Photo: Carbon Market Watch

Article 6: Are carryover credits healthy for climate?

The concluding part of CarbonCopy’s series on Article 6 explores how developing nations want past credits carried over to preserve the mitigation achievements of existing activities and retain private sector confidence, but developed nations worry they may hamper the environmental integrity of future mitigation action

One of the most hard-fought issues in Article 6 negotiations was the transfer of old credits to the new market under Article 6.4. These unsold carbon credits were accumulated under the previous carbon market regime governed by Kyoto Protocol in the pre-2020 period. 

The developed world wanted no trace of these old credits going to the new regime, while some developing countries, who own most of these credits, wanted to carry them over. 

[Read this to find out what Article 6.4 entails and how is it different from Article 6.2]

To get an economic perspective into why the issue was so difficult, let’s take a look at this figure: As per a recent estimate by an Indian think-tank, there are 3.91 billion unsold credits, including latent issuances and the money associated with them, which runs into billions of dollars. China accounted for 54% of total carbon credits issued till date. The next three top issuing countries being India (12%), South Korea (9%) and Brazil (8%). 

Emerging economies wanted the carryover in order to preserve mitigation gains of existing activities and retain private sector confidence in the UNFCCC market mechanisms. On the other hand, developed countries, including civil societies, oppose the transition over concerns associated with the environmental integrity of future mitigation action. 

But after an almost five-year-long intense negotiation on the issue, some headway was made at COP26. The final decision on this said:

  • Transitional arrangements have been agreed for projects set up after 2013. 
  • The credits can only be used towards the first NDCs till 2030.
  • Crucially, the rules require “corresponding adjustments” to be made for all authorised carbon credits under Article 6.4, whether they are used towards meeting countries’ NDCs or for “other international mitigation purposes”, such as the UN aviation offset scheme CORSIA. [We explain this here]

Observers told CarbonCopy that many developed countries were pushing for no carryovers. As a compromise, they would have settled for 2016 as the cut-off year for valid credits. But through an umbrella proposal for the entirety of Article 6, which included beneficial provisions for developed countries in other sections, 2013 was agreed as the year from which old credits would be valid.

So, according to the current rules, any activity registered under the previous market regime after 2013 is eligible to make the transition. The activities will continue to apply the CDM methodology till the time Article 6.4 mechanism with its methodologies is in place, which has a December 31, 2025 deadline. Post that, activities will be needed to apply Article 6.4 methodologies.

Is it really a win for developing countries?

Experts emphasize that this can only be seen as a victory on paper for developing countries. There are still several roadblocks. “The process of transition will not be easy,” Rajni Ranjan Rashmi, former principal negotiator for India at the UN climate change negotiations and ex-special secretary in the MoEFCC told CarbonCopy.

Rashmi says the process will involve making fresh applications, validation and registration of projects from the old regime under the new mechanisms, which may be time consuming and cost-intensive. “Moreover, once registered, the legacy credits of such projects can only be used once for the first NDCs.” 

Further, the mechanisms that old credits will need to follow to re-qualify under Article 6.4 clauses are not in place yet. The new methodologies are yet to be discussed. This is going to be another challenge for the negotiators going forward, said Chirag Gajjar, head-subnational climate action, World Resources Institute, India, a global think-tank.

The negative image associated with these legacy credits is yet another challenge. They will not prove helpful for their host countries if nobody buys them off the market under Article 6.4.

It is a political win with short-term harm for the climate fight   

Civil societies have been arguing against these buying or transferring old credits. They believe these old activities, such as solar and wind farms from previous market regimes, are not really ‘additional’ emission reductions compared to the new projects that will come under the new regime and will help make new emission cuts. 

Second, experts say that double counting in this process is inevitable. The impact of pre-2020 credits on the atmosphere has already been accounted for in the cumulative total of CO2 that has been released to date. Thus, allowing these credits to be used for NDCs would amount to double counting.

Because of these, legacy credits issued in the Kyoto regime come with a bad environmental integrity tag. Potential buyers might steer away from these credits because of the reputational risk.

“We have had one round of carbon market mechanisms under the Kyoto Protocol. We are having another round under the Paris Agreement. I feel that the carbon markets will have to go through another round of evolution beyond these mechanisms in order to truly meaningfully contribute to the overall mitigation,” Gajjar said. 

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