COP26: Global carbon market rules edge nearer at UN climate summit

Incremental progress was made overnight Nov. 11 on agreeing the rules for global trading of emissions reductions at the UN Climate Change Conference in Glasgow, according to observers at the summit.

However, concerns were rising that key countries still remained in deadlock on some of the substantive elements, raising fears that agreement on Article 6 of the Paris Agreement would elude nations for yet another year.

"There was a bit of a breakthrough in the talks on Article 6.4 today, as Brazil signaled that it is willing to compromise on the issue of corresponding adjustments," the International Emissions Trading Association said in a statement late Nov. 11.

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Corresponding adjustments refer to the suggestion that a country transferring emissions reduction credits abroad would need to make an upward adjustment to its domestic emissions tally to avoid both countries claiming the reduction.

"For a long time, Brazil has argued that host countries should not have to make corresponding adjustments for reductions made outside the scope of an NDC [Nationally Determined Contribution] that are sold abroad," IETA said.

"However, we understand that last night Brazil acknowledged that if an Article 6.4 unit is authorized for transfer, a host country should make corresponding adjustments," the group said.

"We believe this is significant because it means that there is no longer an issue of whether reductions are made inside of outside the scope of an NDC," IETA said.

This rule would also apply to reductions that are transferred for voluntary use, as long as the buying party wishes to transfer the reductions abroad, according to IETA's estimates. If the buyer merely wished to claim the reduction, they could leave it in the host country's emissions registry, meaning no corresponding adjustment would be needed, it said.

More work needed

The latest draft texts contain language dealing with how to account for transfers for "other international mitigation purposes" which may refer to markets such as CORSIA, the UN's market for aviation emissions, and potentially a future market for shipping under the International Maritime Organization, IETA said.

"We know that neither India or China has so far agreed to this new Brazilian position, and therefore more work is needed. But this morning's text also included options that would allow no corresponding adjustments to apply until 2025 or 2030, and this suggests to us that China and India are prepared to compromise," the group said.

Importantly, the latest breakthrough from Brazil "may generate the momentum needed to stretch to agreement on the other main issues in Article 6; the Share of Proceeds in Article 6.2 and the CDM transition in Article 6.4," IETA said.

The Share of Proceeds refers to a proposed tariff on emissions trading that will generate funding for the poorest countries to adapt to climate change.

The CDM transition refers to the possibility that pre-2020 emissions credits from the UN's Clean Development Mechanism will be recognized under the new mechanisms in the Paris Agreement. This matters for the voluntary carbon market because it could boost supply significantly, weighing on carbon credit prices.

CORSIA-eligible carbon credit (CEC) prices have increased by 944% this year and were assessed at $8.40/mt CO2e at the close Nov. 11, according to S&P Global Platts assessments, compared with 80 cents/mt when the assessment was launched Jan. 4.

Some environmental groups at the COP26 summit were quick to cry foul over some countries objecting to corresponding adjustments.

"Today, in negotiations under Article 6 ... an increasing number of countries are backing proposals which would exclude corresponding adjustments from being applied to 'other international mitigation purposes'," said Climate Action Network, a group of non-governmental organizations.

"This means they will allow rules that could lead to an emission reduction being counted by both the country where the reduction took place and by a company financing it," CAN said in a statement late Nov. 11.

"This way nobody would know if the reduction paid for by the company is simply replacing another reduction that the host country was going to achieve anyway to reach its Nationally Determined Contribution," it said.

"A deal of this nature that allows double counting seriously risks undermining ambition and paving the way for accounting tricks on emission reduction," the group said.