Over two dozen bilateral agreements have been signed since 2020
Photo: iStock A carbon market transaction involves buying and selling carbon offsets or emissions allowances to reduce greenhouse gas emissions. Sections of Article 6 of the Paris Agreement are now in action by several countries for offsetting carbon emissions.
Article 6 of the Paris Agreement recognises that some Parties choose to pursue voluntary cooperation in the implementation of their nationally determined contributions (NDC) to allow for higher ambition in their mitigation and adaptation actions and to promote sustainable development and environmental integrity.
Two countries can cooperate through the trade of such allowances, where one country sells its excess emissions allowances to another country needing to meet emission reduction targets.
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A country can also purchase offsets from another country to achieve its national targets, such as the carbon sequestered in a plantation in the latter country’s territory.
The rules for such bilateral deals are written in Article 6.2 of the 2015 Paris Agreement. Article 6.2 allows countries to enter into mutual agreements to trade mitigation outcomes (MO) that can be reported and accounted for under an international framework.
In other words, mitigation efforts in one country could be used to fulfil NDC targets in another country.
Article 6.4 of the Agreement, on the other hand, envisages a global unified carbon credit mechanism, which many consider to be a successor to the Kyoto Protocol’s Clean Development Mechanism (CDM).
The Article 6.4 mechanism can only be utilised once the full-fledged mechanism is rolled out for participation, but the relatively flexible Article 6.2 is already becoming the basis of bilateral agreements between countries.
Bilateral cooperation agreements under Article 6.2. This excludes Japan’s agreements under its Joint Crediting Mechanism that have been signed since before the Paris Agreement. Source: CSE
In 2020, Peru and Switzerland became the first countries to sign a bilateral cooperation agreement under Article 6 of the Paris Agreement. Since then, over two dozen additional bilateral agreements have been signed.
Countries like Switzerland, which have high emissions and find limited opportunities for emissions reduction within their territories, are now turning to mitigation efforts elsewhere.
South Korea has been in discussions with six countries including Bangladesh, Cambodia, Laos, Malaysia, Thailand and Vietnam for more cooperation agreements.
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In Switzerland, the carbon dioxide compensation association Klik Foundation will act under a legal mandate to provide internationally acquired MOs to Swiss companies to offset part of their emissions.
These internationally transferred MOs, or internationally transferred mitigation outcomes (ITMO), will be only purchased by the Foundation from countries that have signed a bilateral deal with Switzerland under Article 6.2.
For instance, the Foundation is funding the introduction of electric buses in Thailand, for which it has entered in a contract with a local e-buses producer. The contract will lead to the transfer of 500,000 ITMOs to Klik Foundation by 2030.
Yet another example of a project is loan guarantees for renewable power in Ghana. The Foundation will secure the loans granted by Ghanaian financial institutions by means of guarantees and in return, will get 160,000 ITMOs by 2030.
In 2022, Ghana became the first country to “authorise” the transfer of MOs (thus making it an internationally transferred mitigation outcome or ITMO) to Switzerland under an Article 6.2-based bilateral agreement.
This was from a UNDP-supported Climate Smart Rice Cultivation Project. Ghana came up with a framework for Article 6 implementation in 2022 and the government set up a Ghana Carbon Registry to record and authorise carbon projects.
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The authorisation process in Ghana involves the Carbon Market Office supported by a technical advisory body set up for the purpose of examining activities and corresponding MOs.
Even before the Paris Agreement, Japan established the Joint Crediting Mechanism (JCM) in 2013.
The country enters bilateral agreements with developing countries and provides finance for projects in return for carbon credits that it acquires from the supported projects. It has partnered with 27 countries so far on JCM.
There is currently a high degree of unpredictability regarding the implementation of Article 6. Certain processes, such as the authorisation of MOs, need to be voluntarily framed by Parties, with some guidance from the United Nations Framework Convention on Climate Change (UNFCCC) process.
During the CDM era, projects were issued a ‘letter of approval’ by government authorities. Similarly, under the Article 6 framework, host countries will issue authorisation statements for specific activities.
However, unlike the letter of approval issued for activities under the CDM, the authorisation decision is more decisive and thus more difficult. This is because granting authorisation to sell the ITMOs outside the country means that the country will not be able to count them towards its own achievements.
Consequently, such a voluntary decision-making process requires more institutional capacity.
African countries are being supported by several institutions to develop market capabilities, especially with regard to Article 6, such as the West Africa Alliance on Carbon Markets and Climate Finance and the World Bank’s support for Ghana’s programme.
Similarly, the Eastern Africa Alliance on Carbon Markets and Climate Finance is supporting Article 6 readiness in Burundi, Ethiopia, Kenya, Rwanda, Tanzania, Uganda and Sudan.
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The support is being extended to Asian countries as well. The government of Pakistan and a large independent carbon crediting programme, Verra, recently agreed upon a capacity-building programme for the development of carbon markets in Pakistan.
Host parties, where the projects will be located, are developing these processes and are entering into tailor-made bilateral agreements, along with private efforts to support parties in the implementation of Article 6.
As a result, there are several different pathways with varying degrees of clarity on processes and responsibilities. As the boundaries of Article 6’s flexibility are further explored, stakeholders including host countries and project developers, are hoping for more clarity on the landscape.
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