What to make of Article 6 at COP25?

I spent a week at COP25 in Madrid, with great hope that the negotiators would land the Article 6 text and complete the so-called Paris ‘rule book’. Unfortunately it wasn’t to be the case and the longest COP to date was closed with little to show for the immense amount of effort that was put into it, from the Chilean Presidency, the Spanish hosts and the thousands of attendees. But the COP didn’t end with nothing, in that we do have near completed text for Article 6, albeit entirely bracketed, reflecting the lack of final agreement. Brackets are normally used to surround individual words or short passages of text that remain contentious, but in this case they surrounded the Article 6 guidance in its entirety.

In a world where there is increasing pressure (and need) to get to  an effective state of zero emissions, the ability to use the market to deliver such outcomes by “trading” emission reductions and sinks between countries and sectors, becomes critical. I illustrated this in a recent post which stepped through the transition illustrated below.

The final Madrid text reflects a great deal of effort by the Parties, albeit many of the same issues resurfaced during the discussions and highlighted the differing perspectives, and understanding, of Parties on the role and application of Article 6. This will require all Parties to work hard to bridge differences to see an agreement in 2020.

The entirely bracketed Article 6.2 text looks very good in that it covers the key requirements for a transfer. The definition of the internationally transferred mitigation outcome (ITMO) is sound and importantly includes removals, a clear requirement over the longer term and a necessity for net-zero emissions (see above illustration). The guidance on corresponding adjustments adopts a carbon budget approach to the methodology, which provides the highest standard for environmental integrity of the transfer. The text also provides for Article 6.4 emissions reduction units (6.4ERs) to be transferred via this process.

The 6.2 guidance asks participating Parties to cancel some ITMOs to ensure overall mitigation in global emissions, but importantly this is not a requirement for use of the process. In some instances it may be practical for participating Parties to agree on such a step, but in others it is unlikely to happen. For example, the net flow of allowances between two linked emission trading systems (e.g. Switzerland and the EU) will be an ITMO relative to the respective Nationally Determined Contributions (NDC) within which the trading systems sit, but deciding which allowances to remove from the system when hundreds or even thousands of private entities might be involved is both impractical and self-defeating for the link, in that if there is a penalty for trading with a cross-border entity against a domestic entity, then domestic trades will prevail and the synergy of the link will be lost.

Despite the big brackets and the meeting of the Parties to the Paris Agreement (CMA) only noting the guidance on Article 6, it is very likely that the 6.2 text will be used by Parties as it currently stands. Switzerland and the EU may well be the first Parties to do so as they link their respective trading systems from 1.1.2020. Use of the current 6.2 text may also help legitimize it in the case of the CMA never actually agreeing it.

While the 6.2 guidance was largely (but not completely) without contentious points within the bracketed text, this was not the case for 6.4, where many of the issues going into the COP remained unresolved as it finally closed on Sunday, resulting in the big brackets around everything – remember, in UN parlance, nothing is agreed until everything is agreed. Unlike 6.2 transfers where Parties can simply start using the text on a bilateral basis, this cannot be the case for 6.4 because it is a centrally administered mechanism with a supervisory body, which cannot exist until all Parties agree to the text. So while there is text that looks to be complete, we are still some distance away from it being agreed and the mechanism beginning to function. This means that some countries looking for foreign direct investment through the mechanism as a means of achieving mitigation will have to wait. It may also mean that they pursue other energy infrastructure projects which could lead to lock-in of a higher emitting system. Nobody wins through such a delay.

Some of the points that remain to be agreed in 6.4 are also issues that shouldn’t really be open for debate; not in a world looking for a successful implementation of the Paris Agreement.

• The issue of actions taking place outside the bounds of the NDC is one, when in reality the NDCs need to quickly shift to cover all emitting activities. This should be the first requirement for the agreement that was reached in Madrid that all NDCs are resubmitted next year. As such, there would be no actions taking place outside the bounds of the NDC, which makes the provision entirely superfluous.
• A second issue is related to the transition of remaining units (CERs and AAUs) from the mechanisms of the Kyoto Protocol, with the request from some Parties that they can be utilized and transferred under the Paris mechanism. For existing projects with future issuance, this shouldn’t be an issue in that any use of the units will be balanced by the necessary corresponding adjustments required under the transfer process of 6.2, although some Parties argued that these projects are outside the scope of current NDCs, to the extent that corresponding adjustments wouldn’t be required. But for vintage units there is a clear reason not to allow future use which sits in the IPCC Special Report on 1.5°C. That report established the current level of warming and reset the carbon budgets for various levels of future warming, with a 1.1.2018 baseline. For example, limiting warming to 1.5°C with a 67% chance has a carbon budget of 420 Gt from 1.1.2018. The Paris Agreement is increasingly being formulated around the finding of the report. As such, events prior to that date are now irrelevant, including any units that may have been created.

There was still no agreement on a share of proceeds from the use of Article 6.4 or on how an overall mitigation in global emissions is determined, key issues for some Parties that reflects the importance of demonstrating the potential of trade to deliver emissions reductions. A simple analysis of the use of Article 6 shows that it alone delivers mitigation that wouldn’t otherwise occur, as I illustrated in the recent post referenced above. Unfortunately, some negotiators didn’t see this point and the call for surrender of units continued, with a minimum haircut of 2% appearing in the bracketed text. Penalties such as this will do nothing to promote the use of the mechanism, but only deter investment.

So there we have it, a fortnight of negotiation that very nearly resulted in a good Article 6 ‘rule-book’. But it didn’t and that is unfortunate for all concerned, but particularly for the successful implementation of the Paris Agreement. Let’s hope that Parties can quickly reconvene around the final Madrid text and bring it to a conclusion, perhaps even before COP26 in Glasgow, in that the formulation of mid-century development strategies and more ambitious NDCs for that COP is in part dependent on the availability of Article 6 transfers.