Article 6 was inserted into the Paris Agreement with a view to providing similar compliance flexibility to that offered by the trading mechanisms within the Kyoto Protocol (i.e. CDM, JI, AAU transfers). But given that the Paris Agreement doesn’t have strict targets and emissions management compliance in the way the Kyoto Protocol did, Article 6 was instead rephrased under the term cooperative approaches. The word trading (or trade) doesn’t appear in the Paris Agreement or its associated Decision Text.
The Kyoto Protocol was built from the ground up on an emission allowance basis (i.e. Assigned Amount Units or AAUs for developed countries), such that trade between developed countries (e.g. through Joint Implementation or JI) was strictly accounted for and the necessary adjustments made through the AAU system. But the protocol also included the Clean Development Mechanism (CDM), which offered the opportunity for developing countries to implement emission reduction projects and sell units into developed countries, which in turn incentivised a shift away from fossil fuels in the project host countries. However, the CDM could not make use of the two sided accounting system that AAU and JI trades offered. This was because developing countries didn’t have targets under the Protocol and therefore didn’t have AAUs matched to emissions. The solution, in a qualitative attempt to avoid double counting, was to establish rules around the additionality of the projects, in other words to attempt to show that the project was a real reduction and wouldn’t have happened anyway. As such, project baselines and analysis of counterfactual energy trends became important areas of study.
Within the Paris Agreement, Article 6.2 offers the means to transfer bilaterally agreed emission units between countries and Article 6.4 offers a mechanism to generate units under UNFCCC supervision from various national approaches, but with an emphasis on projects. In many ways, Article 6.4 mirrors the CDM of the Kyoto Protocol, although under the Paris Agreement the 6.4 mechanism can be hosted in any country for potential transfer of emission reduction units to any other country.
Whereas the Kyoto Protocol had strict accounting provisions, albeit with the caveat of the CDM transfers as described above, the Paris Agreement has no such architecture. Nevertheless, the requirement to avoid double counting (Article 6.2 and 6.5) has led to proposals for the Paris ‘rule book’ which will require a detailed emissions accounting approach. The proposed accounting text that emerged from COP25 in Madrid is shown in part below;
Under the 6.2 rule book:
8. Each participating Party shall apply corresponding adjustments . . . . .
. . . .
- Where the participating Party has a multi-year NDC:
i. Calculating a multi-year emissions trajectory, trajectories or budget for its NDC implementation period that is consistent with the NDC, and annually applying corresponding adjustments for the total amount of ITMOs first transferred and used each year in the NDC implementation period and cumulatively at the end of the NDC implementation period;
9. Each participating Party with an NDC measured in tCO2 eq shall apply corresponding adjustments pursuant to paragraph 8 above, resulting in an emissions balance, reported pursuant to paragraph 23 for each year, by applying corresponding adjustments in the following manner to the emissions and removals from the sectors and GHG covered by its NDC:
a) Adding the quantity of ITMOs authorized and first transferred, pursuant to paragraph 8 above;
b) Subtracting the quantity of ITMOs used pursuant to paragraph 8 above.
Under the 6.4 rule book
IX. Avoiding the use of emission reductions by more than one Party
70. A host Party shall apply a corresponding adjustment for all A6.4ERs first transferred consistent with decision X/CMA.2 (Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement) . . . . .
In a Kyoto like world this could be easily implemented. NDCs would first be converted to emissions and AAUs assigned, which would give every country a clear carbon budget. As units were transferred between countries, then the necessary corresponding adjustments could be made via the AAUs. The challenge for the Paris Agreement and Article 6 is to do this in a world that doesn’t have such approaches built into the system but nevertheless needs them to fulfill the accounting requirements.
All the above brings me back to the current state of play on Article 6. Although some excellent text emerged from Madrid, it has yet to be agreed by all the Parties. In the interim, a number of organisations and some governments are pushing ahead with programs to operationalise Article 6 through demonstration. Most of these programs are focused on developing transfers through the 6.2 architecture, creating units under bilateral crediting systems and progressing with the physical transaction of the units between two parties, in some instances using technologies such as blockchain to track the transaction and ensure it is secure. The practitioners within these programs are looking at project baselines, calculating emission reductions, assessing additionality and building registries. But is this really the best use of their resources?
There is a solid twenty year history of project development and emission reduction unit issuance, starting in about 2000 with the likes of the World Bank and their Prototype Carbon Fund. This then led to the early days of the CDM and numerous other regulatory and voluntary market offset schemes. Collectively, we know how to do this and there is a high level of expertise in many institutions, companies and governments. We don’t need to learn this again. But not one of these offset schemes has ever dealt with the complexity of the problem posed by the Article 6 accounting requirements.
What we need are a number of good demonstrations of how corresponding adjustments can be implemented in practice and how they might work when dealing with the wide variety of Nationally determined Contributions (NDC) that currently exist. A prerequisite will be clear demonstrations of how robust emissions accounting can be applied to sometimes vague or non-economy-wide NDCs and to NDCs that have targets other than absolute emissions. Once there is trust around NDC accounting the application of corresponding adjustments is more straightforward and credible for everyone (including both the host country and recipient).
A demonstration program that seeks to establish best practice for corresponding adjustments will require strong cooperation between governments who are tasked with managing NDCs and national greenhouse gas emission inventories, the private sector who will be the likely investors and developers of projects and civil society who have a strong vested interest in environmental integrity and Article 6 itself. This is where the time needs to be invested to operationalise Article 6.