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Article 6 most prominent contribution is the rationalization of carbon markets

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Article 6 most prominent contribution is the rationalization of carbon markets

Highlights

Market seen evolving towards single emission unit destined to multiple uses

Borders between compliance and voluntary markets to blur further

Creation of new sub schemes akin to CORSIA to become easier

The recently implemented Article 6 of the Paris Agreement paves the way for the simplification of carbon markets and therefore the gradual merger of government-led schemes and voluntary carbon schemes, industry players have said.

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It does so by setting the minimum requirements needed to set up an integer crediting scheme and by recognizing that the same mitigation unit can be destined to different purposes.

As a result of this, the carbon market of the future is expected to be made by one single emission unit, which will be used for different claims depending on the extra labels or certificates it carries, industry players have said.

"We are going to have one unit, let's say a Gold Standard certified carbon credits, which could be possibly authorized for different purposes," said Owen Hewlett, chief technical officer at the Gold Standard Foundation, one of the largest certifiers of voluntary carbon projects.

According to Hewlett, this development is the logical deduction coming from paragraph 2 of Article 6, which clearly distinguishes between mitigation outcomes destined to be used by countries to meet their emission reduction targets under the Paris deal (the so called Nationally Determined Contributions), but also to "other international mitigation purposes."

In the language of Article 6, "other international mitigation purposes" refer to the use of carbon credits by the private sector for offsetting purposes.

"Article 6 gives a number of different options for uses that a unit can be authorized for," said Andrew Howard, senior director, climate finance and markets at Verra, the largest certifier of carbon credits. "We see a future where carbon market participants can choose among different claims that can be made with mitigation units."

To differentiate emission units and assign them to different uses a certificate or a label will be attached to each unit.

Article 6 already envisages this when setting the rules for a corresponding adjustment, which is a label to be attached to an emission unit (or carbon credit) certifying that the country where the underlying carbon project is located has authorized the transfer of those units abroad, and also committed to not use those credits against its own NDCs.

"It's the recognition that there are different uses for the same unit," Hewlett said.

Read more: Paris accord Article 6 approval set to jump-start evolution of voluntary carbon market

New sub schemes propping up

The presence of a shared rulebook on how to set up integer crediting mechanism has also suddenly made it easier to launch new crediting schemes.

As a consequence, it will now be easier for specific sectors of the economy to set up their own mitigation schemes, such as the existing international aviation industry's CORSIA pioneering scheme, market players believe.

"Now we have a framework to do it, and we have an accounting mechanism, the corresponding adjustment," Domenic Carratu, senior portfolio manager at Viridios Capital and a participant in the TSVCM, said. "New industry schemes will likely pop up, akin to CORSIA," he said, adding that the shipping and agricultural industries are possible candidates.

Under CORSIA, airline operators have pledged to offset all the CO2 emissions they produce above a baseline 2019 level.

Airlines intend to do this -- at least in part -- by purchasing carbon credits emitted by projects certified by international agencies and recognized as CORSIA-eligible. The first part of the scheme from 2021 to 2026 is voluntary. From 2027, CORSIA will become mandatory for almost all international routes.

Blurring boundaries

While the boundaries between government-led schemes and voluntary schemes have already started to blur, this trend will now accelerate.

South Africa, for example, already allows companies subject to a carbon tax to either pay the tax or to buy and retire voluntary carbon credits certified by Verra, Howard noted.

Article 6 makes the trade of voluntary carbon credits within an Emission Trading Scheme also likely.

The yet-to-be implemented 6.4 crediting scheme is the de facto substitution of the Kyoto-era Clean Development Mechanism, the first crediting mechanism ever created.

Article 6 envisages the continuation of some CDM certified credits (with a 2013+ vintage) under Article 6, meaning those credits will be usable by nations to meet their NDCs, but only for the first NDC cycle, which, according to Hewlett, ends in 2025.

After that, the 6.4 mechanism will replace the CDM completely.

CDM certified credits have been allowed in the past to be traded within the European Union ETS.

For this reason, the new 6.4 certified credits are also likely to be allowed within an ETS compliance scheme.

Should this happen, a voluntary carbon credit that meets all the requirements set by Article 6.4, and is therefore identical to 6.4 certified credits, is also likely to be admitted into the same ETS scheme.

Read more: Paris accord Article 6 approval set to jump-start evolution of voluntary carbon market