Article 6: An Explainer

Introduction

The Paris Agreement is a landmark, legally binding international treaty on climate change adopted in 2015. It rallies together the global community around a shared goal to keep global warming well below 2 degrees Celsius above pre-industrial levels. Nationally determined contributions (NDCs) are at the heart of the Paris Agreement and outline self-defined politically backed national pledges by each country - known as a “party” within the UNFCCC - to reduce national emissions and, increasingly, to adapt to the impacts of climate change (UNFCCC). We should note that not all provisions of the Paris Agreement establish legal obligations; for example, Parties do not have a legal obligation to achieve their NDCs. 

Article 6 of the Paris Agreement

Article 6 of the Paris Agreement allows for voluntary cooperation between countries to achieve their NDC goals, and includes market-based and non-market mechanisms. It provides a rulebook for carbon markets, and was approved at the COP26 climate summit in Glasgow in 2021 after years of fraught negotiations. If designed and implemented well, it has the potential to reduce the total cost of implementing NDCs by more than half i.e. ~$250 billion/ year in 2030. This could facilitate the removal of 50 percent more emissions i.e. ~5 gigatonnes of carbon dioxide per year [GtCO2/year] in 2030, at no additional cost (IETA, University of Maryland and CPLC. Washington, D.C.).

There are two main frameworks within this rulebook: Article 6.2 for bilateral actions between two governments and Article 6.4, which sets up a central UN mechanism for multilateral trades.

Article 6.2 allows countries to trade in emission reductions, and these traded credits are called Internationally Transferred Mitigation Outcomes (ITMOs). It lays out high-level principles such as transparency and the avoidance of double counting. One party reduces carbon emissions and sells those ITMOs to the other party, which counts the ITMOs towards its NDC targets. The seller of the ITMOs can use the financing for low carbon mitigation projects, while the buyer can achieve its NDCs in a cost-effective manner. 

It is important to ensure that two countries do not count the same emission reductions or removals towards their NDCs, a situation referred to as “double counting.” The host country (i.e. seller of the ITMO) has to make a Corresponding Adjustment (CA) to its accounts such that these emission reductions – because they have been sold to another Party – cannot also be counted towards the host country’s NDCs. 

Article 6.4 sets up a United Nations entity, referred to as the Article 6.4 Supervisory Body, to oversee a global carbon market. A project needs to be registered with the supervisory body, and approved by the host country, before it can issue UN-recognised credits. These credits, known as A6.4ERs, can be bought by countries, companies, or individuals. An A6.4ER becomes an ITMO when internationally transferred, and is then bound by Article 6.2 principles (Center for Climate and Energy Solutions).

How does Article 6 impact the voluntary carbon market (VCM)?

The Paris Agreement does not have the mandate to regulate the VCM, which is an entirely decentralized market. However, Articles 6.2 and 6.4 allow for ITMOs and A6.4ERs to be authorized for “other international mitigation purposes”, including use in the CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation, or CORSIA, is a global sector-specific offsetting scheme to address CO₂ emissions from international aviation), domestic markets and the VCM. Individual countries have the right to decide whether to require such authorization, and thus whether a corresponding adjustment is necessary. In the context of the VCM, this corresponding adjustment would imply that the Article 6 credit can be used by the buyer towards their commitments, and would not count towards the host country’s NDC. Following COP27 negotiations, specifically for Article 6.4, it was agreed that credits not authorized by the host country for NDCs and/or other international mitigation purposes, would be referred to as “mitigation contribution” A6.4ERs. These credits do not require a CA, and "may be used, inter alia, for results-based climate finance, domestic mitigation pricing schemes, or domestic price-based measures, for the purpose of contributing to the reduction of emission levels in the host Party."

There are arguments for and against why corresponding adjustments should be required, and these depend on whether credits are sold internationally or domestically, and sourced inside versus outside a country’s NDC. Some are concerned with potential double counting if a credit is counted towards an NDC as well as a corporate climate commitment, but others point out that NDCs and corporate climate targets have entirely separate accounting systems. Additionally, imposing restrictions to avoid this potential double counting could have unintended consequences. Corporate buyers are, to date, largely based in North America and Europe. Restricting them to purchase credits without CAs domestically, i.e. within North America and Europe, could limit climate finance made available to developing countries. Countries are still working through the framework for Article 6 authorizations, so standards and project developers may not be able to obtain corresponding adjustments yet even if they wish to (The Nature Conservancy). 

