the world achieve its climate targets by facilitating the trade of carbon credits. For example, carbon credits can be generated by switching from fossil fuels to renewable energy or conserving carbon stocks in ecosystems such as a forest. By purchasing carbon credits, buyers provide financing to the projects that generate those credits. For example, credits generated from REDD+ projects provide revenue and income to support communities working to prevent the destruction and degradation of forests.
This can be clearly demonstrated by the Mai Ndombe REDD+ project, which protects areas zoned for logging using carbon revenues to halt the reinstatement of commercial logging contracts. The Project protects 300,000 hectares of critical bonobo and forest elephant habitat within the world’s second-largest intact rainforest and some of the most important wetlands on the planet, the Congo Basin.
While Article 6 itself is very high-level, several important details were decided at the Conference of the Parties (COP) which took place in Glasgow in 2021. However, many of the technical and mechanical details are still being fleshed out by negotiators, including at this year’s COP in Dubai.
Source: viridioscapital.com
Article 6 and Nationally Determined Contributions
Nationally Determined Contributions (NDCs) are the commitments each county makes to reduce its national emissions. Under Article 4 of the Paris Agreement, each party has to prepare, communicate and maintain its NDCs commitments, with updates provided to the UNFCCC Secretariat every five years.
It is estimated that trading in carbon credits could reduce the cost of implementing countries’ NDCs by more than half or around $250 billion.
Article 6 allows countries to voluntarily cooperate with each other to achieve emission reduction targets set out in their NDCs
Source: climatewatchdata.org
How Article 6 works in practice
Under Article 6, countries can transfer carbon credits earned from the reduction of GHG emissions to help other countries meet climate targets. In line with this, Article 6.2 creates the basis for trading in GHG emission reductions referred to as internationally transferred mitigation outcomes (ITMOs). Although it is often thought that Article 6.2 relates mostly to bilateral or multilateral agreements between nations, in reality, there is an important role for the private sector in developing the projects that could generate those mitigation outcomes.
Article 6.4 sets out the rules, modalities and procedures for the trading mechanism, which is overseen by a COP Supervisory Body. Under the system, project developers will seek approval for their GHG mitigation activities from a host country before making an application to the Supervisory Body. Once approved, “A6.4ERs” carbon credits will be issued. Article 6.4 also includes a requirement for 5 per cent of the share of proceeds to go to an Adaptation Fund to help global south countries finance efforts to adapt to climate change.
A good example of this is the sustainable water and farming project in the Dominican Republic which sustainable forestry farming practices such as intercropping and tree planting to stablise hilly forest areas against mudslides.
Article 6 and corresponding adjustments
Trading under Article 6.4 is expected to be similar to the Clean Development Mechanism emission reductions, where carbon credits are authorized for transfer by the selling country’s government. However, only one country can count the emission reduction toward its NDC. This is critical to avoid double counting so that global emission reductions are not overestimated. Article 6 also establishes an accounting mechanism known as a “corresponding adjustment,” to ensure that double counting does not occur.
Corresponding adjustment requirements may extend beyond compliance markets to the voluntary carbon markets, where demand is driven by the private sector’s voluntary commitments to reduce emissions. For example, the market-based mechanism for airlines — the International Civil Aviation Organization’s Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) – is expected to require corresponding adjustment for traded credits.
Current Article 6 discussions
At COP28 in Dubai, negotiations continued around Article 6, with the latest draft text showing that, while some progress has been made, a fundamental disagreement remains on whether emissions avoidance projects should be included in the Sustainable Development Mechanism.
What the negotiators decide could have big implications for REDD and REDD+ projects, which most commentators agree is, at least in part, an emissions avoidance approach. The draft text provides a number of alternatives:
Given REDD+’s potential benefits for biodiversity and communities, and the importance of carbon sinks and forests in particular under Article 5, some negotiators believe it should be permitted under Article 6.4.
