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Demystifying Article 6

May 24, 2022 by Ujjwal Gupta

Key Takeaways

  • A UN ‘Supervisory Body’ will be formed to enable a central accounting framework, a central registry, and an Article 6 database
  • An equivalent of 5% of the “share of proceeds” from carbon markets linked to the 6.4 multilateral mechanism will be transferred to the Global Adaptation Fund to help developing countries finance their efforts to adapt to the impacts of climate change, 2% of credits will go unused as an accounting buffer
  • There will be new rules to avoid double counting through corresponding adjustments
  • Approximately 200M of likely more than 1Bn old CDM credits will be available for use within the new system, eligible credits must be of a 2013 or later vintage and not REDD+
  • Article 6 will need to include a wider definition of integrity that embeds wider environmental, social, and governance (ESG) standard

Learnings from the Past

In the Paris agreement of 2015, Article 6 was approved and seen as a major advance for the United Nations Framework Convention on Climate Change (UNFCCC) and the evolving international climate regime. Finally, in COP26 in Glasgow, six years later, regulations around Article 6 were formalized.

Article 6 aims to promote voluntary ambition in climate change mitigation by the participating parties. The objective is to ensure there is a system in place that is credible, transparent, and with robust accounting rules. 

Whether this objective will be reached remains an open question. There is legitimate concern based on the track record of previous international carbon markets formed under the Kyoto Protocol, most notably, the Clean Development Mechanism (CDM). The CDM was controversial in terms of achieving verified and actual GHG reductions, and in often leading to adverse social impacts. Some observers contend that the CDM was a centralized bureaucracy hampered by unclear measurement tools for verifying the quantity and quality of emission reductions or removals through offsets. There were also questions about whether these emission reductions were additional and permanent, as well as unclear accounting rules leading to possible double counting.

Throughout the negotiations and conversations around Article 6, governments sought to ensure that the new international market rules would learn from the mixed record of the CDM. The new rules have been designed to prevent double counting of emissions reductions. The rules also limit the number of CDM projects that a country can count towards their NDCs.

CDM Projects registered after 2012 are eligible for a transition of credits into Article 6, and parties will be allowed to use these credits for their NDCs. Market experts are critical about CDM credits being allowed to be used under Article 6 as these credits are old and based on outdated, often non-additional technologies and protocols. According to an estimate, around 200M extant CDM credits can be used for compliance under Article 6, which weakens the design objectives of the new more rigorous system – as some allegedly ‘junk credits’ will be used from day one.

What does Article 6 actually say?

There are 9 subparts to Article 6. Article 6.2 and 6.4 are the most important clauses in laying out the principles for how countries can “pursue voluntary cooperation” to reach their climate targets, as well as explaining the working mechanism of the international carbon market through defining the roles and accountability of parties.  Article 6.2 covers bilateral actions to reduce or remove GHG emissions. Article 6.4 creates a new multilateral mechanism to replace the old CDM.

The Glasgow Climate Pact finalized what the UNFCCC refers to as those “fundamental norms” intended to ensure that credits in international carbon markets are real, additional, and verifiable in delivering reductions in greenhouse gas emissions. Projects based on Article 6 will need to include a broader definition of integrity that embeds wider environmental, social, and governance (ESG) standards and safeguards to avoid perverse or environmentally destructive outcomes.

Article 6.1 – “Parties recognize that some Parties choose to pursue voluntary cooperation in the implementation of their nationally determined contributions to allow for higher ambition in their mitigation and adaptation actions and to promote sustainable development and environmental integrity.”

Article 6.1  is often interpreted as setting out the aims of Article 6. All Parties are expected to contribute to mitigating greenhouse gas emissions. Host countries are encouraged to set ambitious targets in their NDCs.

Marginal Abatement Curves (MAC) are lower in the countries with the offset projects as compared to the acquiring countries. An important reason for acquiring countries to engage with carbon markets is to take advantage of lower cost mitigation opportunities in the project-hosting countries, in order to reduce the initial and overall costs of transition.

Article 6.2 – “Parties shall, where engaging on a voluntary basis in cooperative approaches that involve the use of internationally transferred mitigation outcomes toward nationally determined contributions, promote sustainable development and ensure environmental integrity and transparency, including in governance, and shall apply robust accounting to ensure, inter alia, the avoidance of double counting, consistent with guidance adopted by the Conference of the  Parties serving as the meeting of the Parties to this Agreement.”

Article 6.3 – “The use of internationally transferred mitigation outcomes to achieve nationally determined contributions under this Agreement shall be voluntary and authorized by participating Parties.”

Article 6.2–6.3 covers how when Parties engage in Cooperative Approaches that involve mitigation outcomes being transferred internationally and used toward the NDC of another Party than where the mitigation outcome was produced, they need to respect the guidance on accounting and avoidance of double counting decided by COP.

Article 6.2 specifically sets out guidelines covering internationally transferred mitigation outcomes (ITMOs) between two governments that are Parties to the Paris Agreement. (The term ITMOs has been used since the 1997 Kyoto Protocol to refer to internationally traded carbon credits between two governments.)

