Article 6 of the Paris Agreement sets out the principles for carbon markets. At COP28, governments will further develop the rules governing these markets. This handy guide explains the issues at stake.
Article 6 of the Paris Agreement consists of nine paragraphs providing principles for how countries can “pursue voluntary cooperation” to reach their climate targets.
These high-level principles were intended as a basis for countries to develop detailed rules on how to implement Article 6 in practice. However, they proved contentious, leading to years of delays.
At COP26 in Glasgow in 2021, following several years of inconclusive negotiations, countries agreed on a package of rules to govern and implement international carbon market mechanisms under the United Nations Framework Convention on Climate Change (UNFCCC).
Negotiations to hammer out the rules governing these carbon markets and how they will function have continued into COP27 and COP28.
Article 6.2
Article 6.2 allows countries to trade emission reductions and removals with one another through bilateral or multilateral agreements. These traded carbon credits are called Internationally Transferred Mitigation Outcomes (ITMOs). They can be measured in carbon dioxide equivalent (CO2e) or using other metrics, such as kilowatt-hours (KWh) of renewable energy.
Article 6.4
Article 6.4 will create a global carbon market overseen by a United Nations entity, referred to as the “Article 6.4 Supervisory Body” (6.4SB). Once the market is operational, project developers will request to register their projects with the Supervisory Body. A project must be approved by both the country where it is implemented and the Supervisory Body before it can start issuing UN-recognised carbon credits. These credits, known as Article 6.4 emission reductions or A6.4ERs, can be bought by countries, companies, or even individuals.
Internationally Transferred Mitigation Outcomes (ITMOs), the carbon credits under Article 6.2, can already be traded between countries. Countries such as Japan and Switzerland already have concrete frameworks in place to buy this variety of credits and count them towards their so-called nationally determined contributions (NDCs). Earlier in 2023, Switzerland submitted the first “initial report” of any country to the UN platform, which focused on deals it had struck with Ghana, Thailand and Vanuatu.
It is typically a lengthy process for countries to conclude 6.2 bilateral agreements and additional requirements for reporting and country authorisation still need to be hammered out, so it may still be some time until ITMOs are widely traded.
As for the credits created under Article 6.4 (A6.4ERs), it’s unlikely any will be issued or traded until 2025 at the earliest (some projects from the Clean Development Mechanism that transition to Article 6.4 may issue credits at an earlier date). This system is overseen by the UN Supervisory Body mentioned above. A6.4ERs cannot be traded until a centralised registry is in place.
Detailed rules still need to be hammered out. These include rules to govern how projects will be assessed before being registered, how emission reductions will be measured, how the system can generate finance for adaptation, and more. Significant work is still needed.
Article 6 rules largely reduce the risk of double counting, but are not completely airtight.
The main tool for avoiding double counting is to apply “corresponding adjustments”, which are required for all authorised carbon credits. Rather like in double-entry bookkeeping, this involves the country selling carbon credits to deduct them from its own greenhouse gas inventory so that the country (or airline) buying them can count them towards its own climate targets. This clearly signals that double counting will not be tolerated in the official system.
However, “voluntary” credits purchased by private companies do not have to go through the Article 6 system. This means that largely unregulated private schemes can still allow double counting, even though this defies logic and environmental integrity. It remains unclear whether buyers will even want double-counted credits when properly adjusted credits will be available.
In addition, the way in which these adjustments will be applied to some varieties of credits may be problematic. This is primarily the case when it comes to accounting for Internationally Transferred Mitigation Outcomes (ITMOs) under CORSIA, the carbon offsetting scheme for aviation. Countries with a 2030 target, but without intermediate target dates, for their nationally determined contribution (NDC), which is the case of most countries, will apply adjustments in the target year as an average of all credits sold and purchased over the entire NDC period, rather than for each individual credit.
In practice, this means that some ITMOs will not have a corresponding adjustment, leading to double counting. This is especially a risk when a country selling credits for CORSIA use has a single-year NDC target and uses an “averaging” approach for corresponding adjustments. Take a country that sells 0 credit over the first nine years of its NDC period, and then sells 100 credits to an airline for compliance under CORSIA during the 10th and last year of its NDC period. The airline will count 100 credits, but the selling country will only correct for the average quantity of credits sold over its NDC period, i.e. 100/10=10 credits. This means that 90 credits are double-counted.
