Photo by: David Waschbüsch
Article 6 is a critical section of the Paris Agreement that deals with technical, market-based mechanisms aimed at reducing greenhouse gas (GHG) emissions and promoting international cooperation between developed and developing countries in addressing climate change, primarily via carbon emission trading.
We are approaching the decade mark of when Article 6 was introduced and agreed upon, however, we still do not have a functioning mechanism. Clearly, the process has been molasses-slow with recent debates on important topics like accounting adjustments to national emissions inventories, contribution versus authorized emission reductions, share of proceeds, treatment of avoided emissions, and the balance between removals and reductions holding back advancement.
At the same time, constructing a comprehensive and effective global carbon market is not a simple task. It is imperative that the Article 6 carbon market is crafted correctly because the financial and environmental costs of getting it wrong could be monumental. For comparison, take a look at the messy state of the current voluntary carbon market.
Let’s investigate the significance of an Article 6 carbon market. How does it contribute to the reduction of GHG emissions in countries? And what implications does it hold for both developed and developing nations?
To explore these inquiries, this essay will focus on Article 6.2 of the Paris Agreement, which revolves around ITMOs.
Article 6.2 and its Key Elements
Central to emissions reduction efforts is the Article 6 carbon market, currently being developed within the UNFCCC framework. This global carbon market facilitates climate action by enabling countries to trade carbon emission reductions resulting from various initiatives, like transitioning to renewables or conserving carbon in ecosystems like grasslands and forests.
The Paris Agreement, including Article 6, revolves around Nationally Determined Contributions (NDCs), which are a country’s formal commitments to lower GHG emissions and combat climate change. Each country tailors its NDC, specifying emission reduction targets, strategies, and actions based on its unique circumstances and capabilities.
Article 6.2 sets the stage for a decentralized framework for carbon emissions trading between countries, allowing one country (the “host”) to transfer emission reductions or removals achieved through its actions to another (the “buyer”), helping the buyer meet its emissions reduction goals. These “cooperative approaches” between parties can either be bilateral or multilateral agreements.
Mitigation outcomes (MOs) represent emission reductions or removals achieved by a country. When transferred to another country, they become internationally traded mitigation outcomes (ITMOs). To avoid double-counting these reductions towards both countries’ NDCs, a Corresponding Adjustment (CA) is crucial. A CA ensures that when one country transfers ITMOs to another, the transferring country adjusts its emissions inventory to account for those reductions, preserving emissions accounting integrity. In essence, the buying country reduces its emissions, while the host country adds these emissions to its total, even though the actual reduction occurred in its territory (Figure 1).
In theory, ITMOs aim to foster international cooperation in tackling climate change, allowing countries to use others’ emissions reductions to meet their own targets, thus promoting cost-effective emissions reduction through investments in projects in different nations where it’s economically efficient to do so.
Figure 1 – Simplified Version of Corresponding Adjustments
Source: GGGI
The Importance of Article 6.2
Research underscores the substantial benefits of collaboration in achieving NDCs under Article 6, with advantages for all parties involved. Cooperative efforts have the potential to generate significant cost savings, estimated at around $250 billion annually by 2030 compared to independent NDC implementation. These savings result from increased economic efficiency through cooperation. Moreover, if countries reinvest these savings to boost their climate ambitions, Article 6 could enable an additional 50% emissions reduction, roughly 5 gigatons of CO2 annually by 2030.
Other research indicates that by 2050, the market value of financial transactions between nations could surpass $1 trillion annually. A cooperative approach is expected to result in a substantial reduction of mitigation costs, with estimated savings of $21 trillion from 2020 to 2050, largely attributed to the anticipated significant increase in global carbon prices over this period.
High integrity carbon markets, when correctly executed, can mobilize resources, reduce costs, generate income, and facilitate the transition away from fossil fuels. As countries approach their 2050 climate goals, the need for carbon markets is expected to diminish, underscoring their critical effectiveness in the coming years.
For buying countries, Article 6.2 offers a cost-effective pathway to achieve emissions reductions and meet NDC targets. These nations, often well-resourced and technologically advanced, can purchase emissions reductions (ITMOs) generated by others, diversifying their emissions reduction strategies, and fostering economic growth. In this manner, Article 6.2 holds significance for both developed and developing countries. It provides a framework for cooperative action, aligning with the principle of common but differentiated responsibilities, acknowledging varying national capacities and needs.
