Climate Change Negotiations

Some Thoughts on Rulebook Negotiations of the Paris Agreement (Article 6)

It has been 5 years since the Paris Agreement, which replaced the Kyoto Protocol, entered into force. However, the rules, principles, and procedures about its operationalization, called the Rulebook, required to make so many new elements functional could not be finalized in the exhausting negotiations of the United Nations Framework Convention on Climate Change (UNFCCC) Conference of the Parties (COP).

Although the parties in Katowice, where COP 24 was held, tried to show how resolute they were about the full implementation of the Paris Agreement in a short period of time by ensuring a high level of participation in the session, the negotiations were locked in the Article 6 negotiations that regulate the market mechanisms and the Rulebook was not completed. The next negotiations were held in Madrid, the host of COP 25, with efforts to reach a consensus on Article 6 at the gist of the session. Despite the fact that COP was the longest session in history, no result could be reached as in the previous session.

It is very difficult to say that the optimism in the other sessions still exists as we are ahead of the COP 26, which could not be held in 2020 due to the Covid-19 and is going to be held in Glasgow in 2021 under serious health measures for delegations. Because of the crisis experienced in the global economy caused by the pandemic, it is now more difficult to attract attention to the climate change of the high-level politicians than before. Also, the headliner of the agenda of this COP session is no longer just Article 6. Considering that there are updated Nationally Determined Contributions (NDC) and post-2025 climate finance issues in this COP, it is possible to say that debates will be conducted at the technical level in the Article 6 negotiations, rather than the leadership of the high level.

In this article, I will revisit the issues that are still not resolved within the scope of Article 6, and I will share my expectations regarding the course of the negotiations within the present state.

From Kyoto to Paris

When we look at the past, it is easy to see that the market mechanisms have been used for a long time under the UNFCCC. With the Kyoto Protocol, emission reduction commitments, which are binding on the countries listed in the Annex-1 of the UNFCCC, were determined. In order to help countries, realize these commitments, tools called “Flexibility Mechanisms” were introduced, and cooperation between parties was encouraged through international projects or emissions trading.

Briefly, the Protocol established three different flexibility mechanisms. These mechanisms are; international emissions trading (IET), Clean Development Mechanism (CDM), and Joint Implementation (JI).

  • Under IET, countries that met their commitments under the Protocol could sell their polluting rights to other countries that needed additional emission reductions to meet their targets. In other words, it would be possible to establish an international emissions trading system.
  • With the CDM, parties listed in the Annex-1 of the UNFCCC can earn Certified Emission Reduction credits (CER) per tonne of CO2e mitigated with the projects in non-Annex-1 parties, and use these credits to meet their commitments.
  • In JI, another mechanism similar to CDM, Annex-1 parties are allowed to obtain Emission Reduction Units (ERUs) if emission reduction projects were carried out among those countries.

All these tools were used by the Annex-1 parties, especially in the first commitment period of the Protocol (CP1: 2008–2012), to achieve their goals. But in the second commitment period (CP2: 2013–2020), some Annex-1 parties did not undertake any commitment in this period. As a result of this, the demand for these tools has decreased to some extent. On the other hand, many developing countries, especially with CDM, have attracted investments through emission reduction projects.

Establishing the Market Mechanism in Paris

Before the negotiations of the Paris Agreement were carried out, some lessons were learned from the unwillingness of the countries in the CP2 period to make new commitments for various reasons and from the historic Copenhagen failure (COP 15). The desire of the countries to abandon the supra-national “top-down” approach came out and therefore a different method of pledging had been seeking. In this manner, countries were called upon to prepare (Intended) Nationally Determined Contributions (NDC), which adopts the “bottom-up” approach, in other words, to let them define their reduction targets, and to participate in the COP21 negotiations in this way.

Celebration of the COP Presidency and the UNFCCC Secretariat for the Adoption of the Paris Agreement

As the last days approached in Paris, between 29 November and 12 December 2015, in a time where there was still no consensus and the red lines of the countries were extremely strict, the French presidency was conducting intensive diplomacy by bringing together the country groups that it could not bring to a common point in the negotiation sessions. After arduous sessions, with the announcement that consensus was reached on 12 December 2015, a brand new market mechanism was created as Article 6 under the Paris Agreement.

The prominent items within the scope of Article 6 are as follows:

  • With Article 6.2, countries will be able to cooperate voluntarily and use internationally transferred mitigation outcomes (ITMOs) to realize their NDCs. Some current examples for this mechanism could be the linking between the European Union Emissions Trading System (EU ETS) with the Swiss ETS and Québec Cap-and-Trade System with the California Cap-and-Trade Program.
  • In article 6.4, under the supervision of a body to be established under the COP, it is possible to trade the credits obtained through projects that contribute to sustainable development and provide emission reduction, and while doing this, it is aimed to achieve overall mitigation in global emissions (OMGE).
  • By Article 6.8, it will be possible to use non-market approaches such as taxes in a way that will also serve the goals of sustainable development and poverty reduction.

