Part 2 of ‘Tools for Climate Cooperation' series
Power Plant in India (Source: Idrees Mohammed/EPA)
Click here to read Part 1, which introduces ‘Article 6’ and discusses the opportunities it brings to global climate cooperation.
“Is this a classroom or a fish market?” is a famous line teachers sometimes say. Fish markets are often observed to be noisy and chaotic. Classrooms are usually expected to be silent and orderly. Article 6 of the Paris Agreement looks to define and design the ambience of the global carbon market, a (virtual) place where emissions could be traded among countries and the private sector. For it to not become a fish market, we require all parties to agree with the ground rules, which have dragged on for years. The hope is for a resolution at the COP29, scheduled for November 2024.
While the previous blog painted a rosy picture of Article 6, this blog sheds light on the potential risks.
Leaving room for double-claiming
The ‘corresponding adjustment’ mechanism that expects the host country to ‘authorise’ the carbon emissions units with an expiry date, would improve transparency in transactions between countries. But, the current Article 6 guidance does not provide clear directions, to account for private companies’ purchases of ‘unauthorised’ credits from voluntary carbon markets (VCM). This could lead to ‘double counting’ and ‘double claiming’ of the same emissions reduction units by both, the countries and companies, undermining the effectiveness of the market and rendering the companies’ net-zero claims a climate greenwash. While some countries and experts suggest that a ‘corresponding adjustment’ mechanism should be mandated, even within VCM, others argue that double counting and double claiming should be acceptable in this context, as a country’s and company’s pledges operate at different levels. This unresolved situation could cause a multilayered problem.
Firstly, the host countries may not increase their emission reduction target under the Nationally Determined Contributions (NDC) to allocate more ‘unauthorised’ credits through the VCM. They would try to balance their NDC target achievement and investment opportunities. Secondly, the uncertainty in host countries’ behaviour could put the buying countries at risk, of being unable to purchase transferable units and achieve their NDCs. Finally, the private actors might exhibit unpredictable preferences for purchasing ‘unauthorised’ credits, which could either work in their favour for ‘double claiming’ or be later scrutinised and dismissed based on domestic law. Hence, clarifying the definition and rules around ‘unauthorised’ credits and the problem of ‘double counting’ and ‘double claiming’, is crucial.
Imagine this: for the very first time in human history, we are establishing a system to trade something that is literally in the air. Though the frustration over the delay in operationalising Article 6 is understandable, this task involves both innovation and cooperation on a global scale. It’s not only about finding the best architecture for the carbon market but also about making every state party agree on the rules. Alternatively, we could say that whatever rules everyone agrees on would be the best architecture for the global market, assuming they all act as rational players in this evolving game. But are they (or we) rational players? Let’s discuss that another time. Now, back to discussing the potential risks.
Loosening environmental integrity
The types of projects that would be registered under Article 6 would determine the ‘integrity’ of the trading schemes. On this note, the latest updates from COP28 highlight that decisions are pending on the eligibility of nature-based activities and other emissions avoidance projects.
Expert interpretations of the Article 6 text suggest that nature-based solutions and projects covering Reducing Emissions from Deforestation and forest Degradation activities (REED+) would undeniably qualify for Article 6.2, as they all could be justified under the ‘emissions reductions and removals’ goal and internationally transferred mitigation outcomes’ (ITMO’s) scope, subject to host countries’ preferences. While such projects are promoted for their near-term benefits and ease of implementation, the long-term permanence concerns, debated during the Kyoto Protocol’s Clean Development Mechanism (CDM), still prevail. Hence, their inclusion under Article 6.4 depends on the methodologies being proposed and approved by the supervisory body. On the other hand, the international negotiations have come a long way since the Government of Ecuador’s proposal for compensation, in 2012, to withdraw exploration of existing oil reserves. Yet, there is also no official denial or definition of ‘emission avoidance’ projects.
Like the ‘double claiming’ issue, the opinions here are largely split. A group of experts and stakeholders support the inclusion of nature-based solutions, highlighting the need to deploy all available options to act on climate change. They argue that there is no reason to avoid utilising an option that could cover a third of the climate mitigation needs. The other side of the argument is pivoted to the reputational risks for buyers of such projects, poor past experiences in credit certification, and concerns around market leakage. Hence, market integrity and impact scalability are dependent on the project eligibility methodologies.
Additionally, the transition of CDM projects to the Article 6.4 system would be another risk to consider, as the latest estimates show 2.8 billion dud credits piled up in the system, which could potentially pull down the entire market when integrated.
Simply put, if we don’t learn from our earlier mistakes and do better, the ghost of the past could come back to haunt us.
How could we, particularly cities, effectively leverage Article 6?
The critics called CDM ‘cheap’ and ‘corrupt’, for its lengthy certification processes, high registration fees, lack of transparency, and favouritism towards buyers. Learning from that experience, let’s hope Article 6’s operationalization will be founded on a well-structured framework with fair regulatory guidance, for both the hosts and buyers, with the goal of quality emissions reductions and removals.
The interaction among processes and mechanisms in Articles 6.2, 6.4, and 6.8 (focusing on finance, technology transfer, and capacity-building) needs to be designed to enhance environmental integrity and reap mutual benefits. For example, conducting new experiments and learning about the effectiveness of nature-based solutions through Article 6.8, by enabling technology transfer or capacity building at the local level, could set precedents for the strategic implementation of REDD+ activities, under Articles 6.2 and 6.4, in the future at the global level.
The roles and responsibilities of private actors (companies and individuals), require further clarity to package the provisions effectively. The role and integration of city or regional governments require definition too, with a clear pathway for them to generate carbon emissions reduction certificates as per the provisions under Article 6. Further, though the rights of indigenous communities and local stakeholders have been embedded, the accountability of the UNFCCC and parties requires strengthening, to guarantee quick and transparent redressal protocols and to build confidence in the supervisory body.
Something to remember: however much we try to perfect the architecture of the global carbon market, it will still be the first time the world is trading through one window, and we might turn it into a noisy and chaotic fish market. But, at the end of the day, all that matters in a market is how successful the business is and how close we really are to achieving the global temperature goal. The noise and chaos could/should be ignored for the larger good.
Have questions, thoughts, or feedback? Write to nagendran.bala.m@gmail.com.
