Uphill Task at Bonn and Baku Climate Negotiations: Finalize Carbon Market Rules

Last year’s Conference of Parties (COP28) at Dubai failed to deliver on Article 6 of the Paris Agreement, which governs carbon markets. Article 6 allows countries to meet their climate targets by trading carbon credits earned from the reduction of Greenhouse Gas (GHG) emissions. Even after two weeks of negotiations, the 197 participating nations in Dubai were unable to reach consensus on the rules governing carbon markets.

Almost 80% of countries say that they may use carbon market mechanisms to meet their Paris Agreement targets. India has also announced the Indian Carbon Market and listed the types of projects from which it will trade credits with other countries.

But the protracted negotiations on Article 6 continue to delay the operationalization of international carbon markets. A few countries and businesses are already trading carbon credits, which will be at risk if different rules are adopted in the future.

The upcoming Intersessional climate negotiations in Bonn, Germany in June and COP29 in Baku, Azerbaijan in November will, therefore, be crucial to resolve the following key issues.

Disagreement on Confidentiality and Definition of Cooperative Approach: How much information on bilateral trading should remain confidential is one of the issues at the heart of Article 6 negotiations. A few countries want full autonomy on information disclosure. The final draft text at COP28 failed to include any checks on what information countries can and cannot designate as ‘confidential’, allowing for ambiguity and a complete lack of transparency.

The definition of the cooperative approach is another contentious issue. Can a host country declare a cooperative approach when it does not have a mutual agreement with another country under the Paris Agreement? A few countries seek a clear definition of a cooperative approach to understand the purview of the minimum applicable standards whereas other countries want to keep it open to offer maximum flexibility for all kinds of cooperation under Article 6.2.

Registries and Agreed Electronic Format: Three registries need to be set up:

1. A national registry in each country
2. An international registry of bilateral cooperation (related to Article 6.2)
3. A mechanism registry (related to Article 6.4).

Many developing countries do not have the capacity to develop their own national registries and hence cannot link their national registries with the Article 6.2 international registry. Instead, it is proposed that they could have accounts in the Article 6.2 international registry that could be used to trade carbon credits.

Another contentious issue is whether these registries would be used only to view emission data or also as a trading platform. There is still no consensus on the agreed electronic format and the tables for reporting under Article 6.2. All discussions are deferred to COP29.

What seems certain, however, is the linkage that could be established between the Article 6.2 international registry and the mechanism registry.

Authorization: A new aspect of authorization allows Parties to revise or revoke traded carbon credits only under extreme circumstances, with information about the decision made publicly available. There is, however, no clarity on what might constitute these extreme circumstances. Countries also do not agree on the sequence or elements of authorization.

Corresponding Adjustments Across Single and Multiple Years: Corresponding Adjustments is an accounting method to avoid double counting of emission reductions, e.g. two countries should not both claim the same carbon credits. The final draft text mentions two approaches:

1. Countries can adopt multi-year trajectories for accounting purposes.
2. Countries can adopt averaging of corresponding adjustments by accounting in the target year for the average amount of carbon credits sold or acquired over a multi-year period.

Currently, both options are on the table, which means countries can choose the method that suits their national interests. Since most countries have single-year climate targets, averaging in the target year can cause countries to miss their targets. The multi-year approach, on the other hand, is expected to be more robust, as long as emission trajectories or budgets are appropriately defined.

Emission Avoidance: The final draft text still includes emission avoidance activities in Article 6. This comes from a proposal by the Philippines that suggests choosing to not develop a fossil fuel project is also a way of avoiding future emissions. But the lack of an agreed definition of emission avoidance means that crediting such projects might preempt the reduction of existing emissions.

Guidance on Removals: Just before the start of COP28, the Supervisory Body submitted draft recommendations on GHG removals, i.e. removing carbon from the air either through vegetation or through chemical processes. The general understanding was that these recommendations would be adopted at COP28. However, there were some points of friction, such as assurance that the removals are permanent, accounting for the risk of reversals, and the appropriate duration to monitor removal projects after completing the crediting periods. Hence, the final draft text was not agreed upon.

What Next?
At best, COP28 avoided the adoption of inadequate rules for carbon markets. Articles 6.2 and 6.4 are subject to Rule of procedure 16, which means that negotiations will automatically resume at the next session.

The Article 6 supervisory body has a long to-do list, which includes the development of a sustainable development tool, tools for baseline setting, a leakage tool, a reversal risk assessment tool, guidance on treating avoidable and unavoidable reversals differently, and recommendations for special cases like reversals that result in removals below an activity’s baseline.

In a nutshell, with the mammoth number of contentious issues yet to be agreed upon and finalized while the window for climate action closes rapidly, countries are once again faced with an uphill task at the Bonn Intersessional and COP29 to operationalize Article 6.

Definitions:
Article 6.2: Article 6.2 of the Paris Agreement allows for voluntary cooperative approaches between countries in implementing their NDCs which can involve transfer of carbon credits from one country (host) to another country (buyer). These carbon credits are called Internationally Transferred Mitigation Outcomes (ITMOs).
Article 6.4: Article 6.4 of the Paris Agreement establishes a new carbon market, overseen by the Article 6.4 Supervisory Body. This is also called A6.4 Mechanism, where countries can use the carbon credits generated through A6.4 registered projects in meeting their NDCs or use them for voluntary action or other international mitigation purposes.
Reversal: Reversal occurs when enhanced or reserved carbon stock due to a mitigation activity is released back to the atmosphere, partially or fully, at a later point in time.

For more information on Article 6, click here.
All views expressed by the author are personal.