The formal adoption the Paris climate accord's Article 6, following the UN Climate Conference in Glasgow, is expected to jump-start the evolution of the voluntary carbon market after years of uncertainty about its future.
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Article 6 is the final article to be implemented of the 29 separate articles that make up the 2015 Paris Climate Agreement and sets up the carbon crediting mechanism used by governments to meet their reduction targets under the nationally determined contributions system. Paragraph 6.4 sets the United Nations as a certifier of carbon projects that can generate credits for governments to reach these NDCs.
The Nov. 13 decision to approve Article 6 has boosted the credibility of carbon credit trading schemes and is set to translate into the development of more carbon projects and still more demand for the credits that are generated from them.
However, in addition to the credibility component, the creation of the 6.4 crediting mechanism is likely to have a significant impact on the shape of the voluntary carbon credit markets moving forward, affecting the way that private actors – not just governments – look to meet their emissions targets.
"Glasgow has confirmed our understanding that the voluntary market is not been regulated by Article 6," said Andrew Howard, senior director, climate finance and markets at Verra, the largest certifier of carbon credits. "But it nevertheless provides tools, such as accounting adjustments, that host countries can use if they wish and are ready," he said.
Howard added that Verra is currently going through the Article 6 decisions in more depth to see how they relate to its carbon market standard.
The accounting or "corresponding adjustment" of Article 6 is likely to have an enormous impact on the structure of the voluntary market as it evolves in the coming years amid hefty increases in expected demand.
"The key takeaway from Article 6 implementation to me is that avoiding double counting matters to the Parties of the Paris Agreement," said Owen Hewlett, chief technical officer at the Gold Standard Foundation, another major certifier of carbon credit projects and credits.
Paragraph 2 of Article 6 states that any time an internationally traded mitigation outcome, or ITMO, is issued under the 6.4 crediting mechanism and transferred abroad instead of being used by the host country against its NDCs, then a corresponding adjustment needs to be made.
Making a corresponding adjustment means that the host country will have to issue a guarantee that it won't use the transferred credits against its own NDCs.
This process ensures that 1 mt of CO2 or equivalent greenhouse gas can only be claimed once: either by the credit-generating country, or by the second country buying that credit from the international market.
For example, if Brazil decided to sell the US 100,000 mt of carbon credits generated by a local carbon project for the US to use against its NDCs, Brazil would need to add 100,000 mt of CO2e to its reduction target, while the US would subtract the same volume.
Critically, however, Paragraph 6.2 also indicates that the corresponding adjustment must be made any time ITMOs are transferred abroad, even if the credits that are being transferred are used by private actors – like a factory, financial institution or airline, for example – to offset their own emissions.
Paragraph 6.2 refers to these types of voluntary transactions by private actors as "other international mitigation purposes," thereby implicitly linking part of the voluntary market to the NDC scheme created under the Paris Agreement.
Thus, if in the example above, Brazil decided to offer those 100,000 mt of carbon credits to the market and they were bought by an international tech company, Brazil would still be required to add the 100,000 mt of CO2e to its NDC total.
"It's still up to the voluntary market to decide whether they require corresponding adjustments for their credits," said Matthew Brander, senior lecturer in carbon accounting at the University of Edinburgh Business School. "But the provision is there in 6.2 for them to do so."
Having a corresponding adjustment on credits transferred abroad for private use is a guarantee that the credits purchased will only be used once, by the end buyer, and not also by the host country.
Practically, this means that an "adjusted credit" – for example, one that has been subject to corresponding adjustment from the host country – would likely be considered of higher quality than a "non-adjusted credit". This would almost certainly lead to the development of a two-tier market, market sources said.
Private actors who are looking for credible ways to offset their own emissions activities may ultimately decide to use only "adjusted credits" for offsetting purposes.
"My guess is that over time the market will move towards adjusted credits [only] as they will - rightly - be seen as having more environmental integrity," Brander said.
According to Hewlett, the market will see "adjusted units" used for offsetting purposes and "support units" used for other social purposes.
Verra's Howard shares a similar view, saying Verra expects there will be different claims made with carbon credits: offsetting emissions claims or to claim against other environmental, social and governance indicators.
"We see that some investors will use carbon credits to claim support of mitigation action but without using the credits to offset their own emissions," he said.
In a sign that the Article 6 rulebook has already started shaping the voluntary market, both Verra and Gold Standard have already taken action to offer carbon credits with a corresponding adjustment.
Gold Standard has recently opened registrations to an "early-mover program" for developers interested in issuing credits with a corresponding adjustment, while Verra is preparing for implementing an Article 6 label, which will be attached to credits with a corresponding adjustment obtained by the host government.