The 193 nations taking part in the Paris Agreement found a compromise on many controversial issues when implementing Article 6 at the UN Climate Conference in November 2021. But some questions remain unanswered: Should avoidance and REDD+ carbon projects be allowed under the new crediting scheme to be implemented under Article 6 Paragraph 4? And under which circumstances?
This subject is now set to dominate the scene in the run up to the next UN Climate Conference, the Sharm-el-Sheik COP27 meeting due in November.
Paragraph 4 of Article 6 requests the Subsidiary Body for Scientific and Technological Advice (SBSTA) to develop recommendations on "whether activities [under the 6.4 mechanism] could include emissions avoidance and conservation enhancement activities."
The pretty blurred line hides, according to many in the industry, the lack of consensus around the use of carbon credits issued by REDD+ projects and other avoidance carbon projects under the new crediting mechanism – the so called 6.4.
Credits issued under the 6.4 mechanism – which in the Paris language are called ERs, or emission reductions – will be used by nations to reach their climate goals, and possibly by the private sector to meet their voluntary carbon reduction targets.
In the general vulgate, avoidance projects are the carbon projects aiming to avoid the release in the atmosphere of further greenhouse gas (GHG) emissions. These include renewable energy projects, industrial pollutants projects and the famous REDD+, or reducing emissions from deforestation and forest degradation.
Avoidance differs from the removal category, which include projects aiming to remove already existing GHG emission from the atmosphere and store them for example in newly built forests, in the sediments that lye at the bottom of the ocean, in minerals or in tech-based carbon storages.
According to Luis Panichelli, a climate change, REDD+ and carbon market expert, and an Article 6 negotiator, there are three main positions among the parties to the Paris Agreement:
- parties that question eligibility of REDD+ projects only under the 6.4 mechanism;
- parties that are questioning the eligibility of all avoidance credits under the 6.4 mechanism; and
- parties that question the eligibility under the 6.4 mechanism of other type of avoidance projects, such as avoided exploitation of fossil fuels basin.
Untangling the hank
Of the three positions, the one about REDD+ promises to be the harder to untangle, given the many questions that avoided deforestation projects raise. But it's also the one that may provide the key to solve the others.
REDD+ projects aim to contribute to the fight against climate change by preserving existing forests in specific areas that are considered at risk of deforestation.
They fall into the "avoidance" project category, since they aim to avoid the release in the atmosphere of the carbon dioxide produced any time a tree – whose dry mass is 50% carbon – dies. By protecting a forest from being chopped down, they avoid releasing in the atmosphere the carbon of which trees are made of.
Since their first appearance in the market 20 years ago, REDD+ projects have been at the center of very polarized debates.
This has happened for several reasons including their additionality, permanence and how their baseline is calculated.
Additionality is one of the core principles of carbon finance. Under this principle, a project can issue carbon credits only if that project is not already legally required, common practice, or financially attractive in the absence of credit revenues.
With respect to additionality, it will be important for the SBSTA to consider whether there are not existing subsidies already promoting the protection of forests.
A second core principle of carbon finance is permanence, which is always at stake when it comes to nature-based solutions, as forests are always at risk of being wiped away by fires, storms or other natural calamities.
Under the permanence principle, the impact of the GHG emission avoidance or removal must not to be at risk of reversal and it has to result in a permanent drop in emissions.
This, according to Axel Michaelowa, senior founding partner at Perspective Climate Group, is the most challenging of the issues concerning REDD+ projects.
"The big elephant in the room is that there are currently no solutions to the main issue: permanence," he said. "Temporary credits allowed under the old Clean Development Mechanism [i.e. the first crediting mechanism of its kind, developed under the Kyoto Protocol] were not attractive for private buyers, Michaelowa said. "Companies want certainty."
Finally, a third core principle – the non-overestimation principle – requires carbon projects to ensure that the number of credits issued matches the reduction of CO2 emissions obtained.
In the case of REDD+ projects, matching this requirement is far from a straightforward operation.
The number of credits issued by a REDD+ project depends on the level of avoided CO2 emission due to the avoided deforestation.
To calculate that level, project developers start by identifying the "baseline," that is: what would happen to the forest in the absence of the project. In other words, how many trees will likely be chopped should there be no intervention, and how many GHG emissions would be produced as a result.
