Markets and Non-Market Approaches for International Cooperation in the Paris Agreement: Open Questions in the International Negotiations

By Rishikesh Bhandary

In an agreement where every country makes its own pledge, how do you increase ambition by increasing collaboration between countries? One of the answers provided by the Paris Agreement is in Article 6 (international cooperative approaches). Article 6 actually contains three distinct elements: emissions trading (referred to as internationally transferred mitigation outcomes or ITMOs), a mechanism to mitigate greenhouse gases while supporting sustainable development (Article 6 Mechanism), and non-market approaches (activities that do not involve the commoditization of carbon to support sustainable development). The common principles uniting these three elements are that they involve voluntary participation, help increase ambition of both mitigation and adaptation actions, and promote sustainable development.[1]

While we can view Article 6 as a successor to the Kyoto Protocol’s mechanisms that were designed to provide flexibility to countries to meet their mitigation obligations, there are three major differences that are worth highlighting. First, under the Paris Agreement all parties have nationally determined contributions (NDCs). This comprehensive coverage indicates the potential for Article 6 to have tremendous scope but it also points to the work that needs to be done to bring some order to the sheer diversity of NDCs. Second, the overriding goal of the cooperative approaches is to go beyond providing flexibility in how countries meet their goals but to increase global ambition altogether. Finally, Article 6 acknowledges that many actors beyond national governments now drive climate action and makes an explicit provision to facilitate participation by non-state actors.

In this blog post, I will highlight some of the major issues at play in each of the three elements of Article 6 and provide a status update on what happened at the most recent round of climate negotiations in Bonn (May 2017). Countries have given themselves until the climate conference in Poland next year to agree on the rulebook to support the Paris Agreement.

Internationally Transferred Mitigation Outcomes

Article 6.2 acknowledges and encourages the patchwork of bilateral and minilateral arrangements that currently exist to link emissions trading programs, among others. For example, states such as California could link their cap-and-trade program with South Korea’s. This element keeps the scope of these voluntary collaborations open but stipulates that they promote sustainable development, ensure environmental integrity and apply robust accounting.

Governing Arrangements

The Paris Agreement foresees a light touch process as countries only have to agree on guidance for Article 6.2 as opposed to rules, modalities and procedures for Article 6.4, for example. Yet, there is a need to strike a balance between encouraging these bottom-up initiatives and ensuring environmental integrity. The debate on how centralized oversight needs to be for Article 6.2 reflects this concern.

Supplementarity

Under what conditions can a country use ITMOs towards its NDCs? A number of countries have called for the principle of supplementarity to be applied. This principle implies that ITMO transfers should be supplemental to domestic action. Supplementarity can also imply that the seller country may be able authorize a transfer only after it has fulfilled its own pledge. While supplementarity is not explicitly mentioned in Article 6.2, a case can be made about the need for ITMOs to allow countries to go beyond what they have committed to in their NDCs (given that paragraph 6.1 calls for higher ambition). Of course, not everyone agrees with the application of supplementarity to Article 6.2, or with this particular interpretation, but one may expect it to be an object of contention in the months ahead. 

NDC Guidance, Reporting, and Corresponding Adjustments

As countries discuss and elaborate the finer details of the Paris Agreement (the so called “Paris Rulebook” negotiations that are due for completion in 2018), countries are considering how guidance on the Paris pledges (NDCs) are linked with discussions on ITMOs. Countries need to consider the full cycle of ITMOs: formally recognizing ITMOs, the reporting vehicle for ITMOs (some have called for using the same vehicle as that for NDCs), and how the reporting will be reviewed (if they get the same level of scrutiny as the rest of the NDC).

It is also clear from the supporting decision text of the Paris Agreement that countries need to declare and make relevant adjustments if they use ITMOs to fulfill their NDC obligations. Parties have different views on the mechanisms of making these corresponding adjustments. Some have argued for adjusting emissions inventories while others want NDCs to be adjusted. The consequences of these two differing approaches have to be explored.

Open Questions

Taken together, Articles 6.2 and 6.4 have the potential to nudge developing countries towards economy-wide targets: by quantifying their NDCs, expanding scope and coverage, and eventually making economy wide commitments. Negotiators need to consider the risk of creating perverse incentives to keep certain sectors uncapped if those sectors generate reductions that can be transferred internationally.

