On the 13th of November 2021, six years after the adoption of the Paris Agreement by 196 countries at COP-21, negotiators finally completed the “Article 6 rulebook,” which allows for cooperation among countries in meeting and going beyond their nationally determined contributions (NDCs). It is also the Article that enables international carbon markets under the Agreement.
Correction (20 December 2021): The article has been updated to reflect The Gold Standard Foundation’s current and updated approach to corresponding adjustments and credit issuances.
16 December 2021 | The carbon market community had eagerly—and excitedly as much as nervously—awaited the decisions on Article 6, attaching a lot of hope that these decisions would bring clarity to regulated as well as voluntary carbon markets. Agreement didn’t come easy as negotiators fought over the rules in 6.4 of the transition from the Clean Development Mechanism (CDM), the criteria for cooperative approaches, and whether a ‘share of proceeds’ for adaptation would apply to such approaches in 6.2.
However, the most contentious issue and greatest headache for market participants was the definition and application of ‘corresponding adjustments’ to Article 6 transactions and the impact of agreed rules on the voluntary carbon market. Further to these issues, friends of nature-based solutions saw themselves confronted with an additional set of worries—namely, how REDD+ would relate to Article 6 and whether nature-based solutions would be considered in the newly-defined cooperative modalities.
As countries close this chapter of multilateral negotiations and move on to contemplate how to implement what has been agreed, uncertainties about what these decisions mean outside of UN negotiation rooms create prevailing insecurities for practitioners. How international carbon markets will develop will depend a great deal on the desire in capital cities around the globe to embrace, regulate and engage in such markets. But with or without further elaboration by governments, Glasgow is the bearer of good news for those that have invested in voluntary markets, REDD+ and nature-based solutions in recent years. Here are my main takeaways for nature from the Article 6 rulebook:
REDD+ is eligible under Article 6.2 and 6.4 of the Paris Agreement.
The implementation guidance of Article 6.2 that defines criteria for ‘cooperative approaches’ and corresponding adjustments, and the rules and modalities for ‘Article 6.4 activities’ embrace all sectors and do not exclude any activities or methodologies. In doing so, they retract past discrimination against nature-based solutions by the CDM.
REDD+ activities, such as avoided deforestation or avoided conversion, afforestation and reforestation, or sustainable forest management, can be developed under both implementation modalities of Article 6 (Art. 6.2 and 6.4), provided that they comply with the respective international and national rules.
The modalities and procedures guiding Article 6.4 will be familiar to those market participants that remember the CDM. The Art. 6.4 Supervisory Body will have to approve methodologies that account for emission reductions and removals, and any activity must obtain host country approval to qualify for Article 6 transactions.
While nature-based solutions do not suffer from regulatory discrimination, it will take a while until they operate on a level playing field: They face the obstacle that they cannot rely on a body of accredited CDM methodologies, which are likely to be prioritized by the Article 6.4 Supervisory Body. The approval of methodologies for nature-based solutions may therefore take more time than the approval of methodologies that sit in the comfort zone of UNFCCC institutions.
Since Article 6 treats the land sector like any other sector, there is no special treatment.
REDD+ gets neither discriminatory nor preferential treatment. In a last-minute effort, the Coalition of Rainforest Nations led by Papua New Guinea wanted to secure a broad recognition of all REDD+ emission reductions generated under the Warsaw Framework for REDD+ (WFR) since its adoption in 2015, but this attempt failed. There were significant concerns about whether the WFR would meet the quality criteria of Article 6.2 or 6.4.
Instead of receiving a blank check, the forest sector, including REDD+ programs, must comply with Article 6 rules, like any other sectoral mitigation effort. Cooperation under Article 6.2 gives participating Parties significant flexibility to define the modalities of their engagement. To participate in an Article 6 transaction, Parties must comply with involved reporting requirements, and have the ability to account for mitigation outcomes, track carbon credits, and make corresponding adjustments.
Further, activities that do not generate emission reductions or removals cannot generate mitigation outcomes under Article 6. The Glasgow decisions clarify that “emissions avoidance”— formulated to respond to proposals to credit decisions not to extract fossil fuels, but also applicable to protect forests that are not under immediate threat—cannot generate any eligible mitigation outcomes.
The authorization of Article 6.2 mitigation outcomes and Article 6.4 emission reductions defines the need for corresponding adjustments.
All cooperative approaches and Art. 6.4 activities must be approved by host countries. Host countries also have to authorize companies and other non-state actors that participate in activities. Nothing new here. But Glasgow cut through the Gordian knot of corresponding adjustments by defining an additional authorization: Host countries can decide to authorize mitigation outcomes generated by Article 6.2 cooperative approaches and Article 6.4 emission reductions (A6.4ERs) for specific uses – some requiring a corresponding adjustments, others not.
Mitigation outcomes and A6.4ERs can be internationally transferred and used against another country’s NDC if so authorized. Countries can also authorize the use of emission reductions and removals for ‘other international purposes,’ generally understood to refer to offsetting schemes defined for international aviation or, in the future, international shipping. A third category of use authorizations cover ‘other purposes,’ which includes current voluntary carbon markets that generate credits that are used to offset company emissions. Any of such authorization requires a corresponding adjustment.