Conversely, Article 6.2 is vital for host countries as it grants access to crucial climate finance. This bridges the financial gap for climate projects promoting sustainable development and emissions reduction. Hosting high integrity carbon credit projects enables countries to sell ITMOs, generate income, and access advanced clean technologies. Additionally, it facilitates the transition toward cleaner and more sustainable development paths, supported by capacity building and knowledge sharing, accelerating progress toward a low-carbon future.
Article 6.2 Implementation
While progress on the Article 6 carbon market has been slow, a recent bold prediction suggests that global governments are on track to establish a fully operational global carbon market under Article 6 of the Paris Agreement within the next two years. This forecast, coming from Trafigura, a major global trading company, was shared by their Global Head of Carbon Trading, Hannah Hauman. Hauman noted that Article 6 is nearly complete, with about 90% of the framework in place, and that governments are actively taking steps related to it on a weekly basis.
Regarding the last part, Hauman isn’t wrong.
Several countries have been actively implementing Article 6.2 agreements. “Buyer” countries like Singapore, Sweden, Switzerland, South Korea, and the United Arab Emirates have entered into bilateral agreements or memorandums of understanding (MOUs) with “host” countries such as Cambodia, Chile, Georgia, Ghana, Kenya, Peru, Senegal, among others. These agreements position both buyer and host countries to utilize future ITMOs from Article 6.2 to achieve their NDCs (Figure 2).
Figure 2 – Article 6.2 Bilateral Agreements or MOUs
Source: IETA
Selling Emission Reductions and the Associated Risks
Not everyone agrees that Article 6.2 is beneficial for host countries and has raised the flag of caution with regard to potential risks.
One recent argument states: “authorized transferred offsets (ITMOs) would allow developed (buying) countries to make achieving their NDCs easier by paying developing (host) countries to make achieving their commitments harder.”
Is this concern realistic or partially overblown?
Let’s investigate it from the lens of a two-country scenario: Switzerland and Malawi
In 2022, Switzerland and Malawi entered into a cooperative agreement to implement Article 6.2 ITMOs, with Switzerland acting as the “buyer” country and Malawi as the “host” country generating the MOs.
Under this arrangement, Switzerland will purchase ITMOs generated by carbon projects in Malawi. Switzerland will subtract the acquired ITMOs from its total GHG emissions, contributing to its net-zero emissions goal. Meanwhile, Malawi is required to add the same emissions quota to its overall emission tally as part of the agreement.
Switzerland has set a net zero emissions target for 2050, an NDC commitment now embedded into Swiss law. In 2020, Switzerland’s total emissions, amounted to 42.25 million tonnes of CO2 equivalent (MtCO2e). Therefore, to achieve its 2050 NDC, using 2020 data, Switzerland would need to eliminate a minimum of 42.25 MtCO2e emissions entirely.
In 2020, Malawi’s emissions totaled 20.31 MtCO2e. During the same year, the country committed to reaching net zero emissions by 2050. To fulfill this, Malawi must completely eliminate a minimum level of emissions of 20.31 MtCO2e by 2050.
So, both countries have 2050 net zero goals; however, they differ on their emissions starting points. Switzerland has to reduce over double the amount of emissions as Malawi.
When taking a further look at Malawi’s emissions, it is broken down as follows:
- Agriculture: 8.62 MtCO2e
- Land-Use, Land-Use Change and Forestry (LULUCF): 8.32 MtCO2e
- Energy: 1.79 MtCO2e
- Industrial Processes: 1.1 MtCO2e
In its 2021 NDC, Malawi implemented targets for cutting emissions by 2040 with 6% as unconditional goals (meaning Malawi can do this independently), 45% as conditional goals (meaning Malawi needs external e.g., finance coming from Switzerland), and 49% to no doubt be addressed in a future NDC, to be reduced by 2050.
Franz Xaver Perrez, the Swiss Ambassador for the Environment, said the agreement means that the Swiss government will invest in high level activities in Malawi including projects focused on biogas plants, solar power, and tree planting.
In June, Malawi launched the Malawi Carbon Markets Initiative and established an agency responsible for supervising its carbon emission offset trade and marketing activities. This agency will undertake various crucial tasks, which include compiling an inventory to create a national carbon registry, identifying potential carbon credit opportunities, and engaging in the marketing and trading of carbon securities. To further its efforts, Malawi has enlisted the assistance of Switzerland’s Klik Foundation, which will aid in evaluating carbon opportunities and issuing internationally tradable credits. Based on current global market prices, Malawi’s carbon credits hold an estimated annual volume of 19.9 MtCO2e (nearly equal to its total national GHG emissions) amounting to a total valuation exceeding $600 million.
