Article 6 in focus: Outcomes from COP28

The overarching Article 6 rules were the final piece of the Paris Agreement ‘rulebook’ when they were agreed at COP26, yet further negotiation is still needed to provide the necessary guidance to operationalise it. The failure at COP28 to conclude several areas of this guidance highlights ongoing and fundamental disagreements about how Article 6 should function in future, which in turn has a number of implications for the global carbon market at large. 

Article 6 mechanisms include market-based approaches (Articles 6.2 and 6.4) as well as collaborative non-market strategies (Article 6.8) that promote sustainable development. As of late 2023, over four-fifths of countries have signalled their reliance on Article 6 to meet their Nationally Determined Contributions (NDCs), either through buying or selling Internationally Transferred Mitigation Outcomes (ITMOs). However, this requires Article 6 to become fully functional in the coming years – a challenging prospect given the number of issues still not yet resolved. 

Article 6 can cover a number of different projects as these indicative examples show: 

• Article 6.2: Country A invests in renewable energy, exceeding its emissions reduction target in its NDC, creating a surplus. Country B, needing to reduce emissions, buys some of Country A's surplus and counts it towards its own NDC.
• Article 6.4: A company in Country C finances a reforestation project in Country D, generating carbon credits. These credits are sold on the international market to other businesses or countries aiming to offset their emissions.
• Article 6.8: Country E shares its successful blueprint for a nationwide energy efficiency program on the Article 6.8 platform, providing free access to other countries seeking to replicate the strategy without a market transaction.

The process for Articles 6.2 and 6.4 of the Paris Agreement begins with project development and host country approval. Internationally Transferred Mitigation Outcomes (ITMOs) and Article 6.4 Emission Reductions (Article 6.4ERs) are then generated, recorded in separate registries, and either transferred or traded. These steps lead to corresponding adjustments to country inventories informing nationally determined contributions. Under Article 6.4, Mitigation Contribution Units (MCUs) can also be generated but are not correspondingly adjusted.

The bedrock of Article 6.2 are memorandums of understanding between two countries which establish the bounds of cooperative implementation. To facilitate this cooperation, Article 6.2 provides for three types of registries: an international registry, the mechanism registry, and domestic registries. In turn, it applies corresponding adjustments to reflect transfers of ITMOs from the host party to the purchasing party. 

Since and even before the rules were finalised at COP26 in Glasgow, several countries have pressed forward with implementing Article 6.2 of the Paris Agreement through bilateral memorandums of understanding. Yet there are still a number of issues pertaining to the mechanics of Article 6.2 which were left outstanding at COP28, particularly in terms of defining cooperative implementation and tracking the international transfer of mitigation outcomes:

Defining a Cooperative Approach:

There has been no clear specification of what a cooperative approach could entail. Some Parties sought a clear definition of what a cooperative approach entails, to clarify what the applicable minimum standards are and oversight may apply–including whether or not it has to involve two Parties. Other parties sought not to define cooperative approaches so as to provide maximum flexibility for all types of cooperation under Article 6.2. 

Transfers between registries: 

The ability to transfer mitigation outcomes between the different types of registries and what constitutes a ‘first transfer’ were also contentious issues at COP28, especially as the latter defines when the share of proceeds for the Adaptation Fund will be levied.  

Sequencing:

The order in which the generation of mitigation outcomes, authorisation, transfer, first reporting and reconciliation of inconsistencies can and should occur was also contentious.

Transparency: 

Negotiators were also concerned with the extent to which reporting under Article 6.2 would remain confidential and or open to further stakeholder engagement. A proposed code of conduct was taken out of the final draft negotiation text.

Concerns over the protection of Indigenous peoples and human rights: 

The lack of firm measures under Article 6.2 to safeguard the rights of Indigenous Peoples and local communities also contributed to the stalemate during COP28.

• While parties trended towards convergence on several of these issues during COP28, there was not sufficient consensus behind the final text presented by the Presidency to Parties on 12th December meaning that reconsideration of these issues is now deferred to the 60th session of the UNFCCC Subsidiary Body for Scientific and Technological Advice (SBSTA) in June 2024 and COP29 in November 2024.

The centralised Sustainable Development Mechanism (SDM) being developed under Article 6.4 is overseen by the Article 6.4 Supervisory Body, made up of 12 rotating members and alternate members–often selected from the same pool of Article 6 negotiators. 

Over the last two years, the Article 6.4 Supervisory Body has been developing recommendations on key areas of the SDM’s operationalisation and oversight for approval by Parties to the Paris Agreement. Because it is a centralised mechanism, there is more guidance that needs to be negotiated. As a result, the the SDM has seen slower development and uptake than cooperative approaches, with expected operationalisation no earlier than 2025. The failure among negotiators to agree on key pieces of the mechanism at COP28 could push this back even further. 

