Article 6: The wildcard holding the Paris Agreement hostage

Climate negotiators from around the world are currently in Bonn, Germany to continue deliberations on the operationalisation of the Paris Agreement after significant parts of the ‘rule book’ were agreed upon during COP 24 in Katowice late last year. But as the meeting trudges into its second and final week, it seems clearer that little progress can be expected in areas of major contention. One such area that observers and experts were hoping would yield some ground is Article 6 of the Paris Agreement.

Article 6 was introduced in the Paris Agreement as a successor to emission offset mechanisms described in the Kyoto Protocol of 1997. As envisioned, the new mechanisms would move away from schemes focused on offsetting emissions, and instead would commit all countries to deliver an “overall mitigation in global emissions” through international markets and non-market tools

While the Paris Agreement was scarce on clarity regarding operationalisation, it laid out three frameworks to enable cooperation between countries in the implementation of their NDCs. The first of the three to enable bilateral cooperation whereby mitigation outcomes from one country can be transferred to and claimed by another to its NDC through “internationally transferred mitigation outcomes” (ITMOs). The second is a crediting mechanism built on Kyoto instruments of Clean Development Mechanism and Joint Implementation. The new crediting system, to function under a yet-to-be-decided UNFCCC body, would enable countries and private entities to trade ‘Certified Emission Reductions Units’ (CERUs). These are tradable units from mitigation activities that have been verified and certified and that provide emission reductions that are additional to any that would otherwise occur. The third and final framework described in the Paris Agreement is for non-market-based approaches that “aim to promote both adaptation and mitigation ambition, enhance public and private participation in the implementation of NDCs and enable opportunities for coordination across instruments and relevant institutional arrangements”.

Right from the outset, forming consensus on how to operationalise the Article was expected to a difficult task. Even before negotiations to take off on how it would look in implementation, several prominent issues, which continue to evade resolution, became evident. Opposing views during negotiations have slowed the development of the final guidance for Article 6 and its implementation. At COP24, for example, countries failed to agree on accounting rules for both Article 6.2 and 6.4 mechanisms and how to achieve “overall mitigation in global emissions”. For one, concerns over a lack of transparent multilateral oversight that could tackle double counting of mitigation outcomes by trading countries have been raised, most prominently by China during negotiations. Additionally, it has been noted that robust accounting rules need to be developed to address the “hot air” in countries’ NDCs, whereby countries set weak mitigation goals, or even higher level of emissions than business-as-usual (BAU) projections, allowing them to pursue only minimal mitigation efforts. The fear is that if this “hot air” is transferred via ITMOs, it could create an oversupply of credits, reducing incentives for others to reduce emissions or set more ambitious NDC targets in the future, and potentially leading to an increase in cumulative GHG emissions.

There is also little agreement on how countries can definitively ensure that there is no double counting of mitigation outcomes. Certain countries believe that after transferring ITMOs, they have to make corresponding adjustments to their GHG inventories to reflect the trade. For example, if transferring 1 tCO2e, the acquiring country could increase emissions by 1 tCO2e above its NDC target, while the transferring country would have to add a corresponding adjustment to make its emissions target of 1 tCO2e lower . This would avoid double counting of emissions reduction and increase incentives to reduce emissions in sectors covered by their NDC . Several countries including Brazil disagree. There is also no clear rule about whether countries can transfer ITMOs from economic sectors and GHG gases that are not included in the mitigation targets of their NDCs. To address the inefficiencies of the Kyoto Protocol in achieving ‘overall mitigation in global emissions’ (OMGE), cancellation of previous offsetting schemes was proposed. However at the COP24 last year, countries decided to make cancellation of previous offsetting credits voluntary, which weakens Article 6’s capacity to contribute to an absolute reduction in global emissions.

But while definitional and institutional contentions share some scope for resolution, a graver concern is regarding the development of a new crediting system to facilitate trade of mitigation outcomes between countries and private entities. Poorly designed market mechanisms can function as carbon offsetting schemes, and fail to actually reduce emissions overall. As a result, total GHG emissions may stay the same or even increase. This consequence seems to have severely blighted the prospects of mechanisms under the Kyoto Protocol. Under the Kyoto protocol scheme a carbon credit (CER) was issued for each tonne of avoided GHG emissions through investments in green projects in developing countries. These CERs could be used to meet some of the targets set by investing countries, which were limited to rich countries under the Kyoto Protocol.

As reported by Climate Home News, scheme has generated more than 1.9 billion CERs and counts more than 8,100 projects and programmes across 111 countries. But the actual effectiveness of the scheme has been questioned and funding has long been criticised for flowing into projects that would have happened anyway. A 2016 report commissioned by the EU concluded 85% of offsets had a “low likelihood” of driving emission cuts. The inefficiencies of the previous scheme in achieving ‘overall mitigation in global emissions’ (OMGE) And this has emerged as the point of the most vocal debate over the last six months as countries cannot seem to agree on how to proceed regarding the future of carbon credits that have already been issued through Kyoto Protocol mechanisms.

A lack of agreement about how to transition the CDM and the SDM to the new system has focused on issues around credit accounting and the scope of the future market mechanism. Beyond the cancellation of previous offsetting schemes, there are disagreements on whether the SDM should adopt CDM’s project-based or a sectoral-level approach. These disagreements have been boiling over in the ongoing negotiating session where ‘informal consultations on Article 6’ have been held every day since negotiations effectively opened on 18^th July. Several developing countries, led by Brazil, have been at odds with the EU and vulnerable countries. While Brazil has put forward the case for modelling a new system in which CERs that were created through the Kyoto Protocol mechanisms to continue to circulate and retain their value, the EU has argued that transferring these CERs to the new mechanism would flood the market with credits of low environmental value and have advocated the setting up of a completely new scheme.

With little progress expected over coming days, any consequential action it seems will be put down to COP25 at the end of the year. Article 6 was supposed to be wild card in the Paris Agreement. While its potential was unmissable, it seems to have been forgotten quickly that a wild card is valuable only if the player can build a game that can effectively utilise its potential. Unfortunately, failure to execute such a game perfectly often ends in the total derailment of any chance of success. One can only hope that this will not be the case with the Article 6 and the Paris Agreement as we enter the last phase of finalising the Agreement’s terms of operation.

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