However, a host country “use authorization” specifying the destiny of a carbon credit is not mandatory. A government can decide to engage in cooperative approaches and approve Article 6.4 activities without authorizing the resulting emission reductions for specific (offsetting) uses. In the future, the market will see adjusted and non-adjusted Article 6 credits, including for nature-based solutions activities.
The voluntary carbon market remains independent from Article 6.
The Glasgow decisions do not include any explicit reference to voluntary carbon markets. Implicitly, the reference to ‘other purposes’ recognizes that private entities may participate in Article 6 transactions to meet corporate climate goals. The decisions do not judge whether these transactions should generate ‘adjusted’ or ‘non-adjusted’ credits (the various pathways for carbon credits are illustrated in the graph.) Instead, the Article 6 rulebook leaves this decision to the willingness of host countries to issue corresponding adjustments, to carbon standards and crediting programs to label or distinguish credits with an adjustment, and corporates to decide whether they wish to procure such credits.
Voluntary carbon market standards have reacted differently to the question of whether to back carbon credits with corresponding adjustments. The Gold Standard has said that it considers corresponding adjustments necessary for carbon offsetting and carbon neutral claims. In June, Gold Standard announced that it would update its claims guidelines to reflect this. Verra announced that it will issue carbon credits for voluntary action with or without corresponding adjustments. Both standards will distinguish between adjusted and unadjusted credits in their registries. Gold Standard’s approach would mean that all adjusted credits used for offsetting claims would fall under the category of Article 6.2 mitigation outcomes or Art6.4ERs that, once authorized, become internationally transferred mitigation outcomes (ITMOs). Verra, on the other hand, does not regulate the use of carbon credits and leaves it to other initiatives, such as the VCMi, to develop guidance on corporate climate claims.
Host countries need to carefully consider when to offer authorized ITMOs.
In contrast to the CDM where engagement for host countries came at little cost, Article 6 can affect a country’s ability to meet its NDC, particularly if the country authorizes an inordinate amount of corresponding adjustments. Host countries will therefore have to carefully evaluate when and under which conditions they will offer authorizations that trigger corresponding adjustments.
The inherent quid-pro-quo (investment against transfer) of authorized uses challenges the idea of ‘common-but-differentiated responsibilities and respective capabilities’ of the international climate regime as it raises the price of engagement for host countries. In this context, it is notable that corresponding adjustments must also apply to authorized emissions not covered by the host country’s NDC. In such cases, the country is effectively paying double for ITMOs related to emissions not covered by its NDC: It has to make a corresponding adjustment without benefiting from a corresponding emission reduction within the scope of its NDC. Countries will therefore have to be extremely strategic in these instances, ensuring that the transfer is worth the resulting carbon finance benefit.
For some time to come, corporate demand for voluntary carbon credits without use authorizations, including for nature-based solutions, is likely to remain strong.
With Glasgow, the typology of carbon transactions and resulting units has increased significantly: in time, there will be trades in adjusted and non-adjusted A6.4ERs, adjusted mitigation outcomes from Article 6.2 cooperative approaches, voluntary units with or without adjustments that fall under Article 6.2 or Article 6.4, or voluntary units with no direct link to Article 6. Eventually, the different categories of credits may allow voluntary standards and buyers to develop sophisticated portfolios of credits meeting different offsetting and non-offsetting needs.
However, considering the complexity of approvals and authorizations that comes with implementing Article 6 activities, the voluntary carbon market that operates separately from Article 6 is likely to remain the venue of choice for many corporate buyers, at least in the near term. It may be several years before host countries will be eligible and able to design Article 6.2 approaches, approve Article 6.4 activities, and comply with the rules governing corresponding adjustments.
Jurisdictional REDD+ seems to be a predestined cooperative approach under Article 6.2.
While nature-based solutions start with a handicap when it comes to approvals under Article 6.4, it enjoys a head start in the design of cooperative approaches under Article 6.2. The engagement of countries in jurisdictional REDD+ makes it a ready-made category for Article 6.2 cooperative approaches. Through existing implementation guidance by voluntary standards (JNR or ART/Trees) and multilateral programs (FCPF, GCF) countries are familiar with quality criteria of large-scale programs. Many countries are in the process of developing jurisdictional programs, and guidance on nesting ensures that they can integrate voluntary carbon market projects in larger programs.
A REDD+ cooperative approach could consist of a jurisdictional program that generates adjusted and non-adjusted mitigation outcomes, and integrates voluntary carbon market and, in the future, Article 6.4 activities. While cooperative approaches enable the cooperation between two or more countries, REDD+ countries could also develop unilateral cooperative approaches that meet the requirements of Article 6.2 and are implemented in cooperation with authorized private entities. In parallel, project developers and other parties can submit avoided deforestation and other nature-based solutions methodologies for approval by the Article 6.4 Supervisory Board and develop activities under Article 6.4.
However, meeting the different accounting requirements of Article 6 will take time; time during which forests may be lost and ecosystems wait to be restored. It is therefore essential that investors do not halt their activities in expectation of the Article 6 requirements being fulfilled. The voluntary carbon market has grown rapidly in recent years, and remains nature’s best (albeit imperfect) chance to enjoy the support of international finance in the short term. Unfortunately, the climate crisis does not endow us with time to waste. Forests need to be protected based on the tools and mechanism that are available at any given moment. Invest in nature now!
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