Types of projects:

One major point of contention that came to the fore at COP28 was the types of projects that could potentially be eligible under it. Specifically, the eligibility of emissions avoidance and conservation enhancement activities. Although all project methodologies have to be approved by the Article 6.4 Supervisory Body, and in line with the final form of the methodologies guidance, there were concerns that an explicit recognition that such projects could be let in would send the wrong signal back to market and could lead to lower-quality emissions avoidance projects crowding out the real and additional emissions reduction and reversals intended under the SDM.

Guidance on removals and methodologies: 

There was significant debate as to whether or not the guidance prepared by the Article 6.4 Supervisory Body on these matters was sufficient (this being the second time guidance on removals was presented at a COP). Some Parties had particular concerns that reversal risk – which applies to emission reduction projects as well as removals – was not adequately developed. 

Updates to authorisation: 

The issue of whether or not parties retained an ability to change and revoke their authorisation of emission reduction credits (known as Article 6.4 ERs) also proved contentious, with some parties seeking to reserve the right to revoke or change their authorisation at a later date.

Timing:

Whether or not the SDM can be operationalised prior to the finalisation of the sustainable development tool and grievance mechanism were also in question.

• Ultimately, the final presidency text presented on December 12th was rejected by Parties. In large part this impasse was created because some Parties not being comfortable accepting the removals guidance and others who did not want to agree to the methodologies guidance alone without also agreeing on the removals guidance. The above issues will now be reconsidered at SBSTA 60 in June 2024, and COP29 in November 2024.

Article 6.8 is designed to help steward a range of non-market approaches. At COP26 and COP27, it was decided to be in the form of a online capacity building platform. 

At COP28 work continued to establish the terms of this platform. During COP28 there was contention, for example, about whether or not the Article 6.8 guidance should mention specific examples of potential non-market approaches, with carbon pricing measures being bracketed in the first iterations of the negotiation texts. 

In the end Parties passed further guidance on Article 6.8 without mention of specific non-market approaches, meaning that the UNFCCC will continue its work developing the platform.

The failure amongst negotiators to agree on key pieces of guidance under Articles 6.2 and 6.4 is seen by many as being a blow to both carbon market mechanisms and the broader climate mitigation efforts they seek to catalyse. 

In any case, the developments at COP28 present several clear signals, which will have a range of near-term implications:

Operationalisation matters, but not at the expense of environmental integrity: 

Many negotiators were under pressure from their respective governments to promptly conclude further guidance on Article 6 so it can be operationalised in the next few years. The rejection of further guidance for Articles 6.2 and 6.4, at this stage in the negotiation cycle, reflects highly divergent views as to this balance between scalability and environmental integrity that Article 6 seeks to strike. 

Even so, developments at COP28 serve as a reminder that a higher standard of environmental integrity is intended under the Paris Agreement’s Article 6 than was present under the Kyoto Protocol’s parallel mechanisms. This signal is especially important in light of questions of environmental integrity plaguing the voluntary carbon market this year.

Decision-making in the face of discomfort and uncertainty:

The development and international transfer of mitigation outcomes is a highly technical process. At COP28, there was recognition of persistent uncertainties involved in rulemaking in these areas and the need for further independent research to help bridge this gap in understanding, for instance in addressing the risk of the emissions reductions or removals reversing under the SDM.

Market response:

Interestingly, even prior to COP28 the voluntary market had already started labelling certain projects as Article 6 compliant to generate confidence and attract higher premiums. The development of cooperative approaches by countries, including Singapore and Switzerland is also well underway. 

Article 6.2 and 6.4 stalling could result in an important signal that quality matters significantly– not only for generating confidence in whatever unit is traded but also for trust in and use of the foundational mechanism that facilitates its trade.

Differentiation remains important:

As negotiations concerning the type of approaches and methodologies that could potentially be included under Articles 6.2 and 6.4 reveal, stakeholders from across the board are becoming increasingly discerning of the quality of the project that is generating tradable units – including characteristics such as  permanence. The announcement at COP28 of a pilot trade of carbon removal between the Swedish and Swiss Governments can be understood in this context.

2024 will be a make-or-break year for Article 6, particularly for Article 6.4 which is more in need of further guidance prior to its operationalisation than Article 6.2. 

COP29 in Baku will be the next chance for the Parties to conclude further guidance related to Article 6. Developments over the next year under both Article 6.2 and 6.4 will be critical to informing the likelihood of either mechanism being successfully operationalised in the near term and contributing to raising global mitigation ambition as intended. 

At the same time, the Article 6 outcome at COP28 serves as a reminder that the UNFCCC-facilitated carbon market mechanisms remain intrinsically linked to both the risks and opportunities of the voluntary and compliance carbon markets at large, including calls from national governments for higher environmental integrity across the board.