Fair deal? The market mechanism for emissions trading comes with great expectations, the fine print though might undermine its real value | Photo: Vajiram IAS

Article 6: How the dependence on “charity” was retained in the new market mechanism

After four years of negotiations, more than 200 countries finalised Article 6 of the Paris Agreement at the recently concluded COP26 in Glasgow. The Article entails global cooperation to curtail rising GHG emissions, including through carbon markets. 

Negotiations over Article 6, however, were shaky from the start and encountered various stumbling blocks before being finalised. Primary among these was the tussle between developing and developed nations over collecting money for the Adaptation Fund. While poorer nations demanded a portion of the money made from carbon trade be mandatorily transferred towards the fund, developed nations remained keen on hanging on to the voluntary status of their contributions. 

The finalised Article 6, however, seems to have worked out in favour of the developed world. This along with the general trajectory of the negotiations over this issue has experts worried that going forward, the developing world might find itself losing more than it gains. 

Main tussle about ‘proceeds to Adaptation Fund’ 

Article 6.2 states that it is not mandatory for parties to contribute money from offsets to Adaptation Fund, but developing countries were demanding that 5% of traded internationally transferred mitigation outcomes (ITMOs) be mandatorily cancelled and the money from this should go to the fund

Under Article 6.4, however, it was agreed that 5% of traded ITMOs would be cancelled with the money going to the Adaptation Fund. 

Under the previous carbon market regime, at least 2% of the share of proceeds from the entire trade would go to the Adaptation Fund. 

In Article 6 negotiations, the demand by developing countries was that a portion of traded ITMOs be mandatorily transferred to Adaptation Fund not only under Article 6.4 but also under Article 6.2. Developed countries, led by the US and the EU, however, were strongly against this. 

This apprehension was reflected in the final decision, in which a mandatory 5% of traded ITMOs for the Adaptation Fund was agreed upon for Article 6.4. Under Article 6.2, however, the contribution remained voluntary with trades and parties only “strongly encouraged” to contribute to the fund.

If developing countries’ demands were heard, the Adaptation Fund would have received a replenishment flow of at least 10% cumulatively from both Article 6.2 and 6.4.

The push by developing countries for higher mandatory contributions from Article 6 to the Adaptation Fund is not new. Under the earlier carbon market regime called the Kyoto Protocol, the lowly 2% mandatory contributions yielded about 20% of the total money that the Adaptation Fund received since its inception. 

The rest of it came from voluntary contributions from developed countries, which the experts say is an unpredictable model and akin to charity.

The main priority in the negotiations on Article 6 was to find a predictable and sustainable source of finance at scale for adaptation and in particular the Adaptation Fund, said Zaheer Fakir, ​​one of the lead coordinators for the African Group of Negotiators on climate change. 

“We recognised that in reality, most of the Article 6 transactions/trades would occur under 6.2 mechanism and hence mandatory contributions from this section was the most viable option of scaled up finance in the absence of an alternative such as a ‘replenishment process,’ Fakir added.

Rajni Ranjan Rashmi, former principal negotiator for India at the UN climate change negotiations and ex-special secretary in the MoEFCC, while speaking to CarbonCopy, agreed with Fakir. Calling the decision on share of proceeds “disappointing” he said, “Article 6.2 mechanism is likely to be a greater source of trading under post 2020 arrangements.”

What are Internationally Transferred Mitigation Outcomes (ITMOs)?

Under Article 6 of the Paris Agreement, countries and authorized entities can transfer emission reductions, in which case they’re referred to as “internationally transferred mitigation outcomes” (ITMOs). 

Difference between trading of ITMOs between Article 6.2 and Article 6.4

Article 6.4 entails creating an international carbon market whereas Article 6.2 is ITMO trading between two countries. In the bilateral setting the activity doesn’t necessarily have to be a mitigation activity, it could be a technology transfer as well. It could be a forestation. It could be a circular economy related activity as well. For example, India currently has partnerships with the French government on working in urban areas, which could also lead to ITMOs. To further explain, suppose one city in India under the French government grant or a lone implements a biodiversity related project in their city boundary, which could lead to emission sequestration. So that also becomes an ITMO.

No replenishment process, adaptation depends on charity

A replenishment process is necessary, but the determination of such a process is completely objected to by developed countries, Fakir said. “What transpired in Glasgow was again voluntary pledges for the Adaptation Fund, which means continued charity,” he said.  

He added that people need to understand that these charity-like pledges “are meaningless unless they are translated into actual contribution agreements or instruments of commitment”. For example, the US can pledge anything, but in reality, what is received depends on what their Congress decided. 

The US, in fact, has a history of not living up to their climate finance pledges, according to Fakir. In the Global Environment Facility (GEF), the US still has millions of arrears stemming from pledges made many years ago. Similarly, in the Green Climate Fund (GCF), the Obama administration’s $3 billion pledge in the fund’s initial replenishment process still has $2 billion in arrears, “which we have been informed by the US will not be fulfilled in the near future,” Fakir said. [GEF and GCF both are financial entities under the UNFCCC.]

“Many of these pledges come with conditions, some of which demand governance changes and seats on Boards,” he added. For example, the US did not pledge anything in the first GCF replenishment, yet they were given a GCF Board seat as well as an alternate seat and two advisor seats. Hence, they have the right to object to GCF projects and determine policies without having to contribute a single dollar. “So in reality we have not succeeded in ensuring a sustainable, predictable and adequate source of financing at scale for adaptation,” Fakir added.

The original idea of how much money is required in the financial entities was supposed to be governed by the needs of developing countries and not by the will of the developed world to contribute voluntarily, Fakir said. The United Nations Framework Convention on Climate Change has a provision in Article 11.3 (d) that says, “Determination in a predictable and identifiable manner of the amount of funding necessary and available for the implementation of this Convention and the conditions under which that amount shall be periodically reviewed.” 

This means that the COP should make a determination on financing needed for its implementation and the ‘replenishment process’ of the GCF and GEF should be guided by this number. “We have not been able to get developed countries to agree to fulfil this obligation since the signing and ratification of the Convention, which was some 28 years ago,” said Fakeer. The reality is that Glasgow did not deliver any ambition on finance both for mitigation and adaptation, he added.

Now, with the final decision on proceeds to the Adaptation Fund under Article 6.2 being voluntary, the worrisome question is where will the money required for developing countries to adapt to climate change fallouts come from. Chirag Gajjar, head-subnational climate action, World Resources Institute, India, a global think-tank, says all eyes will be on the finance commitment of $100 billion annually that the developed world is yet to deliver on. 

According to 2019 figures, developed countries were still $20 billion short. Which means between 2020 and 2024, they need to deliver a $100 billion plus the current deficit. And they have to ensure that it is equally split between adaptation and mitigation, Gajjar said. Right now, only about 25% is going towards adaptation needs. Developed countries, therefore, have two important challenges ahead of them. First, delivering the $100 billion per year between 2020 and 2024, and second, to increase the share of adaptation from 25% to 50%, Gajjar added.

Until these challenges are met, developing countries will have to make do with the “charity” offered by their developed counterparts.