To prevent the overselling of ITMOs, Malawi can allocate a portion of the MOs generated by projects for domestic use to fulfill its own NDC commitments. This process involves the project activity proponent submitting an emissions reduction analysis to Malawi, which then authorizes a specific portion of the total MOs generated by the project, using the remainder to enhance its NDC goals. For instance, Indonesia has proposed setting aside 10-20% of MOs, Paraguay reserves 3%, and Ghana maintains a 1% reserve.
Malawi can establish eligibility criteria to guide ITMO authorization, strategically ensuring that ITMO generation aligns with the country’s priorities. These criteria minimize overselling risks by excluding unconditional NDC measures from ITMO generation. They also direct Article 6 carbon finance toward priority activities, following examples set by India and Zambia, which provide a strategic list of activities that signal government priorities to potential investors and guide carbon finance toward these sectors or activities.
Additionally, Malawi has the option to establish a national crediting mechanism, offering greater control and transparency in measuring and verifying emission reductions. While this setup may be time-consuming and costly, it ensures higher integrity in the ITMOs it issues. For instance, Ghana operates its own carbon registry to do exactly this.
Using the below example (Figure 3), let’s consider Malawi’s approach to managing MOs from a REDD+ project. Malawi decides to reserve 10% of the generated MOs, which amount to 70,000 tCO2e annually. Switzerland purchases the remaining 90%, totaling 63,000 tCO2e, while Malawi retains the 10%, equal to 7,000 tCO2e. Consequently, Switzerland reduces its emissions by 63,000 tCO2e, while Malawi’s emissions increase by 63,000 tCO2e, but due to the 10% reserve, Malawi’s net emissions rise by 56,000 tCO2e.
Figure 3 – Keeping a Share of ITMOs for Domestic Use
Source: GGGI
Now, if Malawi decides to sell those 63,000 ITMOs at a rate of $30 per tCO2e, similar to pricing seen in other African countries with REDD+ projects, it amounts to $1,890,000 in revenue. Although the exact percentage of revenue Malawi retains has not been finalized, for the sake of illustration, let’s assume it’s 30%, aligning with Zimbabwe’s approach. This would result in $567,000.
With this revenue at its disposal, Malawi has the flexibility to reinvest it as part of its agreement with Switzerland. Malawi can choose to channel these funds into clean energy initiatives or tree planting projects, directly contributing to emissions reduction efforts in the LULUCF (land use, land-use change and forestry) sector or the energy sector.
In 2010, Malawi possessed approximately 1.39 million hectares of natural forest, spanning about 12% of its land area. However, by 2022, the country had lost 13,300 hectares of natural forest, leading to emissions equivalent to 5.25 million MtCO2e. The hypothetical REDD+ project that generated the MOs is likely addressing this very issue. Malawi could continue down this path if it decides to allocate the ITMO revenue into more reforestation or tree planting initiatives, further address emissions stemming from LULUCF activities, and theoretically reducing its overall emissions and progressing towards its NDC net zero commitments. All of this comes at the cost of trading 63,000 ITMOs to Switzerland, presenting an opportunity for Malawi to align its economic interests with its climate goals.
So, did adding 63,000 emission units to its inventory really make achieving Malawi’s commitments that much harder?
63,000 accounts for 0.315% of Malawi’s total 20.31 MtCO2e emission portfolio – a negligible amount of their overall emission profile. In return, the country could utilize that $567,000 to implement changes and projects that reduce emissions in sectors such as LULUCF, agriculture, or energy production.
Conclusion
Certainly, this scenario is built upon several fundamental assumptions:
- Malawi can create a framework for ITMO trading
- Malawi can define clear activities for generating MOs
- REDD+ projects are sanctioned under Article 6
- Malawi can secure a rate of $30 per tCO2e for REDD+ credits
- Malawi can effectively determine the areas in which it intends to invest this funding, with the specific goal of contributing to its net zero objectives
Nonetheless, by forging an agreement with Switzerland and borrowing from other African countries that are already addressing these assumptions, there’s no compelling reason to doubt that Malawi cannot position itself to utilize the generated ITMO finance as a catalyst toward achieving its net zero targets without making it much harder on itself.
Do you have another take? We would love to hear it.