To identify the baseline, developers usually look at the deforestation rate observed over the past 10 years in a nearby area – called the reference region – which has the same economic and social profile of the selected area.
Once the baseline is identified, a developer is able to calculate the mitigation impact of the carbon project – i.e. the amount of GHG avoided – and issue an equivalent number of credits. Credits are then sold on the market and used by the developer to finance the project.
The weakness of REDD+ projects lies in the fact that it is not possible to calculate the baseline with absolute certainty because it will never be 100% clear what would have happened to that specific forest in the absence of the carbon project.
The way in which the baseline is calculates represents one of the main criteria setting the quality of a REDD+ project.
"The challenge for REDD+ credits, and carbon markets in general, is that quality is a spectrum, and buyers don't know which are the high quality projects," said Ben Rattenbury, vice president for policy at carbon offset rating company Sylvera.
"With REDD+ projects quality is a function of the carbon performance on the ground, combined with additionality, strength of baseline, and permanence, and in addition most buyers are also interested in co-benefits" he said.
Still in the game
Despite these very controversial issues – additionality, permanence and no-overestimation – for which a definitive solution is still not necessarily available, experts have said the future of REDD+ projects under Article 6 seems to be safeguarded by the fact that an entire article of the Paris deal is dedicated to them: Article 5.
Article 5 of the Paris deal encourages nations to incentivize activities that reduce emissions coming from deforestation and forest degradation, and also to support conservation projects, the sustainable management of forests and enhancement of forest carbon stocks in developing countries.
With this guarantee in place, the SBSTA will likely solve the controversies surrounding REDD+ project by drawing a line between good quality REDD+ and bad quality REDD+, with only the former allowed to be certified under the 6.4 mechanism, sources said.
"The parties will need to find a way to allow REDD+ by setting a high-quality threshold," Sylvera's Rattenbury said. "It will be about defining the methodology that ensures high quality, and then finding the reliable data to assess it."
Panichelli holds a similar view: parties to the Paris deal and the SBSTA will likely set the minimum requirements that a REDD+ project need to meet to be certified under 6.4 rules, modalities and procedures, but they will also allow single nations to add their own further requirements.
On the one hand, the minimum requirements, said Panichelli, would be set in terms of approved methodologies, baselines, additionality criteria, social and environmental safeguards, base crediting period, vintages, procedures for the project authorization, recording and tracking for the transfer of units. On the other end, the additional specifications to be subject to national approval will include contributions to sustainable development met by the project, additional baseline and methodological requirements, as well as crediting periods to be applied.
According to Michaelowa, it may also be possible to solve the permanence issue by introducing a credit "swap" mechanism.
Under this system, REDD+ credits used for offsetting purposes and issued by a forest destroyed by a fire or other calamities would be replaced with an equal volume of credits issued by other, non-forestry projects eligible under the same crediting mechanism. The liability to do so would remain with the project developer and his legal successors.
But given the difficulty in solving some core aspects like additionality, permanence and no overestimation, many in the industry believe that REDD+ will be increasingly be used as part of a donation market, where companies or individuals buy the credits issued by these types of projects without using those credits to offset their emissions or reach climate goals.Once the REDD+ bottleneck is unblocked, the broader avoidance discussion will follow the same lines, according to Panichelli, with some terms set by the SBSTA and some additional terms set by hosting countries.
Impact on voluntary carbon markets
Article 6 is the last implemented of the 29 articles that make up the Paris Agreement. Its recent signature represents a milestone in the development of carbon markets as it enlists the rules to be followed by nations that intend to use carbon credits to reach their national climate goals, the Nationally Determined Contributions.
Being a widely supported rulebook, its text will impact voluntary carbon markets as well, which are used by private companies and individuals to offset their unavoidable carbon emissions on a completely voluntary basis.
Some rules introduced by Article 6 in November 2021 have already stated to shape the broader voluntary market, where projects are certified by private entities like Verra or Gold Standards – the private equivalent of the 6.4 mechanism.
Similarly, the debate on REDD+ and avoidance projects under Article 6 will also resonate across the whole carbon credits market.
And with so many different interests at stake, both from nations and from the private sector, the debate is set to be intense.
Further reading: Commodities event calendar 2022
Correction:This article has been amended to reflect that the Subsidiary Body for Scientific and Technological Advice is an existing body, and not one that is yet to be created as previously stated.