Article 6.4 – “A mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development is hereby established under the authority and guidance of the Conference of the Parties serving as the meeting of the Parties to this Agreement for use by Parties on a voluntary basis. It shall be supervised by a body designated by the Conference of the Parties serving as the meeting of the Parties to this Agreement”

Article 6.4 establishes a new, unnamed multilateral mechanism that resembles the function of the former Clean Development Mechanism—notably in a Supervisory Board that would approve all 6.4 projects—while potentially allowing some technical flexibility. For example, instead of using a set formula for establishing a baseline of carbon emissions, this new mechanism will examine individual party baseline estimates and allow them to be adjusted to their circumstances. Article 6.4 mechanism will be guided by a UN Supervisory Body. The credits generated via Article 6.4 will be referred to as A6.4ERs which can be bought by  countries, companies and individuals to offset their emissions. New system commencement depends on how soon the Supervisory Body is established. Experts believe that it will take 2-3 years. It will be interesting to see the interplay of the newly formed Supervisory Body with the existing body/registries.

Article 6.5 – “Emission reductions resulting from the mechanism referred to in paragraph 4 of this Article shall not be used to demonstrate achievement of the host Party’s nationally determined contribution if used by another Party to demonstrate achievement of its nationally determined contribution.”

Article 6.6 –  “The Conference of the Parties serving as the meeting of the Parties to this Agreement shall ensure that a share of the proceeds from activities under the mechanism referred to in paragraph 4 of this Article is used to cover administrative expenses as well as to assist developing country Parties that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation.”

The Glasgow pact ensures common metrics in terms of transparency, accuracy, completeness, compatibility and consistency of carbon measurements systems. It basically ensures that there is no double counting of ITMOs which otherwise may lead to net increases in emissions.

  • The infrastructure to ensure environmental integrity by authorizing the formation of a ‘Supervisory Body’ for a central accounting framework, a central registry, and an Article 6 database. Though this may take years to be formed it comprises a centralized project authorization system overseen by a new supervisory board.
  • Glasgow resolves long-standing concerns that the same ITMO-connected carbon reduction credit could be counted twice by the home and host country. New rules to avoid double counting use corresponding adjustments. Host countries will have the flexibility to decide to use carbon credits for their own NDCs or instead sell it to an international government which will immediately be subjected to corresponding adjustments. ITMOs will not include “avoided emissions” projects.
    – Sharing of carbon credits generated from Cross border electric power projects will be disallowed as corresponding adjustments rule under Article 6.4 comes into action.
  • Glasgow negotiators agreed that an equivalent of 5% of the “share of proceeds” from carbon markets linked to the 6.4 multilateral mechanism will be transferred to the Global Adaptation Fund to help developing countries finance their efforts to adapt to the impacts of climate change. 2% of all A6.4ERs will be canceled without anyone using them.
  • The above rule does not cover Article 6.2. Countries entering into multilateral agreements to trade ITMOs are encouraged but not obliged to put a certain percentage of credits into the Climate Adaptation Fund.

Some but not all of the old CDM days carbon credits with weak guarantees regarding additionality and permanence will be discontinued. Estimates by the UNFCCC suggest that past CDM certified emission credits counted anywhere between 300 million to 2.3 billion credits. The Glasgow compromise allows credits generated after 2013—anywhere between 120 and 300 million credits—to be eligible for inclusion in the first tranche of a country’s NDC. It does not allow any such inclusion for activities that were “REDD+” transactions to avoid deforestation.  

Article 6.7 – “The Conference of the Parties serving as the meeting of the Parties to this Agreement shall adopt rules, modalities and procedures for the mechanism referred to in Article 4 above.”

Article 6.5 – 6.7 establish a mechanism to produce mitigation outcomes and support sustainable development. It operates under the authority of the COP. This mechanism will produce mitigation outcomes that can then be used to achieve the NDC target of another Party. An issue still under debate is whether the scope of these paragraphs is limited to a CDM-like mechanism, or if it is much broader in scope.

Article 6.8 – “Parties recognize the importance of integrated, holistic and balanced non market approaches (NMAs) being available to Parties to assist in the implementation of their nationally determined contributions, in the context of sustainable development and poverty eradication, in a coordinated and effective manner, including through, inter alia, mitigation, adaptation, finance, technology transfer and capacity-building, as appropriate.”

Article 6.9 – “A framework for Non Market Approach (NMAs) to sustainable development is hereby defined to promote the NMAs referred to in Article 6.8.”

Article 6.8 addresses non-market international cooperation among governments. These new rules cover both government-to-government and government-to-private sector interactions. Some early signals suggest these new rules will guide the practices of fully private sector or voluntary carbon market activities.

Insights from Glasgow

  • Article 6 was received with fanfare in 2015, it took six further years, to agree on a broad outline of the rules. The full resolution of the details of ITMOs, Corresponding adjustments, and the central registry make take several further years.
  • The system is evolving so it is not a clean break from the past – around 200 Mn CDM credits will be eligible within Article 6. CDM has been tarred as a ‘junk’ program, but negotiators could not find the political will to totally ditch these sometimes questionable but pre-existing carbon assets.
  • There is confusion and risk about the balance between public and private ownership of offset projects. Host countries may be able to claim offsets that were generated on their soil by private developers, deals will have to be brokered over the composition and percentage of public vs. private credits.
  • A6.4ERs will be the credit type for this program, and these can be used by governments, companies and even individuals. How the UN supervisory body relates to the existing registries and offsets infrastructure is still unknown.

Analyst Contact:
Ujjwal Gupta (ugupta@californiacarbon.info)

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