Article 6 May Trigger a Split in Carbon Finance Market

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  • Policymakers meeting at the United Nations Climate Change Conference, or COP26, in Glasgow will be held in November 
  • A tense debate on whether or not private buyers of carbon credits should also be part of this accounting.
  • A Glasgow decision in favor of a framework involving privately used credits may split the current voluntary carbon market.

Policymakers meeting at the United Nations Climate Change Conference, or COP26, in Glasgow in November will face a subject set to change the future course of the voluntary carbon markets , says an article in S&P Global

About  Paris Agreement

Under the Paris Agreement, governments worldwide have pledged nationally determined contributions to put in place mitigation efforts to reach specific targets in the fight against climate change. The main goal is to collectively limit the global temperature increase by the end of this century to 2-degree Celsius .

The draft Article 6 of the Paris Agreement allows countries to achieve their mitigation goals in several ways by:

  • setting up compliance instruments 
  • resorting to a yet-discussed new crediting mechanism akin to the UN Clean Development Mechanism
  • exchanging voluntary carbon credits among each other.

Governments have been unable so far to use the voluntary carbon credits to meet their NDCs due to lack of a mechanism to keep track of where the credits go, to avoid the same credit from being counted by both the host country and the purchasing country.

The big disagreement

A tense debate is unfolding on whether or not private buyers of carbon credits should also be part of this accounting.

Some argue that it’s fine to have the same credit used by a private company to offset its emissions and also by the host country (the country where the underlying carbon project is located) as a way to reach its NDCs.

Another group of stakeholders believe that each credit should be used only once, either by the private company to offset its emissions, or by the host country as a tool to meet its NDCs.

Opinions about The Paris Agreement

“The two types of claims are fundamentally different. The host country’s claim is being made against their NDC under the Paris Agreement. A company’s claim is a voluntary one that is not tied into any NDC anywhere else,” Verra CEO David Antonioli said.

“Under our approach, a company can claim that they have contributed toward their climate goal by buying credits from a project—and a host country can also do that [by claiming the same credits against its NDCs],” Antonioli said.

“Forbidding host countries to use credits produced on their territory and used by private companies as offsets would slow down the deployment of carbon projects”, he added.

“Host countries would lose the ability to claim the credits against their NDCs, so the effect will be that they will be disincentivized to authorize projects in their jurisdictions, to the detriment of the need to solve the climate emergency, which requires accelerated and massively scaled-up actions,” Antonioli said.

But those who advocate for a one-time use of carbon credits believe that a double claim will discourage host governments from putting in place crucial reforms needed to shift the economy away from fossil fuels.

“Many Gold Standard credits are being used by companies pledging to offset their emissions. We want to make sure that companies can trust the integrity of the credits that they buy. In the Paris context, this means ensuring that credits used by companies are not also claimed towards the host country’s NDC, potentially displacing other emission reductions,” said Hugh Salway, Head of Environmental Markets at Gold Standard.

Core carbon principles

The five core principles are additionality, overestimation, permanence, exclusive claim, and the provision of additional co-benefits in line with the UN’s Sustainable Development Goals.These principles constitute the basis on which the whole voluntary carbon market is built.

The exclusive claim principle already requires that each carbon credit is only claimed once, and it must include proof of retirement once it has been used to reach one’s mitigation targets.

Under the additionality principle, a carbon project can issue credits only when it is not already financially attractive in the absence of carbon credits, it is not common practice or legally required.

For some, this principle alone should prevent a double use of a credit in a voluntary and compliance system since the carbon credit would finance a reduction which the host country in any case committed to make. It won’t be additional anymore.

But the debate around the corresponding adjustment seems to be highlighting the need for a completion of these two principles.

What is Non-deterrence principle

A non-deterrence principle is also emerging. It requires a carbon project or voluntary carbon finance and doesn’t discourage host countries to put in place the action mandated by the Paris Agreement.

It’s a principle helping define the relationship between voluntary carbon markets and compliance carbon markets.

This principle may  help voluntary carbon markets shrug off the perception that their very existence is preventing the transition to greener technologies.Voluntary markets  are there to offer a way to reduce or remove emissions that are still deemed inevitable while we wait for cleaner alternatives to rise.

A split in market

A Glasgow decision in favor of a framework involving privately used credits may well split the current voluntary carbon market in two halves.

On the one hand is a market of voluntary credits with a corresponding adjustment, usable either by companies and individuals to offset their emissions or by governments to meet their NDCs. On the other hand, a market of credits without corresponding adjustment, usable only by host countries to meet their NDCs and not by private companies for offsetting purposes.

The second market would rely on a contribution model, with carbon projects financed by donations either from individuals or companies with no offsetting needs.

“This model won’t be [based on] tradable units. It would be based on targeted donations,” said Florian Eickhold, climate finance and environmental markets expert at Germany’s project developer Atmosfair.

Demand for this type of project may soon emerge, Eickhold said: “At Atmosfair we are preparing projects ready to receive a donation. We see upcoming demand. Some companies are moving from an offsetting approach to a contribution claim, or combine both.”

Projects combining both models could see part of the project financed through donations, and the remaining part financed through the issuing of carbon credits linked to a corresponding adjustment. 

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Source: S&P Global

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