Paris Agreement: Article 6 Rulebook

After more than two decades of negotiation, 194 participating countries concluded an international treaty on climate change at the 21st UN Climate Change Conference (“COP21”), held at Paris (“the Paris Agreement”) in 2015. 

While participating countries at COP24, held at Katowice, Poland, in 2018, had agreed on majority of the provisions for implementation of the Agreement, called the “Paris Rulebook”, there was, however, no agreement on the provisions for implementing Article 6. The unfinished task of Article 6 rulebook is perceived to be a major impediment in securing the climate goals under the Agreement.  

COP26 will convene in Glasgow on 31 October 2021 to review the implementation of the Agreement, and the resolution of the differences amongst the participating countries on Article 6 rulebook will be at the top of its agenda. 

Article 6 envisages voluntary cooperation amongst the global community for achieving climate goals. Of the three separate mechanisms for such cooperation that it provides, two are market-based. Under the market-based framework (Article 6.2), a country that has exceeded its climate pledge, or the Nationally Determined Contribution (“NDC”), will be able to sell its excess credit to a country that has fallen short of its goal. It also aims (under Article 6.4) to create an international carbon market for trading emission reduction achievement (or the carbon credit) earned anywhere in the world by any public or private body.  

International carbon market provides pathway for participation of the private sector in achieving climate goals. It will accelerate private investment, which is much needed to achieve the ambitious goal of net-zero emission by 2050. 

A robust and transparent Article 6 rulebook will provide clarity on carbon pricing, help consolidate the market, and thus lead to a more coordinated approach to carbon pricing. Further, independent research has shown that it has the potential for reducing the cost of implementation of national climate commitment by more than half.   

International cooperation through market mechanism is thus crucial for securing the climate goals under the Paris Agreement. Article 6 is, therefore, justifiably, referred to as the “make or break” provision. Coming to an agreement on the rules for the carbon markets under Article 6 has proved difficult and resulted in failed negotiations at COP 25 in 2019 which pushed all decisions on the matter to COP 26. Resolving the differences and finding an agreement on the rulebook is of utmost priority for the Conference.  

The issues that have plagued the negotiations so far include “double counting” and the measure for “overall mitigation in global emission”. Agreement on how to account for bilateral trade between countries via “corresponding adjustments”, ensuring only one nation claims credit for emission cuts and that there is no double counting, has proved elusive. The related issue whether the corresponding adjustment must be made for projects falling “inside” the scope of that country’s climate pledge, rather than those “outside”, adds to the complexity. 

Further, participants have not reached an agreement on a system that would ensure an “overall mitigation in global emissions” (“OMGE”), in other words, a net benefit for the atmosphere, rather than emissions in one place being offset elsewhere. The latest proposal under consideration is for cancelling a part of the traded offset to achieve a net positive effect on climate gain.  

Cooperation through international carbon market is essential for achieving decarbonization targets and for reducing the cost of national climate commitments with the engagement of the private sector. The global business community, therefore, eagerly awaits the agreement on the Article 6 rules. 

There are significant gains to be made by immediately operationalizing Article 6, saving of cost of achieving climate goals is the foremost for the global community ravaged by the pandemic and its fiscal toll. The time to close the deal over Article 6 is now.  Any further delay will only render the global climate goals even more elusive.