The Paris Agreement, which was agreed between 196 party countries at COP21 in 2015 aims to limit the global temperature increase to 1.5°C above pre-industrial levels. Since 2020, countries party to the Paris Agreement are required to commit to reducing their greenhouse gas (GHG) emissions and reach a specified target, known as a Nationally Determined Contribution (NDC). For instance, the UK's NDC is to reduce all greenhouse gas emissions by at least 81% by 2035, compared to 1990 levels (excluding international aviation and shipping emissions).
While some countries aim to focus on GHG emissions reduction to achieve their NDC, rather than offsetting emissions, Article 6 of the Paris Agreement enables parties to use carbon markets to achieve their NDCs. Carbon markets allow countries to buy carbon credits generated though projects which either remove GHGs from the atmosphere or mitigate the production of GHGs and offset their own GHG emissions against the credits. Generally, a reduction or a mitigation in the production of one tonne of carbon dioxide (or equivalent for other GHGs) equates to one carbon credit which can then be traded on the market. The theory behind Article 6 is that if countries can use carbon markets to achieve their NDC, they will be prepared to set more ambitious targets.
However, there are several concerns associated with using carbon markets hence they have struggled to establish widespread credibility and adoption in recent years. These include a stark variation in carbon prices globally; questions over the integrity of carbon credits; difficulties in methodologies for measuring reductions in carbon; and a risk of double counting where the emission reduction associated with the credit is recorded in both the country hosting the reduction of emissions and the country importing the credit.
There are several fundamental concerns associated with using carbon markets, which have struggled to establish widespread credibility and adoption in recent years.
Article 6 of the Paris Agreement
Article 6 seeks to address these concerns by regulating the process by which countries can trade carbon emission reductions and removals through:
- bilateral agreements between state parties (Article 6.2);
- a global carbon market mechanism supervised by the UN, known as the Paris Agreement Crediting Mechanism (Article 6.4); and
- co-operation between states through non-market-based approaches (Article 6.8).
Article 6 itself does not contain detailed guidance on how the mechanisms will operate. However state parties have entered into subsequent agreements at various COPs, in particular at COP 26 and COP 29, which paved the way for operationalisation of Article 6.2 and 6.4. The key provisions within Article 6 and subsequent agreements on how they will operate are set out below.
Article 6.2
Article 6.2 provides for a cooperative approach where voluntary bilateral agreements between countries are used to trade carbon credits falling within the definition of international transferred mitigation outcomes (ITMOs) to allow the country acquiring ITMOs to reach its NDC and the country selling ITMOs to receive an economic benefit.
Defining which projects fall within the definition of ITMOs was an area of contention at COP 26 with some participants arguing that credits from avoidance projects (e.g., projects aiming to prevent deforestation) should not be included due to difficulties with measurability of emission reduction. However, it has been agreed that ITMOs include credits generated through both carbon removal and reduction projects, and the current consensus is that avoidance projects are included within this (there is however a view for the parties to reconsider this in 2028).
Article 6.2 also requires that countries engaging in bilateral agreements must use a transparent process with accurate accounting of emission reductions in order to avoid double counting. This transparency is intended to be achieved through an international registry operated by the UN which ensures that a country selling its credits increases its reported emissions by an amount equal to the credit. Transparency is also achieved through a 'Technical Expert Review' process by which state parties must comply with reporting requirements set by the UN in relation to the bilateral agreements.
Article 6.4
The aim of Article 6.4, through the operation of the Paris Agreement Crediting Mechanism, is to:
- promote the mitigation of emissions;
- incentivise public and private entities to participate in the mitigation of emissions; and
- enable state parties to use emissions trading to fulfil their NDC ambitions.
The mechanism encourages states to approve and authorise carbon emission reduction or removal projects which follow standards and methodologies set by the UN. Carbon credits generated through these projects (known as Article 6.4 Emission Reductions) can then be authorised to be traded globally through the mechanism. The mechanism purports to ensure that credits are more robust than other voluntary carbon credits on the market which is aimed to be achieved through requirements for projects to comply with the UN Supervisory Body's criteria. For instance, projects must:
- be additional, meaning that they are outside the scope of the state's pre-existing national policies and legislation, and that the project would not have occurred without funding made available through Article 6.4;
- deliver a measurable and long-term benefit;
- pass stringent approval and verification procedures; and
- accurately monitor and calculate emission reductions.
The mechanism under Article 6.4 is seen as a successor mechanism to the Clean Development Mechanism (CDM) created under the Kyoto Protocol. Article 6.4 allows for these legacy CDM credits to be transferred to Article 6.4 Emission Reductions to the extent that the projects fall within the requirements of the Supervisory Body and that the projects follow prescribed time limits and procedures for transitioning.
Registry
Both cooperative approaches under Article 6.2 and the Paris Agreement Crediting Mechanism under Article 6.4 require a robust process to ensure the transfer of credits is accurately accounted for and that corresponding adjustments are made to a country's reported emissions when credits are transferred. As such, the UN has developed:
- a Centralised Accounting and Reporting Platform (CARP) for the record of ITMO transactions under Article 6.2; and
- an Article 6.4 Mechanism Registry which records the generation and transfer of Article 6.4 Emission Reductions.
Both the CARP and the Article 6.4 Mechanism Registry act as a tracking tool for the UN to ensure that credits are accurately recorded, monitored, and used as intended. The two registries under Article 6.2 and 6.4 are distinct but the relevant frameworks provide for Article 6.4 Emission Reductions to later be converted into ITMOs which can then be traded through CARP.
Article 6.8
Article 6.8 provides for non-market-based approaches for cooperation amongst state parties to achieve their NDCs. The aims are largely the same as those under Articles 6.2 and 6.4 (to promote mitigation and encourage both public and private sector participation to achieve NDCs) but instead alternative approaches are called upon for cooperation. The UN has established a work programme to facilitate these aims and a key element includes a collaborative web-based platform to distribute financial and technical resources for obtaining NDCs amongst party states as well as sharing information, best practices, lessons learned and case studies.
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