Articles about emissions trading
The 56th session of the UNFCCC’s Subsidiary Body for Scientific and Technological Advice took place in Bonn over the past two weeks and one of the features of the session was further progress in operationalising Article 6 of the Paris Agreement, particularly after completion of the rule-book at COP 26 in Glasgow. But like many other aspects of the Paris Agreement and the global effort to significantly reduce emissions, Article 6 is making good progress but not rapid progress, yet it is rapid progress that is needed. My colleague, Malek Al-Chalabi, was in Bonn for SBSTA 56 and together we thought it would be useful to reflect yet again on the critical importance of this somewhat overlooked corner of the Paris Agreement. Article 6 was the last piece of the Agreement to fall into place in December 2015 and the last part to have its rule-book agreed, taking three years longer than every other part of the Agreement (but addmitedly not helped by COVID-19).
The importance of Article 6 stems from the clear message delivered by WGIII of the recent IPCC 6th Assessment Report; that carbon dioxide removals (CDR) are vital if the world is to achieve 1.5°C, the more ambitious goal of the UN Paris Agreement. This includes direct air carbon capture and storage (DACCS), afforestation (NBS or nature-based solutions), and bio-energy with carbon capture and storage (BECCS).
Arguably, there is no net-zero emissions without Article 6. Not all countries will have the same geographic and geological ability to harness or deploy CDR options or reduce emissions at the same rate, and the majority of countries cannot expect to reduce emissions to zero such that CDR is not needed. This is where trade is relevant.
Trade underpins economic activity and offers society the flexibility to provide the wide range of goods and services that we all benefit from. Trade is often the underpinning reason for foreign direct investment. It encourages the business sector to engage in projects and activities outside their traditional base with a view to bringing goods and services into that base. Cooperation between nation states is often pursued through some form of trading arrangement.
Article 6 of the Paris Agreement is a tailored and comprehensive policy that can enable cost reductions for lowering emissions via trade between nations. It allows countries to work together via ‘cooperative approaches’ through its voluntary nature. An International Emissions Trading Association (IETA), University of Maryland, and Carbon Pricing Leadership Coalition (CPLC) study has shown that cost reductions from cooperative implementation under Article 6 can be achieved through improved economic efficiency over independent implementation of countries’ nationally determined contributions (NDCs). According to the trade models used by the University of Maryland, the potential benefit is up to ~$250 billion per year in 2030.
In addition to the direct commercial benefit, it is the ‘net’ of ‘net-zero emissions’ that Article 6 unlocks. Large scale cross border investment that would otherwise not take place can result from the development and trading of carbon removal units. This is why Article 6 is so important – it helps all sectors and Parties to the Paris Agreement reach net-zero emissions. This can be illustrated with a simple example shown below. The country and the aviation sector both have a target of zero emissions, but neither is able to realise that goal through direct reductions. A regional partner has untapped carbon removal potential, but no need to use it as emissions are already at zero. By cooperating through the trading provisions of Article 6, the end result is that net emissions of 200 units CO2 across the three are brought to net-zero emissions.
While removals such as afforestation are well known, DACCS and BECCS have growing but still limited experience. That is why further international cooperation is needed alongside Article 6. In order to bring technologies like DACCS and BECCS to scale at an economic price and to further afforestation, cross border capacity building, joint research and development opportunities to pilot CDR options, and integrated policies and funding will also be required. This can make CDR more economically viable.
There are encouraging signs of international cooperation taking place, including countries agreeing to pilots and agreements using Article 6. However, these agreements are few and at the moment not used at scale. In order to maximize the use of Article 6, IETA has identified the following elements for governments to consider (see the full IETA paper here):
- Announce whether and how the country will authorize Article 6 credits and/or accept towards the achievement of its NDC.
- Provide a clear strategy and stable guidelines on which sectors, activities and vintages will be eligible for Article 6 credits.
- Articulate how the use of Article 6 will help achieve the goals of the Paris Agreement.
- Elaborate what policy framework the host country will adopt and how it will interact with the receiving country.
- Establish an effective interaction between compliance instruments and the voluntary carbon market (VCM).
- Support the emergence of a widely accessible traded market for carbon credits.
- Ensure a suitable digital registry or other infrastructure for GHG accounting and reporting is in place.
- Address key risks in the activity cycle and identify mechanisms to reduce them.
- Emphasize the areas where capacity building is required and the role of international organizations.
Article 6 remains an innovative and new policy framework which has not been globally tested and used and it is understandable why some countries and regions may look to meet their own NDCs targets domestically instead of internationally. There are many areas to align, including how to formalize reporting mechanisms and ensuring that the deals that are made between countries (either directly or through business-to-business transactions) are set at prices and in frameworks that are transparent and benefit both.
However, if countries are to reach their NDCs independently of one another, it will be more expensive than working together and net-zero emissions will become an elusive goal. Article 6 has the potential to improve economic efficiency while helping reduce emissions across countries and sectors and provide access to opportunities only possible through cooperation. The opportunity exists to use it – and hopefully that can be maximized.