No. There is no independent body that oversees the Article 6.2 market and only minimal requirements are in place, meaning the quality of emission reductions or removals transferred will not necessarily be easily measurable or verifiable.
Under Article 6.2, it is largely left to countries’ discretion to self-define “environmental integrity”, social safeguards, and other core criteria for their Internationally Transferred Mitigation Outcomes (ITMOs), such as baseline setting and the conditions to determine whether a climate project would have happened anyway or not (“additionality”). As long as participating countries can come to agreement and provide relatively basic justifications, a huge range of project types can potentially qualify under Article 6.2: whether from a little-known or major private voluntary carbon market standard, from the Article 6.4 carbon market, or potentially from self-defined and unvetted approaches.
While a review team composed of UN technical experts will analyse countries’ ITMO trade agreements, this may largely amount to a tick-the-box exercise. At COP27, countries severely weakened the review team’s regulatory oversight by forbidding it from: “Review[ing] the adequacy or appropriateness of: i) a cooperative approach in which a Party is participating and associated descriptions; ii) The activities under the cooperative approach” (Decision 6/CMA.4, Annex II, Paragraph 10).
This means that the review involves, for example, checking if countries report that environmental and social safeguards are in place but does not extend to actually assessing if these safeguards are robust. Moreover, countries are not required to implement the review team’s recommendations and there may be no meaningful consequences if they submit inconsistent information to the review team, which they are told to correct but decide to ignore.
Finally, countries are allowed to classify any and all information regarding their bilateral trades as “confidential”, in which case key data about such transactions and the underlying mitigation projects would never be made available to the wider public or independent watchdogs. Countries may not actually exploit this transparency loophole, since this would justifiably raise significant concerns, but they troublingly have the option to be secretive if they wish. This can give free rein to countries that do not wish to be scrutinised for trading credits they may know are of poor quality or that fail to uphold human rights to do as they please.
The Clean Development Mechanism (CDM), which was established under the Kyoto Protocol, will continue for a transitional period under Article 6:
- CDM project transition: the Article 6 deal allows CDM projects to transition to the 6.4 mechanism if it is approved by the country where the project is located, and if the project meets the new rules, with the exception of rules on methodologies. Projects can continue to use the same old, and often deeply flawed, CDM methodologies until 31 December 2025, or the end of their current crediting period, whichever comes first. From 2026 on, they must be fully compliant with Article 6, but hundreds of millions of largely junk CDM credits could be rebranded as 6.4ERs, i.e. carbon credits under Article 6.4, up until that date. Up to 2.8 billion credits could become eligible for issuance if all CDM projects were to transition. More clarity on figures should emerge in 2024 and 2025, once it’s known how many projects have requested to transition and have been approved to do so.
- Use of CDM credits: CDM credits (known as CERs) from projects registered on or after 1 January 2013 can be used towards countries’ first nationally determined contributions (which ends in 2030 for most countries). Previous estimates indicated up to 300 million CERs could be eligible. No credits from the Kyoto Protocol’s Joint Implementation mechanism (ERUs) are eligible under Article 6.
Overall, the CDM will eventually expire. It can no longer accept requests for registration, for crediting period renewals, or for issuance of CERs relating to emission reductions from after 31 December 2020. However, in the meantime, it can inflict significant damage to the credibility of Article 6 and to efforts to achieve real-world emissions reductions. The CDM’s remaining funds will largely be repurposed for the future Article 6.4 mechanism.
Any project seeking to register under Article 6.4 will need to comply with all 6.4 rules regardless of who buys the credits (a company or a country). All credits authorised by countries must be accounted for, including when sold to private companies.
It was also agreed to distinguish a separate category of credit under Article 6.4, called a “mitigation contribution” unit, which will not have a corresponding adjustment and which thus must not be used for offsetting purposes. It was no coincidence that countries named these mitigation contribution units and specified that they “contribute to the reduction of emission levels in the host Party” (Decision 7/CMA.4, annex, para29b), meaning that the country where the reductions happened will count this towards its own target. The careful language around these units refers to the “contribution approach” – where a company retires carbon credits to support mitigation efforts but without claiming to compensate for its own emissions or to advertise its products or services as carbon neutral – an approach which Carbon Market Watch, WWF, and others have promoted for many years.
