OECD-CEFIM-IEA Focus Group Discussion IV: Regulation and linkages to international carbon markets, 17 May 2022, Paris

1. Page 1
Overview of Article 6 and the Paris Agreement
Rulebook
Luca Lo Re
IV FGD – Session: “Linkages to international carbon markets”, 17th May 2022

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Agenda
• Quick history of UNFCCC international carbon markets
• Rationale behind Article 6 of the Paris Agreement
• What is Article 6?
• COP26 Article 6 rulebook
• Article 6 outlook

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Phase 3
Fragmentation
Phase 2
“Gold Rush”
Phase 1
Emergence
UNFCCC international carbon markets: a “rollercoaster” history
Degree of
support of
international
market
mechanisms
Source: based on Michaelowa et al. 2019
Phase 4
Post-Paris
Agreement
1995 2000 2005 2010 2015 2020
1st KP
Commitment Period
Doha Amendment (2nd KP
Commitment Period)
Kyoto Protocol (KP)
agreed
COP21: Paris
Agreement
agreed
Paris Agreement
begins
COP26:
Article 6
Rules
agreed

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Why Article 6? Rationale for international carbon markets in the
Paris Agreement
• Article 6.1: “Parties recognize that some Parties
choose to pursue voluntary cooperation in the
implementation of their nationally determined
contributions to allow for higher ambition in their
mitigation and adaptation actions and to promote
sustainable development and environmental integrity”
• Potential of Article 6 to improve the economic
efficiency of NDC implementation (IETA/CPLC):
- Reduce implementation costs to up to USD 250
billion / year in 2030, or
- Facilitate the removal of 50% more emissions (=
increase ambition by 5 GtCO2 / year) at no
additional cost.

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What is Article 6?
Article 6.2 Article 6.4 Article 6.8
• Accounting framework for
voluntary co-operative
approaches involving the
use of Internationally
Transferred Mitigation
Outcomes (ITMOs) towards
NDCs;
• Bilateral /multilateral
transfers of ITMOs between
Parties (no UNFCCC
supervision, accounting
rules agreed under
UNFCCC at COP26).
Market based Non-market based
• Mechanism to contribute to
the mitigation of GHG
emissions and support
sustainable development
• Involve public and private
sector;
• Under international
oversight through the
UNFCCC;
• Has to deliver an Overall
Mitigation of Global
Emissions (OMGE)
• Has to provide a Share of
Proceeds (SOP) to the
Adaptation Fund
Non-marked based
approaches to promote
mitigation and adaptation
ambition

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What was agreed at COP26 on Article 6?
• Article 6 rulebook adopted:
- Had been negotiated since 2016
- Many technical items were deferred to the work programme. Current challenge: implement new rules
without compromising environmental integrity
• Article 6.2:
- Robust accounting framework – application of corresponding adjustments at first transfer (for
NDCs use) or at authorisation (for other purposes)
- No banking of ITMOs across NDC implementation periods
- SOP and OMGE encouraged on a voluntary basis
• Article 6.4:
- Mechanism established – aligned with 6.2 accounting
- Mandatory SOP at 5%, OMGE at 2%
- Transition of Kyoto activities and units
• Article 6.8: establishment of “Glasgow Committee for Non-Market Approaches”
• The IEA is contributing to promote dialogue on and enhance understanding of
technical climate negotiation issues through the OECD-IEA Climate Change
Expert Group (CCXG)

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What’s next for Article 6 and international carbon markets?
• Intersessional negotiations in Bonn – 6-16 June:
- Many Work Programme items to be discussed
- COP27
• Interplay with Voluntary Carbon Markets:
- Host Party approval and authorisation process – domestic regulatory
alignment? Application of Corresponding Adjustments?

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luca.lore@iea.org

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Points of reflection on Article 6 rulebook
As all negotiations: compromises had to be done by different Parties on different points:
o Article 6.2 accounting framework:
• Positive: overall strong framework
• Potential risks: averaging accounting method for single-year NDCs
o No banking of ITMOs between NDC implementation
• Positive: mitigation outcomes thus must be used in the same NDC implementation period in which they were
generated
• Potential risks: potential challenges with agreement outside Article 6 room for "common timeframes" -
interactions yet to be analysed in details
o Crediting baselines
• Positive: stringent principles for baseline setting and additionality;
• Potential risks: technically difficult to implement
o CERs transition
• Positive: limited in scope, time and use
• Potential risks: not aligned with Paris Agreement goals and latest available science

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How do international carbon markets function?
Source: ETC, 2022

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Focus on international carbon markets / taxonomy of carbon credits
How is the credit generated?
Emission
reduction projects
w/o storage
Emission
reduction projects
with storage
Avoided emissions NBS
Technology-based
CDRs
Counterfactual forward-
looking baseline:
RE, cleaner cookstoves
Retrospective data:
Methane/N2O
abatement
CCS/CCUS on industrial
facilities or FF plants
Non-exploitation of FF
reserves, avoided
deforestation
Afforestation,
reforestation,
ecosystems restoration
DAC(S), BECCS
Is carbon stored?
No
Yes Yes Yes
Yes
Source: OECD/IEA CCXG, 2021 -adapted from Oxford, 2021
Emission reduction
Prevent additional
future GHG emissions
from being emitted
Carbon removal
Remove from the
atmosphere previously
emitted GHGs

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Emission
removal
Emission
removal
technologies
DACCS, BECCS, EW High
Availability be limited by global
removal capacity and land and storage
site constraints
Nature-based
solutions
A/R Unclear
High vulnerability to the risk of non-
permanence of stored emissions; land
availability limitation
Are all carbon credits suitable in a net-zero pathway?
All types of mitigation activities needed to get to net-zero, but their suitability to issue credits in
international carbon markets in a net-zero context varies:
Category Sub-category Examples Suitability for issuing
credits in a net-zero
context
Limitations / concerns
Emission
reduction
Emission
reduction
without storage
EE, RE Low-High
Some activities might increase absolute
GHG emissions at a slower rate than a
counterfactual baseline
Emission
reduction with
storage
CCS Mid-High -
Emission
avoidance
Emission
avoidance
Non-exploitation of fossil
fuel reserves, avoided
deforestation
Low
High vulnerability to the risk of non-
permanence of stored emissions

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Voluntary carbon markets (VCMs)
• VCMs:
- Private standards
- Independent; no UNFCCC, nor Governmental oversight;
- VCM credits often used to support corporate carbon/climate neutrality
claims.
- Interaction between VCMs and Article 6 still unclear.

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Challenges and opportunities for international carbon markets
• Carbon markets have shown so far methodological limitations that can hinder
their environmental integrity, including:
- Weak quantification of emission reductions and removals, i.e. due to
lack of data, poor data quality, old data, baseline methodologies with high
uncertainty;
- Non-respect of “additionality” criterion;
- Double counting / issuance / claiming;
- Risk of non-permanence of stored emissions.
• Addressing these limitations is technically feasible but requires a co-ordinated
effort by many actors.