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COP26: INTERVIEW: Paris Article 6 deal will boost confidence in carbon markets: Gold Standard

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COP26: INTERVIEW: Paris Article 6 deal will boost confidence in carbon markets: Gold Standard

Highlights

Draft text shows narrowing of options for negotiation

Final agreement not expected until final days of COP26

Text includes options for transfer of CDM credits

Agreement on Article 6 of the Paris Agreement at the UN Climate Change Conference in Glasgow would boost confidence in the use of carbon markets to achieve global climate goals, Hugh Salway, head of environmental markets at standards setter Gold Standard said in an interview Nov. 2.

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A consolidated draft text has emerged from the COP26 summit, which runs Nov. 1-12, as negotiators work to find common ground among countries on how the mechanism will work, although final agreement is unlikely until the second week of the talks, he said.

"I think there's a major confidence issue. If there is a deal out of this COP, it will provide a major confidence boost in the use of markets to deliver on the objectives of the Paris Agreement," said Salway.

Article 6 is the part of the Paris Agreement "rulebook" that deals with international carbon markets, and it remains an outstanding issue left unaddressed from previous UN climate talks.

The latest draft text has not significantly moved the negotiations forward, but it has consolidated the options by narrowing them down, Salway said.

"Going into these negotiations, we had three versions of each text – Articles 6.2, 6.4, and 6.8," he said.

Those three sections deal with how governments will account for transfers of emissions reductions, a new mechanism for global emissions trading, and a mechanism for promoting non-market cooperation, respectively.

"The purpose of this draft is to consolidate that. There are some things that are moving forward, but mostly this is about making sure there is one text for discussion," he said.

Within the scope of Article 6, the first week of the talks is likely to lead to agreement on technical aspects of the mechanism, while bigger political issues are likely to need ministerial-level agreement, which won't happen until the second week of COP, he said.

Those political issues include the carry-over of older emissions credits, such as those from the UN's Clean Development Mechanism, into the Paris Agreement. Another issue is the so-called Share of Proceeds, which aims to set aside a share of revenues from emissions trading to support developing countries.

New sources of demand

Agreement on Article 6 matters for the Voluntary Carbon Market because it could bring in governments as buyers of emissions credits, representing pent-up demand that could ramp up in the coming months and years.

"I think maybe there's been a bit of a pause in the market ahead of COP," said Salway.

Carbon credit prices assessed by S&P Global Platts showed a more stable trend in September and October, having rallied strongly earlier in 2021.

CORSIA-eligible carbon (CEC) credit prices were assessed at $7.15/mt CO2e at the close Nov. 2, having traded as low as 80 cents/mt in January.

"The main thing for me is that if you look at the Nationally Determined Contributions [national climate targets], over two thirds of them say they plan to use Article 6. And most haven't made use of that yet," said Salway.

"One of the outcomes is that governments may start to make use of this once there is agreement," he said.

Another important point is whether a country can make a Corresponding Adjustment linked to a transaction in the voluntary carbon market, he said. Corresponding Adjustments involve a country adjusting its national emissions tally upwards if it transfers emissions reduction credits abroad and they are counted towards another country's target.

Geneva-based industry group the International Emissions Trading Association confirmed that discussions had started on the new negotiating texts.

"Article 6 specialists opened their discussions with negotiating blocs and individual countries setting out their positions, many of which were fairly familiar to long-time observers of these talks," IETA said in a note late Nov. 1.

"Our observers in the room say very few new elements were raised; some parties started to make specific proposals or made clear what they wanted to see in the text, but generally the interventions by the groups and the individual parties were statements of well-known positions," IETA said.

"As expected, the main issues are Share of Proceeds -- and whether it should apply to Article 6.2 and 6.4 – corresponding adjustments, and the CDM transition into the Article 6.4 mechanism," the group said.

Share of Proceeds, use of CDM

A draft Article 6 text seen by S&P Global Platts Nov. 2 had bracketed text for many of the elements, including on the Share of Proceeds, with options including a 2% and 5% levy on emissions trading, showing that these were still up for negotiation.

The Share of Proceeds matters because a higher levy would be expected to raise the amount of funding for developing countries while at the same time reducing profit margins for companies trading emissions reductions.

The draft text also showed various options for credits from the UN's Clean Development Mechanism to be transferred into the Paris Agreement, with proposed cut-off dates for project approvals ranging from December 2023 to 2025 or later.

Various conditions linked to the transfer of CDM projects were also bracketed in the draft text, detailing elements such as whether the projects were programs of activities, small-scale projects, and the dates for when projects transfers were approved.

These elements of the draft provided signs that CDM credits, in some form, could be transferable into the new agreement, although all options in the text are ultimately subject to negotiation and need agreement by the Parties in Glasgow to be adopted by the UN.