Articles about emissions trading
This is a critical year for Article 6 of the Paris Agreement. The ‘rule book’ wasn’t agreed at COP24 in Katowice, so the focus of negotiations at COP25 in Santiago will largely be on Article 6. This is the section of the Paris Agreement that sets out the framework under which cooperative action can be organised between Parties with a view to achieving their Nationally Determined Contributions (NDC). While cooperative action could take many forms, Article 6 is being negotiated as a carbon trading framework. There are very significant benefits in doing this, as recently shown in new work from the University of Maryland.
There are a number of interpretations of how Article 6 should work, hence the lack of agreement in Katowice, but the text in the Paris Agreement is really very clear. As I recently discussed, the underlying issue is the implication of the rules. A simple illustration helps explain Article 6 and can show why it is so important, why robust accounting is essential and why it can help deliver an overall reduction in global emissions.
In the illustration below, we have three countries (A, B and C) and the aviation sector. They each have a goal of zero emissions, but that is not the current state they find themselves in.
- County A still has considerable emissions (100 units) from its heavy industry sector, but with no local abatement opportunities. As such, it is stuck and unable to make further reductions.
- Country B has reached zero emissions but has not developed local options to easily sequester carbon dioxide as it has no need to do so.
- Country C is undeveloped and has no emissions, but needs to develop energy infrastructure.
- The aviation sector still has emissions (200 units) despite efficiency improvements and perhaps some fuel substitution. It has no immediate opportunities for further reductions.
These countries and sector decide to make use of Article 6 of the Paris Agreement to achieve their goals, enhance ambition and achieve further reductions. Investors develop a large scale air capture project in Country B, with geological storage. Emissions for Country B fall to -100, but they transfer units to Country A using Article 6.2 which underpins the original investment. Both A and B adjust their inventories accordingly with each now achieving net-zero emissions.
A similar transaction is executed between Country B and the aviation sector, but this time using afforestation as a natural sink. Country B remains at net-zero emissions as it adjusts its inventory and the aviation sector emissions can now be reported as 100 units. The transfer of nature based units, again using Article 6.2, has delivered real reductions for the sector.
But aviation still needs to take further action and as such encourages project developers to implement an avoided emissions project in Country C using the mechanism under Article 6.4. The project investment delivers reduction units that are then sold to the sector, bringing emissions to net zero. However, because of the need for a corresponding adjustment to their own inventory under the rules of 6.4, Country C now finds itself with 100 units of emissions, despite having no physical emissions in the country itself. This is because of the strict accounting rules of the Paris Agreement that are designed to ensure an eventual net zero outcome.
So in this example, Country C opts for a transfer from Country B under Article 6.2, with Country B further developing its natural sink potential to allow the transfer to take place.
After making all the local reductions that were possible and then utilizing the cooperative trading approaches offered by Article 6, the overall outcome across the countries and the sector is net zero emissions, which aligns with their desired goals.
Article 6 has delivered in many ways;
- An overall reduction in global emissions has been achieved, with emissions falling from 300 units to net zero.
- Ambition has been enhanced, with the countries and the sector all able to confidently target a net zero emissions outcome instead of stopping short of that goal.
- Economic activity across the countries has been enhanced, with jobs and investment resulting from the transfers and project activity. Importantly, no country or the sector has had to reduce its economic output to meet emissions goals.
- No double counting has taken place and clear carbon emissions accounting has ensured that the actions are visible to all and pass the critical test of environmental integrity.
- Project developers have made use of the capabilities of Article 6.2 and 6.4 and invested with confidence, knowing that the transaction and supporting accounting systems behind Article 6 would deliver a return on their investment, without delay and without withholding of units.
- The transaction under 6.4 delivered valuable revenue to another developing country through its share of proceeds provision (Article 6.6).
While the above is a very simplified illustration, it nevertheless shows the importance of the market oriented aspect of Article 6 in delivering the goals of the Paris Agreement. In addition, there is Article 6.8 which will be used to deliver non-market oriented approaches, such as the Kigali Amendment to the Montreal Protocol. With regards the market provisions of Article 6, early and clear implementation of the rule-book, embracing the clear intent of the Paris Agreement as shown above, is the essential next step.