Article 6 and Voluntary Carbon Markets
The completion of the Article 6 rulebook of the Paris Agreement is a necessary step towards building a robust framework in which participants can use collaborative approaches and a market-based mechanism to promote climate and sustainable development goals. There is widespread expectation that the Article 6 rulebook will create the conditions for effective and robust international carbon markets to thrive, including continued, significant growth in private sector investments through voluntary carbon offset projects. Increasing the credibility and integrity of these markets and greater alignment between voluntary and compliance markets can increase the adoption and the efficiency of these markets in achieving their goals. It will also pave the way for cooperative approaches that allow the financing of technologies needed to meet climate targets and raise climate ambitions of participating countries. The mechanism under Article 6.4 could pave the way for the development of a new crediting mechanism that avoid the shortcomings of the Clean Development Mechanism.
However, there are still some uncertainties surrounding the wider implications of Article 6 on carbon markets. This paper highlights the potential impact of Article 6 on the diversity of carbon credits available for investors and the uncertainty faced by investors when investing and trading on projects and their underlying credits as well as for corporations, particularly in what claims they can make by purchasing these different carbon offsets. Participants in carbon markets will be closely examining the implications for investors in terms of balancing investments in adjusted versus non-adjusted credits and accessing high quality projects including carbon removal credits. They will also be considering options to manage some of the risks associated with governments’ authorization processes, how corresponding adjustments (CAs) are applied, the governance frameworks in place and assessing the financial and reputational risks of some countries not being able to meet their nationally determined contribution (NDC) while engaging in large transfer of internationally transferred mitigation outcomes (ITMOs). Participants will also be monitoring closely the emission reductions generated under the Article 6.4 mechanism and whether these will gain the credibility and integrity to be permitted to be used in other compliance markets such as the EU-Emission Trading System (ETS), encouraging convergence across markets. Various supervisory efforts are already underway to help reduce uncertainty and provide more clarity for users of these markets. Market participants will be monitoring clarifications from a variety of initiatives and bodies including the United Nations Framework Convention on Climate Change (UNFCCC) Article 6 Supervisory Body (scheduled to meet twice in 2022), the Taskforce for Scaling Voluntary Carbon Markets (TSVCM), the Integrity Council for Voluntary Carbon Markets, the Voluntary Carbon Market Integrity Initiative (VCMI), and the various accreditor organizations such as Gold Standard and Verra. Also, the UN Secretary General has recently launched a high-level expert group with the task of assessing current standards and definitions for setting net-zero targets by non-state actors. There is hope that that as rules, guidance, and frameworks from regulated and market led initiatives consolidate, this would create the regulatory certainty to ensure the environmental integrity that investors seek.