As the COP 26 draws to a close in Glasgow, many new climate commitments have been put forward. These include India’s pledge to achieve net-zero emission target by 2070, the global methane pledge of 105 countries to reduce methane emissions by at least 30% by 2030  , and the commitment to phase out coal in the 2030s. However, the consensus is still uncertain on the topic of debate, which is the implementation rules of Article 6 under the Paris Agreement. The Article 6 proposed two market mechanisms to help countries achieve their own emission reduction commitments based on voluntary cooperation between countries (as shown in Table 1), which aimed to establish powerful rules for the International Carbon Market^[1] and create new global carbon offsetting mechanism.

Table1: Two market mechanisms under Article 6 of the Paris Agreement

Source: the Paris Agreement

What main issues in Article 6 are still not agreed upon?

Due to the conflict of interest between different parties, the key problems in the implementation rules of Article 6 have not been resolved. For example, whether the avoidance of double counting mentioned in Article 6.2 should be also applied to the International Carbon Market under Article 6.4. Brazil insisted that countries with emissions reduction programs did not have to make “corresponding adjustments” when they sold emission reductions, and could continue to benefit from selling emission reductions as well as accounting them for their own NDC reductions.

Another controversial issue was whether the carbon offsetting credits from the “Kyoto Protocol“ were still applicable. That means the Certified Emission Reduction (CER) generated under the Clean Development Mechanism (CDM) still works in the carbon offsetting market under Article 6.4. Owning a large number of CERs, Brazil and India insisted that these CERs were still applicable both in the market and accounting for their own NDC reductions. However, the EU opposed the continued use of CERs, claiming that it would weaken the ambitiousness of existing climate targets. At the same time, the pricing of CERs has been criticized to be extremely low, at about 0.35 US dollars/t CO_2, it can not stimulate the carbon price and thereby mitigate climate change.

In addition, another challenge was whether, similar to what's included in Article 6.4, Share of Proceeds (SOP) should also be set aside to support climate-vulnerable countries under bilateral transactions in Article 6.2. The EU strongly opposed that and believed it would restrict trading activities under this mechanism if SOP was taken out from the carbon market, which was equivalent to paying "transaction tax" and would increase transaction costs.

Opposing countries cause negotiations to stall

So far, each countrie's stand on the Article 6 market mechanism have remained the same. From the perspective of actively and effectively responding to global carbon emissions reduction, most countries led by the European Union hoped to ensure that the two carbon market mechanisms would avoid "double counting" emissions reduction, believing that it would undermine global efforts to reduce carbon emissions if countries continued to use those CERs that had been already sold to account for their own NDCs. However, Brazil and Arab countries that held large numbers of CERs hope to make "double counting" permitted. They wanted to sell carbon credits to obtain benefits while using these credits to account for their NDC reductions. They've put their own national interests first, rather than prioritizing global emissions reduction.

Some developing countries, including Brazil and Arab countries, as previously mentioned, along with China, hoped that all CERs, generated during the "Kyoto Protocol" period, can be carried forward to be included in their own NDC reductions. However, most countries said that this would flood the new international carbon offsetting market under Article 6.4 with cheap and "expired" emission reduction credits, which would not only undermine future climate goals, but also lead to a potential increase in global greenhouse gases emission. Currently, there is still room for negotiation on whether carbon offsetting credits from the "Kyoto Protocol" period can be used under Article 6.4. Specifically, deciding on a time period where carbon offsetting credits after a certain date could be used, one options is allowing the credits produced after 2013 or 2016^[2]. Tina Kobilsek, a senior EU negotiator, mentioned that the EU is analyzing the total number of carbon credits, but has not yet decided whether the previously negotiated date is acceptable^[3]. Brazilian negotiators said last week that they agreed to carry forward part of carbon credits based on the “date rule”. Concession between the two parties on this issue can advance the negotiation process of the detailed implementation rules of Article 6, but it is also rather likely to increase global greenhouse gases emission towards opposite direction.

Also pending is whether a portion of the proceeds from bilateral carbon trading under article 6.2 should be used to help climate-vulnerable countries adapt to the effects of climate change, such as droughts, floods and rising sea levels. The Association of Small Island States (AOSIS) previously submitted its view on the implementation of Article 6 to the United Nations, announced its move to impose a 5% tax on all international carbon transactions^[4]. Not surprisingly, it was opposed by developed nations including the United States and the European Union, arguing that this extra cost would limit bilateral transaction opportunities.^[5]

Conclusion

Due to political and economic relations and conflict of interest among parties, the representatives from various countries are still negotiating on many issues under the mechanism of carbon market. In order to finalize the Article 6 implementation rules this week, the priority is to reach a political consensus among parties, while the specific technical rules can be discussed later. In addition, the parties may also need to make concessions on some key issues, such as the agreement on the time period which carbon offsetting credits can be used to avoid low-quality carbon credits, even though such credits may undermine the effect of Article 6 to cope with climate change, potentially increase global greenhouse gases emissions. With a limited time frame, even though there is a large gap between current negotiation process and urgency to tackle climate change, the COP26 Chairman Alok Sharma said that he is still hopeful to conclude the conference on Friday as scheduled. Let's wait and see the final implementation rules of Article 6 under the Paris Agreement.

Note：

[1] The international carbon market under Article 6 includes carbon quota and carbon offsetting credits. Article 6.2 allows the connection of two or more national carbon markets and the international transfer of carbon credits between countries; Article 6.4 refers to the global carbon offsetting market mechanism.

[2] Carbon copy? COP26 confronts familiar roadblocks on market rules, Reuters, Link: https://www.reuters.com/article/climate-un-carbon-markets-idAFL4N2RZ3TM

[3] CO₂ Prices 2020, Factor, Link: https://www.wearefactor.com/en/co2-prices/2020

[4] Submission of views on the content of Article 6.2 guidance and Article 6.4 rules, modalities and procedures, presented by the Republic of the Maldives on behalf of the Alliance of Small Island States, UNFCCC, Link: https://www4.unfccc.int/sites/SubmissionsStaging/Documents/167_344_131542508049675849-AOSIS%20Submission%20on%20Art%206.2%20and%20%206.4.Nov.2017.cleandocx.pdf

[5] COP26 carbon-market talks 'difficult' - but hopes for breakthrough, says Norway minister, Reuters, Link: https://www.reuters.com/business/cop/cop26-carbon-market-talks-difficult-hopes-breakthrough-says-norway-minister-

Author：Yuan Yating

Translation: Chen Shikai

Proofread: Pan Yiren & Lin Jiaqiao

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