Overtime Progress on Article 6 of the Paris Agreement
Although the Paris Agreement was adopted in 2015, a key segment of its regulations was unfinished until a few days ago. Disagreements surrounding Article 6 of the Agreement stymied climate progress by delaying the creation of a global carbon market . Fortunately, a series of overtime compromises after the official close of COP26 broke the 6-year deadlock on climate action. Article 6 allows countries to transact carbon credits in pursuit of the emission reduction goals set forth in their Nationally Determined Contributions (NDCs). The specific policies of this important marketplace have been difficult to compromise on: if the rules are too weak, the credits could become a loophole for countries to continue emitting above their NDCs. Alternatively, excessively stringent rules make carbon projects prohibitively complex and expensive to execute.
Three major issues were at hand: the potential double-counting of credits, a ‘share of proceeds’ provision, and the inclusion of offsets from the Kyoto Protocol era . Brazil, a major exporter of carbon offsets, opposed the adoption of corresponding adjustments. These adjustments prevent a source country from counting an exported credit towards its own NDC through complex double-entry bookkeeping. The updates in Article 6 mandate corresponding adjustments for any credit used toward an NDC, although voluntary credits will be exempt. The share of proceeds provision levies a tax on credit transfers to fund climate adaptation. It was supported by vulnerable countries on the frontlines of the climate crisis but opposed by developed countries like the USA. Negotiators settled on a 5% tax of all emissions reductions traded on the centralized hub; however, bilateral trades will not be taxed . Finally, some countries including Brazil, India and China argued in favor of trading old, unused credits from the 1997 Kyoto Protocol’s Clean Development Mechanism, while other parties were committed to only supporting forward-looking climate action. The recent compromise dictates that only credits registered after Jan. 1, 2013 can be used for just the first cycle of national commitments. This measure prevents a portion of the older credits from flooding the market and driving down carbon prices, which would reduce the price of emissions.
These agreements will be perceived as being too lenient by some stakeholders, and as too stringent by others. Yet, as the first tangible products of a 6-year negotiation, they should be welcomed. A 2019 report  from the International Emissions Trading Association (IETA) found that Article 6 houses an incredibly powerful mechanism with the potential to either halve the cost of achieving NDCs (saving roughly $250 billion/ year in 2030), or to enable the sequestration of 50 percent more emissions (5 GtCO2/year in 2030) at no additional cost. The pursuit of a perfect system cannot be the enemy of progress. Time is our greatest resource in climate action; breaking the deadlock on Article 6 could not happen soon enough.
News + Resources
- CarbonBrief.org – How Article 6 Carbon Markets Could Make or Break the Paris Agreement.
- S&P Global Platts – COP26: Nations strike deal on international carbon markets at Glasgow summit
- Reuters – U.N. Climate Summit Reaches Carbon Markets Deal
- IETA report – The Economic Potential of Article 6 (2019)