In addition, other decisions will send a signal to the voluntary carbon market. Actors in these markets should take note that all countries who have ratified the Paris Agreement have agreed that simple offsetting is no longer acceptable (2% of all A6.4ERs will be cancelled without anyone using them), and that credits must deliver climate adaptation finance (5% of all A6.4ERs will be given to the Adaptation Fund, which can re-sell them to generate revenues).
More and more voices are calling for the voluntary carbon market to get in line with Article 6 by adopting this mandatory minimum 2% cancellation of credits (referred to as overall mitigation in global emissions, or OMGE), and this mandatory minimum 5% share of credits to support adaptation (referred to as share of proceeds, or SOP). Two UN negotiating groups representing 85 countries that are highly vulnerable to climate change, the Alliance of Small Island Developing States (AOSIS) and the Least Developed Countries (LDCs), have publicly called on the voluntary market to adopt mandatory minimum 2% OMGE and 5% SOP rates.
Avoided emissions – whereby a project makes assumptions about how its existence could lead to future emissions being avoided – do not qualify as a basis to generate any kind of carbon credits under Article 6.
However, the distinction between emission reductions and emission avoidance can sometimes be murky, which can lead to differing interpretations, especially in Article 6.2. For example, projects that seek to avoid deforestation may materialise under Article 6.2, since countries have the discretion, if they choose, to define this as an emission reduction relative to a historical baseline (though such projects also make assumptions about future deforestation levels). In Article 6.4, which has more oversight and rule-making, it is not yet clear whether avoided deforestation projects would qualify.
A technical UN body has been tasked with assessing whether avoided emissions could be considered as a basis for generating credits in the future in Article 6.2 and 6.4. Countries are unlikely to agree to allow crediting on the basis of “emissions avoidance” because the term is poorly and/or inconsistently defined and can bear significant risks. For example, under the guise of emissions avoidance, a fossil fuel extracting country or company, could say they’ll pump less oil and gas or do less exploration, quantify the potential amount of avoided emissions, and sell this as carbon credits, even though such assumptions and claims might be impossible to verify and may not be at all realistic.
There are many other questionable examples of potential future decisions that one can argue would have happened under the rationale of emissions avoidance. This could potentially amount to gigatonnes of greenhouse gases, which would blow apart the Paris Agreement, since these hot air credits could be used by another country or company to “reach” a climate target, even if such credits would be environmentally worthless.
Positive
6.2 & 6.4:
- Mandatory corresponding adjustments for all carbon credits authorised by host countries, regardless of whether they were generated in “sectors or GHGs” covered in the host country’s NDC or not.
- All authorised credits have a de facto expiration date, since they must be used (and adjusted for) in the NDC period in which they occurred.
6.4:
- Mandatory “in-kind” and monetary levies on each carbon credit traded under Article 6.4 (6.4ER) support climate adaptation in developing countries.
- Possible grievances flagged by peoples and communities negatively affected by carbon crediting projects will be addressed by an independent body, though the finer details are still to be determined.
- Stakeholders, like civil society organisations and local communities, have the right to appeal Supervisory Body decisions, though the finer details are still to be determined.
Neutral
6.2 & 6.4:
- Human rights and rights of indigenous peoples are referenced, but not strongly enough.
6.2:
- Internationally Transferred Mitigation Outcomes (ITMOs) can be in “non-GHG” metrics (e.g. kWh of renewable energy, hectares of forest), which is methodologically complex and vague, potentially leading to abuses. However, reporting on the non-GHG trade will have to include information on how it can be converted to CO2e.
6.4:
- Mandatory partial cancellation of each A6.4ER trade so as to help deliver an overall mitigation in global emissions (OMGE) – but the 2% cancellation rate is too low.
