Article 6 Operational Labyrinth: Strategic Patience and Rigorous Planning

Authored by Pedro Carvalho & Alexis Massot

Image credit: Voices of Youth

With a few days before the start of COP28, negotiators will need to face remaining operational matters for the complete implementation of the Paris Agreement’s Article 6. However, even with the conclusion of the so-called Article 6’s Rulebook, the de facto establishment of an operational and working mechanism at a host-country level is expected to be fraught with intricacies, placing a weighty responsibility on host countries tasked with issuing Letters of Authorization (LoAs) for Corresponding Adjustments (CAs) that will need to delve a delicate interplay of policy, risks, and strategic governance, to unlock the full potential of Article 6 in a manner that, ultimately, supports host-country’s NDC and helps to raise ambition to achieve the Paris Agreement’s targets.

Central to the mechanism of Article 6 is the Corresponding Adjustment, a concept that, while technically complex, holds the key to ensuring integrity and environmental soundness in the cooperative approaches within the Paris Agreement’s scope and objectives. The issuance of an LoA by a host country signifies a commitment to adjusting its national greenhouse gas inventory to account for the transfer of mitigation outcomes either against an NDC or for “Other Mitigation Purposes” as per the text of the agreed decision in Glasgow, during COP26. This process is not straightforward; it requires coordination of policy instruments and institutional arrangements to ensure that LoAs are provided in the right circumstances and scenarios to benefit the country that is committing to adjusting its inventory. Host governments and respective designated authorities often find themselves at a crossroads where LoA decisions will have long-term implications for their NDCs and the trust of investment parties mobilizing climate finance under Article 6’s cooperative approaches.

Figure 1. Transfer of emission reductions following CA between Host and Acquiring country (Gold Standard)

Decisions pertaining to Article 6, if made hastily or without adequate deliberation, can trigger a cascade of detrimental consequences. This includes the misallocation of climate finance resources at the country level towards activities that could be implemented with the host country’s resources/technologies without the CA trade-off or, perhaps, the excess adjustment of mitigation outcomes at the national inventory after unplanned granting of LoAs, ultimately rendering the host-country’s NDC unachievable and undermining its climate pledges. Of course, host countries may provide LoA towards inexpensive mitigation solutions. Still, it is essential to ensure that such a measure is aligned with its NDC and long-term policy to avoid a backlash.

Such actions can compound legal uncertainties and result in far-reaching implications. Once a LoA is issued, a host country becomes committed to a trajectory that may not align seamlessly with its long-term climate strategy. At this moment, the host government will be faced with two alternatives: either continue operating the adjustment at its Biennial Transparency Reports (BTR) and further undermining its ability to achieve its NDC or, one could argue, the LoA can be unilaterally revoked and/or rendered illegal by the legal system. Needless to say, the latter would create uncertainty for long-term investments at the host-country level, which could undermine investing parties’ trust in committing to cooperate with that government under Article 6 approaches. Given the high stakes and the narrow margin for error, host countries must approach these decisions while being conscious of their implications and with a clear strategic foresight.

While it is not exactly rocket science, the implementation of CAs is far from routine. It requires defined institutional design, a robust domestic carbon framework with clear rules and allocation of responsibilities for development of carbon projects, considers local challenges, and must be in alignment with ever-evolving climate technology innovations. From ownership rights to additional safeguards, host countries must codify aspects of carbon project governance to ensure that international methodologies are correctly applied, taking into account local reality and circumstances, ultimately ensuring a positive local impact.

Further, and beyond carbon project design and implementation rules, the integrity of CAs is closely tied to the clarity and right ambition level of a host country's NDC. An NDC needs to clearly identify unconditional and conditional targets at the sub-sectorial economic level or even the development of intervention’s whitelists, thus facilitating the alignment of domestic actions with Article 6 mechanisms to create clear evidence and benefits of Article 6 cooperation. Strong Measurement, Reporting, and Verification (MRV) systems at the country level will further enable tracking of the impacts at the specific subsectors where the intervention is developed. This, in turn, ensures that CAs contribute to the host government's priority development sectors (energy, waste, transportation) and prioritizes Article 6 cooperation on activities with high margin abatement cost for the host country, rather than detracting from its climate goals. The delicate balancing act of aligning ambitious targets with the operational demands of Article 6 is a task host countries must navigate.

However, that is not all - transparency and accurate reporting form the bedrock of trust in Article 6 mechanisms. Adhering to the Enhanced Transparency Framework and submitting Biennial Transparency Reports in a timely manner is not just a procedural requirement; it is fundamental to avoiding double counting emissions, correcting the allocation of finance and resources, and ensuring the environmental integrity and success of CAs. These processes ensure that adjustments in the national GHG inventory are accurately reflected and recognized internationally, thus fostering trust and integrity within the system.

Ultimately, the potentially transformative impact of Article 6 on climate action is undeniable. Yet, unlocking its full potential demands a meticulous, strategic, and patient approach. Host countries play a pivotal role in this endeavor by nurturing a harmonious regulatory framework that aligns seamlessly with the Paris Agreement. Concurrently, investors must undergo a paradigm shift, readjusting their expectations to prioritize long-term sustainability over fleeting gains. The pursuit of Paris-aligned carbon markets leaves no room for shortcuts; instead, it necessitates a unified effort to cultivate the capacity for meaningful collaboration and establish an ecosystem where Article 6 can authentically catalyze lasting benefits.