COP27: Article 6’s carbon markets mechanism strikes back
Time to read: 1.5 minutes
Controversy over authorisation has the potential to undermine the viability of the carbon market mechanisms under Article 6.
Just when it was thought that there was cause for quiet optimism that headway could be made on resolving technical elements to support the implementation of the various provisions of Article 6 to facilitate mitigation outcomes, draft texts released over the weekend by the contact groups who had facilitated those discussions showed some differences remain, and some new critical ones emerging.
Why Article 6 matters
Article 6 contains two mechanisms to support international carbon markets and rules for non-market approaches.
The draft texts make clear that the contact groups on Article 6.2 and Article 6.4 were unable to reach consensus on the draft decisions. These texts were submitted to the SBSTA plenary on Saturday evening. SBSTA has been charged with responsibility to provide the technical advice to the CMA on operationalising the provisions in Article 6. The contact groups also submitted cover decisions for Article 6.2 and Article 6.4 which make clear that the draft outcomes do not reflect consensus among the Parties, and further work by the CMA will be necessary to finalise it.
There were also related developments in relation to work being done by the SBI on the future of CDM under the Kyoto Protocol and how it can be transitioned into mechanisms under Article 6.
The discussions over Article 6
The draft text for Article 6.4 retains a significant amount of bracketed text. This means that the text is not agreed and often can contain a number of competing options proposed by different party representatives or national groupings. The issues of contention appear to be:
- the operation of the registry of the centralised Sustainable Development Mechanism;
- the transfer of CERs from the CDM registry; and
- transaction procedures including the issue of authorisation of emission reductions by host countries.
The issues on registry operations and transaction procedures cross over with the negotiations over Article 6.2.
By far the most controversial issue in the Article 6 talks at COP27 concerns that of authorisation, with some countries wanting to retain the right to revoke or amend the authorisation of emission reductions even after they have become ITMOs (Internationally transferred mitigation outcomes) or credited as emission reductions under Article 6.4. This has the potential to undermine the viability of the market mechanisms under both Articles, since market participants will be significantly concerned by the risk of a host country withdrawing authorisation for a project. Additionally, it could stymie financial flows to support emission reduction projects, and even undermine the integrity of those Article 6.2 bilateral agreements that have already been announced.
Get in touch
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.