Apart from these issues specific to the operation of the Paris Agreement, countries need to pay attention to how linking carbon markets may actually work out in practice. You can read CIERP Professor Metcalf’s article on how to linking may work between different jurisdictions here. Similarly, Green, Sterner and Wagner have written about the political challenges of linking bottom-up markets.

 Article 6 Mechanism

The Article 6 Mechanism is inspired by the Clean Development Mechanism. It would allow the host country to benefit from activities that mitigate GHG emissions and also allow a different country to use those emission reductions in meeting its NDC obligations. 

Additionality and Double Counting

From the submissions of parties and discussions thus far, it is not clear how much appetite there is to come up with an operationalization of additionality that is different from the Kyoto Protocol’s. The Clean Development Mechanism followed a baseline-crediting approach where projects are considered additional if they would not have been executed without the CDM. With every party having an NDC, it has become a little trickier to ascertain additionality (especially as there may also be activities under this mechanism that may take place outside the scope of the host party’s NDC). In addition, given the diversity of NDC types, there is a need to consider how additionality can be made contextually relevant.

Furthermore, some countries contend that corresponding adjustments apply only to Article 6.2 and not to Article 6.4 as it is not explicitly mentioned in the supporting decision text of the Paris Agreement (1/CP.21). This position has important implications for delivering overall mitigation and double counting. Properly distinguishing between ITMOs and transactions under the Article 6.4 would help to bring some clarity.

Transitional Issues

A number of countries have pointed to the need to address what happens to the projects and programs under the Clean Development Mechanism and the Joint Implementation. Proposals range from a wholesale grandfathering approach (which would involve Article 6.4 carrying over all of the institutional arrangements of the CDM and JI including their approved methodologies, credit issuing projects, and pipelines) to a back-to-the-drawing board approach that would take the Article 6.4 Mechanism as an opportunity for a fresh start. The key challenge here is in providing assurance to those investors who have spent considerable resources engaging with the UNFCCC and using Article 6 as an opportunity to learn from the CDM/JI by improving the nature of activities and projects that it supports.

Sustainable development

That mitigations actions pursued using the Article 6 Mechanism should support sustainable development is clear from the language that establishes this mechanism (Article 6.4) as well as the overall chapeau of the article (paragraph 6.1). What is less clear, however, is how the mechanism’s focus on sustainable development will be made operational. Some countries have proposed linking Article 6.4 firmly with the Sustainable Development Goals. A few others hold the view that there is no need for multilateral guidance on this matter as sustainable development is a national prerogative. The CDM reflects this view as each country determines on its own whether a CDM project contributes to sustainable development or not. While this hands-off approach recognizes the sheer diversity, by necessity, of CDM projects, concrete guidance could probably have provided some confidence on the value of CDM projects (beyond mitigating greenhouse gases). Leaving things open to each country has also made it difficult to systematically study CDM’s impact on sustainable development, for instance.

Open Questions

Article 6.4 provides ground to reflect the Paris Agreement’s commitment to human rights as laid out in the preamble (“Parties should...promote and consider their respective obligations on human rights”). Such language can provide a number of potential entry points for addressing human rights, for example: when methodologies for projects and programs under A6M are developed to include safeguards and standards; by providing guidance to countries to consider human rights when authorizing activities; and when the governing body of the A6M recognizes projects and programs.

As discussed, one of the key distinguishing features of this mechanism is to help achieve a higher level of ambition. To generate additional mitigation, ideas on the table mostly include shaving off a certain fraction of mitigation units generated. For example, if a project generates an emission reduction of 500 tCO2, a 10% shave-off can be applied so that 50 tCO2 becomes canceled and only 450 tCO2 is eligible to be used for NDC obligations. (See this article by Warnecke et al. (2014) for an analysis of four net mitigation delivery options).

The Adaptation Fund receives a share of proceeds from the CDM. A similar provision has been built into the Article 6 Mechanism though it does not specify who the recipient would be. While some countries have sought to direct the funds towards the Adaptation Fund, others want to wait until the arrangements of the Adaptation Fund under the Paris Agreement are clear. Similarly, some countries have argued for a share of proceeds to be generated from ITMOs as well.

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