Article 6: Down to the Wire
By Rishikesh Ram Bhandary
As COP24 went down to the wire, the paralysis in international cooperative approaches (Article 6) held things up. International cooperative approaches in the Paris Agreement include market-based approaches (internationally transferred mitigation outcomes, ITMOs), such as emissions trading, an emission credit generation and transfer mechanism (inspired by the Kyoto Protocol’s Clean Development Mechanism), and a framework for non-market approaches. Why were countries in such a log-jam? What issues were so sticky? I discuss a few of them in this article (released prior to COP24).
It is also worth mentioning that over the course of the negotiations on the Paris rulebook, Article 6 was mostly stuck in procedural battles. It often required interventions by the leadership (SBSTA chair) to conclude deliberations during the earlier negotiating sessions and was marked by an atmosphere of general distrust. While such a state of affairs is not entirely surprising for the climate process, had the consequences of different design options been fully explored together, countries may have had a different kind of understanding of the various issues that they needed to address.
Corresponding Adjustments
Perhaps the most controversial issue was around the concept of corresponding adjustments. Essentially, corresponding adjustments is about how we should account for the transfer and use of emissions reductions created in other territories. And, should the origin of the emissions reductions, that is, whether it comes from a sector that is covered under an NDC (national determined contribution) or not, matter. In other words, for example, if a country transfers mitigation outcomes from a sector outside its NDC, should it be subject to corresponding adjustment? A developing compromise position was to allow for transfers to happen without adjustment up to 2031, but require corresponding adjustments after that year (for transfers generated from sectors outside NDCs). Furthermore, as there is demand from International Civil Aviation Organization’s (ICAO) CORSIA for credits, there was a debate as to whether transfers made to fulfill ICAO-related commitments would entail corresponding adjustments. Again, an emerging landing zone was to allow transfers without corresponding adjustments until 2024.
For Article 6.4, there was agreement that both covered and uncovered sectors should be eligible for credit generation. The key controversy, however, was in how to account for transfers made from uncovered sectors as opposed to covered ones. An identified landing zone for transfers from uncovered sector would be subject to corresponding adjustments after 2031, however, it did not materialize.
What drives the polarized positions? On the one hand, certain parties believe that there is a possibility of double counting emissions reductions if there are no corresponding adjustments – regardless of whether they are created under covered or uncovered sectors. A related argument is that by allowing developing counties to sell credits from uncovered sectors there may be a perverse incentive to prevent a move towards economy-wide NDCs. On the other hand, the counterargument is that countries should be able to benefit from the investment that comes into uncovered sectors and the mitigation arising from those actions, as it is a global benefit. Furthermore, the argument also runs that not requiring automatic corresponding adjustments under Article 6.4 would allow countries to sell compliance grade credits to companies. It is also worth thinking about how the sale of emissions reductions, if subject to corresponding adjustments, would impact the country’s compliance with its NDC targets (and its own cost effectiveness in doing so).
The Kyoto Protocol’s Clean Development Mechanism: transition challenges
Parties were close to agreement to allow CDM projects to transition into Article 6.4 projects until 2023 as long as they met the requirements under Article 6.4. The controversial issue, however, was around the treatment of emissions reductions that projects have already created. There was a distinct possibility that the use of pre-2020 credits towards NDCs (which start from 2020) would not be explicitly ruled out in the text. The lack of agreement on Article 6 provides more time for discussion on how allowing pre-2020 credits to the post-2020 phase can undermine ambition and impact environmental integrity.
Share of Proceeds
The Adaptation Fund has been designed to receive its resources through a share of proceeds from the Clean Development Mechanism (the levy was agreed to at 2%).
While there is an explicit mention of share of proceeds in the context of the mechanism, there is no such mention in the section on ITMOs. So, negotiators had to contend with two issues: would the share of proceeds contribution be a hard legal requirement, and how much would the levy be. There was reluctant convergence towards a voluntary approach at the COP.
The expectation for an international market mechanism to generate climate finance is not new. Allowances and their auctioning were expected to form a large part of the commitment by developed countries to mobilize 100 billion by 2020. For example, the Secretary-General’s High-Level Advisory Group on Climate Change Financing devoted considerable attention to this issue.
As the only major issue that countries punted to for 2019, under the Paris rulebook talks, Article 6 negotiators will have to brace for far more scrutiny than they have received over the course of the last few years. With a less crowded agenda, there is finally a much welcome opportunity to think through the different elements of Article 6 and how their design features can truly promote more ambitious action on climate change in a manner that promotes environmental integrity.