25 November 2022
COP27: Five takeaways on Article 6
Head of Policy
Head of Net Zero Research
As COP27 concludes, we examine the key decisions that were taken and deferred on Article 6 and what this means for international carbon markets. We also look at how countries are cooperating outside of formal negotiations and how this will shape the market in the coming months.
1 The bilateral carbon market took a step forward
The first phase of allowing countries to collaborate to meet their climate targets is through Article 6.2, which enables countries to trade bilaterally subject to certain ground rules to make sure they are robust. Switzerland and Ghana marked the launch of this market by signing the first agreement to authorise carbon credits. While it will take some time for the project to begin to issue credits, this is an important test case for the market. In addition, dozens of further agreements were announced, adding to a long list of partnerships that once finalised will generate credits over the coming decade (see below). Japan has now signed more than 20 agreements with other nations under its Joint Crediting Mechanism. And there were reports that China is exploring involvement with Article 6.
2 Transparency may have taken a step backward
Robust transparency rules have been seen as a way to help the market scale, particularly as the Article 6 rulebook is finalised and tested. Instead of bolstering these rules, negotiators included a provision allowing parties to keep information confidential, raising the worrying prospect that certain transaction details won’t be reported. The introduction of broad confidentiality provisions could act as a deterrent to investment and highlights the importance of ratings, as discussed in our recent report. This also cuts against the grain of many other recent market innovations and initiatives that seek to increase transparency in carbon markets, which is key to supporting integrity and scaling the market.
3 Many decisions were deferred which may delay the development of the market
The list of issues not agreed in the Article 6 negotiations is longer than the issues that were progressed. Amongst the issues deferred to next year include detailed reporting and review provisions to improve accountability in the market and rules governing greenhouse gas removal which we discussed in our pre-COP report. The contested issue of whether certain emission avoidance and conservation enhancement activities qualify under either or both of the Article 6 mechanisms has also been pushed to a working group to decide ahead of COP28 next year. While the market may be up and running, it will have to operate without a complete rulebook to guide early actors. Progress should be made on these issues in the coming year, many of which are technical in nature, but the delay may inhibit investment and weigh on the growth of the market in the short term.
4 Corporate reporting on carbon credits remains an ongoing debate
A key element of the market maturing is the common understanding around the use and claims of carbon credits by corporate organisations in the voluntary carbon market, an issue which is being driven by the Voluntary Carbon Markets Integrity Initiative (VCMI), among others. During COP27 the UN added their voice to the debate, describing unauthorised Article 6 credits as ‘mitigation contributions’ and setting out use cases including financing host country mitigation and results-based climate finance. Concurrently, a UN high-level expert group report noted that the voluntary purchase of credits can support faster emission reduction and encourage beyond value chain investment. It also advised that corporates should only use these credits to counterbalance residual emissions in addition to mitigation within their own value chain and label if the credits are used to contribute to an NDC (i.e. whether they are correspondingly adjusted or not).
It may be helpful to have the UN set norms for the use of these credits. Clarifying that non-adjusted credits can be used by corporates may help to reduce the policy uncertainty that has contributed to moratoriums on issuances in several countries. Ultimately the use of credits by corporates is outside the remit of the UN and privately driven standards (e.g. through the VCMI or SBTi) or domestic rules will be required to regularise this activity. The risk is that this ongoing debate continues to confuse corporates who do not yet have clear guidance on how to report on their carbon credit claims confidently.
Corporate trust in the voluntary carbon market is needed for it to be able to scale. While these guidelines demonstrate that the debate is advancing, now is the time to develop robust quality control and assessment tools in the VCM.
5 Carbon markets continue to develop outside of formal negotiations
While progress on Article 6 text was disappointing, governments continue to drive progress on both Article 6 and the voluntary market outside formal negotiations. To highlight a few examples:
The US wants to mobilise markets to reduce fossil fuel extraction: A big talking point of the COP27 negotiations was the failure to strengthen language on the phase out of fossil fuels. The US is pushing an initiative to support this through carbon markets. Details are scant, but it could offer a market-based mechanism to slow the extraction of fossil fuels in some countries.
Japan launched an Article 6 capacity building programme: As a leader in developing Article 6.2 partnerships, Japan is keen to build capacity to accelerate the scale-up of the market. A group of 40 countries has already joined the alliance to share knowledge and experience on carbon markets and their links with NDCs, and support the development of carbon credit methodologies for international markets.
The EU also launched a capacity building programme: The Integrated Assessment for Article 6 (IAAS) is a two year programme helping countries develop the institutions and measures needed to participate in Article 6 markets. The programme will include support to help countries meet their NDC goals, a key dependency of generating article 6 credits.
While the COP26 agreement in Glasgow held significant promise for Article 6 markets, this is now being met with the reality of developing a complex international market. Early bilateral partnerships will have to operate in the absence of a complete rulebook, which may delay the development of the market. Meanwhile, activity outside formal negotiations is likely to be a key driver in the development of Article 6 markets, and the early trades will provide learning that should support future negotiations.If you would like to discuss this and other issues with the BeZero team, contact firstname.lastname@example.org.