As can be seen, although the market mechanism created with the Paris Agreement, is not much different from the flexibility mechanisms under the Kyoto Protocol and it also brings with it some concepts such as non-market instruments, ITMO, OMGE, or the establishment of a new UNFCCC body for surveillance purposes. However, the most important factor that distinguishes market mechanisms from flexibility mechanisms is that not only Annex-1 parties but all parties now have NDCs in the Paris Agreement, in other words, all countries have commitments. Thus, the negotiations on market mechanisms have become a topic that is followed closely by all countries, whether they have the capacity to implement these mechanisms or not, instead of being the sessions where more attention was paid to Annex-1 parties, unlike in the past.

Why Can’t Compromise on Article 6 Rulebook ?

This section will try to remind why a consensus could not be reached in the Rulebook negotiations and what are the issues discussed. For a better understanding of what has been said up to this point, I kindly invite you to read not only Article 6 but the entire Paris Agreement at this moment. I believe that the connections between the articles or the reasons for the creation of the articles will be understood more easily in this way so that the problems of the countries in Article 6 could be better apprehended.

In reviewing the issues around which the discussions focussed on, the outcomes of the UNFCCC Interim Sessions held in 2021, as well as the results of the Informal Ministerial Consultations held under the UK Presidency and COP25 documents will be taken into account.

In this direction, we can talk about four main issues that have locked the negotiations of Article 6 Rulebook.

  • The first of these is the term OMGE, which can be deemed as the removal of a portion of the credits obtained from the projects, which will be less than the emissions reduced by the project, in other words, an absolute emission reduction instead of offsetting the emissions. For example, let’s assume that the UK will invest in solar farms in Egypt. If this project is completed by ignoring OMGE, the UK will expect to obtain a credit certificate equal to the emission reduction amount provided by this investment in Egypt and use it to meet its own NDC. On the other hand, OMGE aims to reduce emissions on a global scale in absolute terms by providing a certain amount of deduction from the certificate, rather than a 1:1 approach. The concept is included in articles 6.4(d) and 6.2. While countries and negotiating groups by-and-largely agree on the general concept of OMGE, the disagreement takes place over how much the cut or cancellation rate will be. In addition, some parties support voluntary deductions around certain criteria, while others support mandatory cancellation.
  • Another issue that cannot be decided is whether the credits that were generated before 2020 but could not be used under the Kyoto Protocol will be allowed to be used in the new period, at least within a transition period. There is a serious objection from the developed countries to this transition period request coming from countries benefiting most from the CDM. To explain with an example, let’s assume that there is an offshore wind farm investment coming from Switzerland to Brazil within the scope of CDM. If CDM projects before 2020 are canceled without a transition period, then Brazil will not be able to count the credits generated by emission reductions from this project in the new period, and this will bring an additional burden in terms of emission reduction. Therefore, countries preferred for CDM projects such as Brazil and India claim that the existing infrastructure of CDM can be used under Article 6 context and that these investments will have a leverage effect for the next period, and demand that usage of these loans be allowed at least until 2025. On the other hand, developed countries state that a possible transition period will make the already very difficult 1.5ᵒC target even more unreachable, and they think that there is an enormous amount of unused credits and that the structure created by Article 6 will be damaged if they are put into the system. So much so that at the Pre-COP held in Costa Rica before COP 25 in 2019, 32 countries including developed and developing countries published an ambitious statement on the negotiations called the San Jose Principles. In this statement, besides underlining the importance of OMGE, parties clearly emphasized that they are against the usage of the credits remaining from the Kyoto Protocol period in the new period. In the Interim Session of the negotiations in 2021, it is possible to say that there has been some relaxation in the attitudes of some developed countries compared to the past. As a matter of fact, it is stated that a possible transition process can be accepted if it is prepared in a way that takes certain issues into account. However, it should be underlined that this statement of developed parties does not mean that every demand of the developing countries regarding the transition process will be accepted.
  • Another issue on which the discussions could not be finalized is “share of proceeds (SOP)”. This expression, which we are familiar with from the Kyoto Protocol, was basically created in order to transfer a certain part of the credits that arise during the use of flexibility mechanisms to cover administrative expenses and a part of the adaptation costs (Kyoto Protocol, Article 12.8). Similarly, this term found its place under the Paris Agreement, referring to article 6.4. The most fundamental point of the discussions is that some country parties stated that there is no legal basis for the implementation of the SOP, that it would deter mitigation actions, and that the SOP would not be applicable for certain types of cooperation defined under this article. Another discussion topic is about the percentage of this deduction, which will be used to cover administrative costs and transferred to the Adaptation Fund. In the negotiations, developing countries express that this ratio should be at the level of 5%. It is expected that the relevant parties will evaluate options at the 2%, 5%, and 10% levels. In addition to these discussions, another issue that countries need to agree on is the demand, especially from developing countries, that the SOP is used not only for article 6.4 but also for article 6.2 of the Agreement. Although all parties agree that adaptation financing should be predictable, a mandatory application for article 6.2 is requested by some parties. While developing countries indicate that their expectations of a predictable adaptation finance flow can be met in this way, they underline that they will demand the establishment of a separate mechanism if developed countries do not agree to this.
  • The last topic of discussion we should mention is double-counting. It is aimed that a project carried out under market mechanisms will not be used in achieving the emission targets of both the investor (buyer) country that receives credit from the project and the host country. To explain, let’s assume that Germany will do a renewable energy project in India. In this project, Germany will gain a credit equal to the amount of emissions it has reduced and will be able to use these credits to meet the targets it has set in its own NDC. In India, where the project is made, if the double counting is neglected, this project will achieve success in reducing its total emissions, not only in that year but also in the following years, with the emission reduction obtained from this project. While the investment made and the amount of reduced emissions will be realized only once for generating credits, the said reduction will be used both by Germany through credits and by India due to its contribution to the reduction in its total emissions. Preventing double-counting is an issue accepted by all parties that such an application cannot be accepted in a conjuncture where the 1.5ᵒC target has become so difficult to reach. On the other hand, countries are intensifying their discussions on the applicability of avoiding double-counting in emission reductions in areas not covered by NDCs. In this context, the parties have adopted a concept called “corresponding adjustment” to prevent double-counting of emission reductions within the scope of NDC. With this concept, while the parties gaining credits from the project can use them to meet the target in its NDC, the country hosting the project has to make the necessary arrangements and not take into account the amount of emission reduction, when preparing and presenting its NDC. Discussions under this topic also capture whether emissions outside the scope of the NDCs should be subjected to the corresponding adjustment at least for a period of time.

