Photo: China Dialogue

Article 6: Will cancelled credits lead to real emission reductions?

In the third part of CarbonCopy’s series on the finalised Article 6, which refers to the carbon market, we evaluate the viability of Overall Mitigation in Global Emissions (OMGE), a concept that aims to move markets ahead of the zero-sum offsetting game to make real emission cuts. The question is, how far will the currently agreed floor of 2% take us?

Is emissions offsetting a zero-sum game or does it translate into actual emission cuts? This has been the main concern with Article 6. With previous carbon market regimes, greenhouse gas reductions in one region were canceled out by continued pollution elsewhere. In the end, the only change seen was the geography of these emissions.  

The Paris Agreement did address this issue partly by agreeing to cancel some percentage of overall traded Internationally Transferred Mitigation Outcomes (ITMOs) from the carbon market. The text referred to this as Overall Mitigation in Global Emissions (OMGE), as part of Article 6.4. 

But this became one of the most contentious topics while finalising Article 6 at COP26. One of the demands was for OMGE to also be applied to Article 6.2, which deals in bilateral trading options, along with Article 6.4. However, it was finally decided that 2% of traded ITMOs would be mandatorily cancelled under Article 6.4 to achieve OMGE. 

The demand to cancel traded emission units from both Article 6.4 and 6.2 was put forward by groups such as AOSIS. They argued that applying this cancellation solely under Article 6.4 would create an imbalance that could skew the market. The demand of automatic cancellation under both mechanisms was opposed by developed countries saying that this is a sort of a tax that would limit the level of trade and impede the benefits of Article 6.

In the final decision for Article 6.2, parties are only “strongly encouraged” to cancel a portion of traded offsets to support overall mitigation against the mandatory 2% cancellation of traded ITMOs under Article 6.4.

“This mandatory cancellation under Article 6.4 has been done in the name of environmental integrity. This was strictly not called for, but has been agreed by way of compromise,” Rajni Ranjan Rashmi, former principal negotiator for India at the UN climate change negotiations and ex-special secretary in the MoEFCC told CarbonCopy.

Some experts, however, believe that the portion decided for cancellation is not enough. “This [2% mandatory cancellation] remains too low to contribute meaningfully to reducing emissions overall. Moreover, bilateral trades of emission reductions and removals brokered under Article 6.2 still unacceptably remain exempt from a mandatory partial cancellation,” said a release by Carbon Market Watch. By and large, international carbon markets will be used to shift pollution from one place to another, it said, hoping that the structure of OMGE, which is now in place, can be used to increase the rate in a future review of the rules. 

Increasing the rate of cancellation in the future, however, would not be acceptable for developing countries unless their counterparts from the developed world up the ante.

“According to the current decision, total emission reductions that will be cancelled under Article 6.4 now stand at 7%. Going beyond this number will need some serious financial commitment from developed countries,” said Chirag Gajjar, head-subnational climate action, World Resources Institute, India, a global think-tank.

“If Article 6.2 cannot finance the Adaptation Fund at the rate same as (the provisions of)Article 6.4, which is a 5% cancellation, then increasing the rate for OMGE would be a challenge,” Gajjar said.