- Provisions for the baselines used to determine the number of carbon credits a project can issue are largely governed by the right principles from the COP 26 decision. However, these will need to be implemented effectively and transferred into concrete technical provisions, which is not guaranteed and will depend on negotiations in the Article 6.4 Supervisory Body.
- Provisions for additionality, i.e. that a project leads to emission reductions that would otherwise have not occurred, also appear to be based on the right set of principles. However, these will need to be implemented effectively and transferred into concrete technical proposals, which is not guaranteed and depend on negotiations in the Article 6.4 Supervisory Body.
Negative
6.2:
- There is virtually no oversight in Article 6.2 due to a poor outcome at COP27: countries are permitted to largely trade whatever credits they wish with one another; there will be no consequences to the official review of these deals; and countries are even permitted to keep the details of their deals and trades secret – partially or in their entirety – without even needing to provide a justification (information flagged as confidential is never made public).
- The possible inclusion of carbon removal projects with short-lived storage (such as most nature-based activities), which do not lead to permanent emissions reductions. Countries and companies must resist pressure to use temporary carbon storage for offsetting purposes.
- ITMOs can be generated by certain countries on the basis of quantifying “policies and measures” in terms of carbon dioxide equivalent (CO2e), which is vague and potentially subject to abuse.
- Double counting not fully ruled out (see above question about double counting).
- No mandatory partial cancellation of ITMOs (“OMGE”) – it is purely voluntary.
- No mandatory levy on each ITMO to support climate adaptation in developing countries.
6.4:
- The possible inclusion of carbon removal projects with short-lived storage (such as most nature-based activities), which do not lead to permanent emissions reductions. Countries and companies must resist pressure to use temporary carbon storage for offsetting purposes.
- No specific requirement to obtain free, prior and informed consent from indigenous peoples and local communities.
- Clean Development Mechanism (CDM) projects transitioning to the 6.4 system can continue to use outdated and flawed methodologies until as late as 2025 in some cases. If all projects transitioned, the world could face the nightmare scenario of up to 2.8 billion largely dud credits (representing 2.8 billion tonnes of CO2) being issued.
About 300 million CDM credits (CERs) could be used to reach countries’ NDCs until as late as 2030 (see above question about the CDM).
The main issues at stake concern transparency and accurate accounting.
Will countries define clear reporting rules with consequences for non-conformance?
In Article 6.2, all information reported by countries is to be reviewed by a technical expert review team, which checks if countries have provided information about the high-level requirements in 6.2 but without assessing the quality of the submitted information. The review team itself has a very limited scope, since its ability to actually review content was greatly watered down at COP27.
At COP 28, countries will discuss what happens when there are “inconsistencies” in countries’ reporting. These inconsistencies could range from minor issues (e.g. a typo in the name of the deal) to bigger issues, such as:
- A country did not provide any information regarding key details about their baseline-setting and additionality assumptions or how the deal upholds human rights
- A carbon credit has been transferred to the wrong entity or used for the wrong reason (for example, Article 6.2 credits can be used towards NDCs or by companies, which needs to be previously identified).
However, for now it remains unclear how any inconsistencies will be addressed and what consequences there might be if countries fail to or refuse to address these inconsistencies.
Therefore, at COP 28, countries need to define what counts as “inconsistencies”, specifically delineating inconsistencies that are “material” (i.e. significant) or “immaterial” in nature. Countries should also define what happens if inconsistencies are not resolved, i.e. if they remain unaddressed after two reviews. In such cases, they should be tagged as “persistent inconsistencies” and reported on the public platform for information about Article 6.2 trades (the centralised accounting and reporting platform). Depending on the severity of the inconsistency – for example, failure to report on environmental integrity or human rights issues – there may need to be stronger consequences, such as cancelling or freezing the ITMOs, or involvement of the Paris Agreement Implementation and Compliance Committee (Art 15) which oversees wider compliance with the Paris Agreement.
Will countries rein in the loose rules on confidentiality?
At COP27, countries agreed to very weak rules that would allow a country to claim that some (or potentially all) information concerning its bilateral deals and credits is “confidential”, which means the information will never be made publicly available. They are also not required to provide any justification for why they would designate information as confidential.