What’s next 

Negotiations around accounting, methodologies and other aspects of Article 6 are still ongoing; however, countries have begun to develop pilot projects, impose restrictions and try to define the role of the VCM. This is a rapidly evolving landscape with many potential considerations for VCM participants. So far, we have seen a variety of approaches, with some countries requiring a CA (e.g. Bahamas, The Parliament of the Bahamas), some countries not requiring a CA (e.g. Ghana, Ghana Carbon Market Office), some not requiring a CA depending on the claim i.e. if it is a mitigation contribution claim (e.g. Indonesia, Ministry of Environment and Forestry), and many other countries are still undecided. Some countries like India have introduced potential restrictions on VCM credit exports if unable to meet its own NDC (S&P Global Commodity Insights). Indonesia had also placed a temporary freeze on 2021-22 vintage VCM credits, before finalizing legislation in 2023 (S&P Global Commodity Insights).

Apart from country regulations, the VCM is impacted by market standards and norms set by corporate demand. Since COP26, VCM standards have weighed in/ updated their position on CAs, and as of now they do not require a CA but many of them provide templates and other resources for authorization. Initiatives like the Voluntary Carbon Markets Integrity Initiative (VCMI) and the Integrity Council for the Voluntary Carbon Market (ICVCM) have not yet indicated CAs as a requirement for VCM credits within their meta-standards (The Nature Conservancy). The VCMI Claims Code of Practice released last month allows for carbon credits with or without associated corresponding adjustments to underpin VCMI Silver, Gold and Platinum Claims. However, this release provides guidance only on “contribution claims”, which may not be used as offsets and “represent a contribution to both the company’s climate goals and global efforts to mitigate climate change.”  Updates to the VCMI Code in November may potentially include guidance on offsetting claims where carbon credits could be used “toward meeting interim emission reduction targets” (VCMI); it remains to be seen if VCMI would also update its guidance on corresponding adjustments at that point. Additionally, corporate demand for credits with CAs could result in these becoming the norm, especially if standards have mechanisms in place to provide CAs. It is already anticipated that credits with CAs would potentially trade at a premium.

As mentioned above, Article 6 does not directly regulate the VCM and so Article 6 negotiations may not provide much clarity around private transactions in the VCM. However, outside of these negotiations, some countries could choose to restrict carbon exports and/or regulate their domestic VCM activity. Additionally, corporate demand could still drive the market toward credits with corresponding adjustments. Concepts like “mitigation contribution” credits arising from Article 6 negotiations could impact corporate claims in the VCM. Broadly, VCM players should stay informed about host country, market, and Article 6 requirements to better align with the Article 6 mechanism once it is operational (The Nature Conservancy).

References

• Nationally Determined Contributions (NDCs), UNFCCC
• “The Economic Potential of Article 6 of the Paris Agreement and Implementation Challenges”, IETA, University of Maryland and CPLC. Washington, D.C. License: Creative Commons Attribution CC BY 3.0 IGO. 
• What does the COP26 outcome on Article 6 mean for Non-Party Stakeholders?, Center for Climate and Energy Solutions
• Article 6 Explainer, The Nature Conservancy   
• To trade or not to trade?, The Nature Conservancy  
• Climate Change and Carbon Market Initiatives Act, 2022, The Parliament of The Bahamas 
• Ghana's framework on international carbon markets and non-market approaches, Ghana Carbon Market Office
• Ministry of Environment and Forestry Regulation No. 21 of 2022 on the Procedures for Carbon Pricing Implementation (MOEF Reg 21/2022), Ministry of Environment and Forestry, Republic of Indonesia
• Indian carbon credits to be sold both domestically and internationally: minister, S&P Global Commodity Insights
• Indonesia halts carbon project verification process over legal concerns, S&P Global Commodity Insights

VCMI Claims Code of Practice, June 2023, Voluntary Carbon Markets Integrity Initiative (VCMI)