15 February 2024
Harry Cook
The first question to ask is: What is the Voluntary Carbon Market? The Voluntary Carbon Market (VCM) is a market in which private individuals and organisations issue, buy, and sell greenhouse gas emissions reductions in the form of carbon credits, voluntarily. Naturally, the next question to ask is what is Article 6? Article 6 (of the Paris Agreement) provides a mechanism for countries to cooperate with each other to meet their emissions reductions targets by trading emissions reductions internationally. Countries lay out their emissions reductions targets and plans for achieving these targets in their Nationally Determined Contributions (NDCs). Countries can develop projects and buy carbon credits to help meet their Nationally Determined Contribution or export carbon credits to generate revenue. It is generally expected that developed countries will purchase emissions reductions from less developed countries under Article 6. Developed countries that have ambitious NDCs, substantial baseline emissions, and limited capacity to generate cost effective emissions reductions (e.g. Singapore), will finance projects in less developed countries (e.g. Rwanda) that otherwise would not be possible. The developed country successfully moves towards its NDC target, while the less developed country receives valuable international finance. The most relevant elements of Article 6 to carbon trading, and thus the VCM, are Article 6.2 and Article 6.4.
Article 6.2 governs bilateral agreements allowing two countries to trade “mitigation outcomes” (i.e carbon credits) with each other. When the host country (the country where the project is based) authorizes an international transfer of a carbon credit, it becomes an Internationally Transferred Mitigation Outcome (ITMO). The host country authorizes the unit for international transfer by applying a Corresponding Adjustment (CA). A CA is an accounting mechanism introduced to avoid double counting by ensuring that only one of the host country or the buyer country count an emissions reduction towards their NDC. The first transfer of Article 6.2 credits happened recently between Switzerland and Thailand on January 8th, 2024. The Klik Foundation, on behalf of the Swiss government, purchased 1,916 ITMOs from the Thai company Energy Absolute Public Co to fund the Bangkok E-bus programme. The financing provided by the Klik Foundation to purchase the ITMOs is used to fund the Bangkok E-bus programme, and in return, the Swiss government can claim the emissions reductions that result from the E-bus program as their own. By applying a CA, Thailand gives up the rights to claim the emissions reductions against their own NDC. See below the annotated figure of how the Switzerland-Thailand transfer works.
Article 6.4 differs from Article 6.2 primarily in that it will apply a centralised mechanism, supervised by the United Nations ‘Supervisory body’. Market participants will be able to trade credits issued by projects adhering to methodologies mutually agreed upon by all parties to the Paris Agreement – that is, the credits are issued unilaterally, rather than through bilateral agreements between two nations. This market will be established as a successor to the CDM, another United Nations-run market which was established in the Kyoto Protocol in 1997. Through this mechanism, a project developer in one country can implement projects that generate carbon credits and sell them on the international market. It should be noted that Article 6.4 is not yet up and running much to the consternation of many VCM actors.
As progress continues to be made on both Article 6 mechanisms, we predict that there will be several impacts on what buyers perceive to be high-integrity credits. With the addition of a CA, credits issued under Article 6 have an added protection against double counting compared to traditional voluntary market credits. When choosing between purchasing a credit which has a guarantee against double counting or a credit without such a guarantee, buyers will naturally gravitate towards the former. The impending shift towards Article 6 aligned units is evidenced by leading voluntary market standards, Gold Standard & Verra, creating an Article 6 label that tracks Authorizations and CAs in anticipation of market demand. Furthermore, compliance schemes around the world which allow carbon credits to be retired against carbon taxes, like Singapore’s carbon tax or ICAO’s CORSIA for the reduction of emissions from international aviation, have introduced CAs as a condition of eligibility. In the future it is predicted that CAs will be required by all buyers, reducing the risk of double counting on a global scale.
It is also anticipated that Article 6.4 will be seen to set the standard when it comes to carbon crediting methodologies. With heightened concerns surrounding project quality surfacing in the past year, the Article 6.4 supervisory body is expected to develop methodologies that cannot be misused in the same way as some older VCM and CDM methodologies. This will build off the progress the VCM has made on improving quality across the market. In recent years, industry initiatives like the ICVCM and VCMI have been set up to help standardise carbon crediting methodologies. Further progress was made at the most recent COP, where these industry initiatives made a joint announcement to collaborate and align on their guidance to market participants. Article 6.4 is seen as a potential fresh start, utilising all the lessons learned the hard way by the VCM over the last decade to develop robust, high-integrity methodologies.
Fundamentally, buyers want assurance of integrity and quality when buying carbon credits. With the CA mechanism under Article 6 set to redefine carbon accounting integrity, and Article 6.4 having potential to set a new standard for carbon credit quality, understanding the intricacies of Article 6 will be crucial if buyers are to continue making emissions reduction claims in line with market best practice.
With decades of experience, CFP Energy continues to guide companies through the Voluntary Carbon Market's evolving landscape. With the introduction of Article 6 as a newer market mechanism, we've adapted to meet rising quality standards. Our commitment to transparency and deep understanding of regulatory changes, combined with access to verified, high-integrity carbon projects, positions us to assist businesses in achieving their voluntary carbon goals, both now and in the future.
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