It should be noted that apart from these aforementioned issues, the discussions on other elements of the article continue. In particular, we are at the beginning of the way in dialogues on how to operationalize non-market mechanisms of Article 6, functional. Clarification of a work program on this is awaited by the negotiating groups. In addition to this, discussions are continuing how and in what way a credit registry system will be established.

What Should We Expect From COP26?

To sum up, in light of all this information, it would not be wrong to say that the discussions on the Article 6 Rulebook will be tough as in the previous sessions. On the other hand, it seems possible to expect the COP 26 agenda to be dominated by the issues of climate finance after 2025 and the evaluation of the updated NDCs. As mentioned above, in this short period before COP 26, many unresolved issues remain at the technical level. This makes it very difficult to meet expectations of the successful completion of the Rulebook in Glasgow.

For instance, in article 6.8, which refers to non-market mechanisms, there are still some reservations about its definition, 5 years after the entry into force of the Agreement. Another point that should be underlined is that the discussions on this matter are still far from being mature. Moreover, least developed countries and small island developing states, which are disadvantaged due to the lack of capacity in terms of benefiting from market mechanisms, attach more importance to the contributions from the SOP, and they have an attitude towards the provision of capacity building activities by the UNFCCC Secretariat within the scope of Article 6.

Boris Johnson at the UN Climate Change Conference

The steps to be taken by the UK Presidency will be decisive in order to conclude the negotiations, which could not be concluded in the Katowice sessions, where the high-level political will seems determined but could not be completely successful, and in Madrid, where the market mechanisms were the centerpiece of the agenda, in Glasgow in an environment with such uncertain elements. It is possible to say that the parties are somewhat flexible compared to the previous year in both OMGE and SOP issues. The process, supported by analytical studies published by international organizations and think tanks, especially OECD, needs to be reinforced with reports to be prepared and workshops to be held under the UNFCCC, and to be effectively explained to country groups.

The steps to be taken by the UK Presidency will be decisive to conclude the negotiations, which could not be concluded in the Katowice sessions, where the high-level political will seems determined but could not be completely successful, and in Madrid, where the market mechanisms were the centerpiece of the agenda, in Glasgow in an environment with such uncertain elements. It is possible to say that the parties are somewhat flexible compared to the previous year in both OMGE and SOP issues. The process, supported by analytical studies published by international organizations and think tanks, especially OECD, needs to be reinforced with reports to be prepared and workshops to be held under the UNFCCC, and to be effectively explained to country groups.

The Paris Agreement had been designed as an agreement in which every article was related to each other. Due to this fact, the Agreement continues to be inoperable with each passing day, where the rules, principles, and procedures for market mechanisms also affect transparency and global stocktake frameworks. Considering that we only have two years left until the global stocktake, the first of which will be held in 2023, negotiation groups and all organizations that support the negotiations with their analytical studies should intensify their efforts in the coming period. At this point, it is of great importance that technical experts make enough progress in the negotiations to bring the issue to the level of political decision-makers.

Although the current situation leads us to be pessimistic, there are many examples, notably, as we saw in the COP 21 negotiations, that technical disagreements can be easily resolved in the presence of a high level of political determination. With the right steps to be taken in this context, under the leadership of country leaders, it seems possible that the Rulebook will be finalized at COP 27, if not this year, with an intense work program and diplomacy.

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Carbon Pricing and Climate Finance Expert | R and Python Enthusiast | linkedin.com/in/ardauludag

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Arda Uludag

Arda Uludag

Carbon Pricing and Climate Finance Expert | R and Python Enthusiast | linkedin.com/in/ardauludag

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