At COP 28, countries will discuss certain aspects regarding confidentiality, and have explored the possibility of developing a “code of conduct”, with a potential requirement for countries to justify what reasons they have for claiming confidentiality that would be verified by the Article 6.2 review team.
Countries should indeed develop a code of conduct as well as further requirements around confidentiality. At the minimum, countries should be required to provide a justification to the review team for why they deem something to be confidential, which the review team should then be able to freely assess. If the review team has questions about the country’s justification, or finds it to be unconvincing, then they should have the power to require the country to justify or remove the designation of confidentiality.
If the country were to ignore this or fail to provide a valid justification for the designation of confidentiality, then the review team should categorise this as an inconsistency and publicly signal that the country’s reporting on confidential elements contains inconsistencies. This can be done in a way that does not compromise the confidential nature of the underlying information (however, it is worth noting there have been no compelling explanations from countries concerning why information might qualify as confidential and in fact many countries see no need to designate information as confidential).
Will countries allow 6.2 credits to be revoked or revised after they have already been traded?
Any credit under Article 6.2 must be officially authorised by the selling country, which triggers the application of a corresponding adjustment to avoid double counting. This is a key principle required under Article 6 to ensure no double counting can happen between the buyer and the seller. However, it means that selling countries will exercise caution in how many credits they authorise, since they will need to subtract all authorised credits from counting towards their own NDC.
At COP28, countries will discuss whether countries are allowed to revoke or revise any credits that have been previously authorised. Some countries wish to reserve the right to revoke or revise authorisation for several reasons, including for example in case it turns out they risk not reaching their NDC because they authorised too many credits. However, allowing revocations or revisions to an ITMO risks leading to double counting, especially if the ITMO has already been transferred or used by a buyer.
Therefore, if countries were to agree at COP28 to allow revisions/revocations to authorised credits, then they need to agree that this cannot affect any credits that have already been transferred/used. In this way, revisions/revocations might be applicable to future credits not yet issued or traded, but not to any that have already been in circulation.
The main issues at stake for COP 28 concerning the types of emission reductions/removals that could be traded and how overall integrity should be secured
Will countries adopt proposed rules on removal activities and methodological principles for Article 6.4?
Most of the rules for the Article 6.4 market will be established by the Article 6.4 Supervisory Body, which has its own governance and decision making processes. The Supervisory Body does not need approval from the COP for most of its decisions, except on two issues, where they have been mandated to seek approval from countries at COP28: on removal activities and on methodological requirements (the framing rules around baseline-setting, additionality tests, and other issues).
After much debate and many meetings, the Supervisory Body concluded their two sets of recommendations on 17 November, forwarding them to countries at COP28.
The draft recommendations on removals and on methodological requirements are going to be a very important topic at COP28. If they are adopted, they will have significant repercussions on how methodologies are developed and on how removal activities would feature in the Article 6.4 market. Whether these repercussions are positive or negative depends on whether countries decide to rework these draft recommendations at COP or to put in place key guardrails.
Carbon Market Watch’s take on these two texts that are open for adoption during COP28 can be found here.
Will the independent appeals and grievance processes be established soon?
The Article 6.4 Supervisory Body is also tasked with establishing an independent grievance process, which is planned to be completed in 2024. A month-long public consultation was launched in November 2023, but it risks not having wide participation due to the fact that the Supervisory Body decided to launch the consultation in the last weeks leading up to COP28, when many relevant stakeholders who otherwise would have responded do not have capacity to reply to the consultation.
Carbon Market Watch has responded to previous calls for inputs on the grievance process.
Will emissions avoidance definitively be excluded from eligibility? (for more general information on this, see specific subsection on avoidance above)
Emissions avoidance is not currently permitted as a way to issue carbon credits under Article 6, but negotiators have been tasked (again) at COP28 to assess whether it could be permitted under Article 6.4.
Emissions avoidance should not be eligible as a way to issue ITMOs or Art6.4 credits, since this term is inconsistently and poorly defined, with potential interpretations that could lead to very questionable crediting at a massive scale (gigatonnes potentially).
There is near total opposition from countries to allow emissions avoidance under Article 6, but since the UN process requires unanimity and one country supports including avoidance for eligibility, this issue may not be resolved at COP28, even though it should be.
