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Article 6 and Voluntary Carbon Credits

Much has been written about the impact of Article 6 of the Paris Agreement on carbon markets and in particular the voluntary carbon market (VCM). A lot of the discussion seems to be confused, so I will try to provide some clarity.

Article 6 is a Framework for Collaboration

Article 6 provides a framework for collaboration between countries to reduce greenhouse gas (GHG) emissions – allowing them to pool resources to implement emission reducing actions and to allocate resulting reductions between parties in a way that avoids double-counting of the mitigation outcomes. Note that the parties to the Paris Agreement are countries (not companies), the accounts referred to are national GHG inventories and the targets for reducing national emissions are the Nationally Determined Contributions (NDCs).

NDCs are Not a Given

Most developing countries have stated that external finance and technical assistance will be required to achieve their NDCs, and most industrialised countries recognise that voluntary efforts by business will be required in addition to regulations and formal policy measures. The voluntary carbon market consists of businesses (and sometimes individuals) buying credits to compensate or offset some or all of their emissions. The emissions of businesses are calculated using organisational GHG accounting methods that attribute (direct and indirect) emissions associated with various activities, such as energy use and transportation.

While the emissions calculated and reported by businesses are theoretically subsets of national GHG inventories there is no direct correspondence between corporate and national accounts since business activities often span multiple countries and countries do not use corporate reports as direct inputs to their national inventories; these are instead based on national statistics on the purchase of fuels, the production of cement, the number of livestock, the area of forests and so forth. The emissions of businesses and countries therefore overlap – not in a problematic way, from an accounting perspective, but in a similar way that national GDP and corporate financial accounts operate at different levels.

Similarly, NDC targets are not allocated to, nor do they correspond directly to businesses operating within a country, so while a company may reduce its operational emissions within a country, this will not always translate into a corresponding reduction of emissions at the national level.

Carbon Credits Must Move the Dial on Climate Mitigation

Carbon credits are effectively tokens denoting the avoidance of GHG emissions to (or removals from) the atmosphere from planned activities (sometimes called projects) that would not have occurred in the absence of a carbon finance incentive. This “additionality effect” is calculated relative to a reference level that represents either “business as usual” or a credible non-carbon finance scenario. Much of the discussion on the validity of different carbon credits rests on the strength of the additionality test and whether a given project or activity is genuinely moving the dial on emissions or simply free-riding to generate some additional revenue.

All Mitigation Actions are Picked-Up by National GHG Inventories

Emission reductions and removals undertaken for credit generation, direct mitigation actions undertaken voluntarily by business and society and mitigation actions planned by governments should all be reflected within the national GHG inventories and should all contribute towards a country hitting or exceeding its NDC target.

While it is hoped that actions financed by the voluntary carbon market could make meaningful contributions towards achieving or accelerating progress towards national targets, the effects of individual credit related mitigation actions will be difficult to discern within a national GHG inventory.

Efforts are being made to improve alignment between national monitoring systems and voluntary actions. The Verra carbon crediting program is at the early stages of aligning project reference levels with NDC processes. The Natural Forest Standard, a jurisdictional carbon crediting program, is working with national agencies monitoring land use changes to develop regional risk maps defining the forest areas in need of additional protections from land use change, fire and other threats.

Voluntary Credit Transfers Don’t Result in Transfers of National Obligations

Currently the trading of voluntary credits between entities in countries hosting the carbon projects and entities buying the credits makes no transfer of obligations between the countries – the country hosting the project gets the benefit of any reduction as lower emissions towards its NDC, the country of the buyer gets no benefit transferred to it, so there is no double counting of the benefit at the level of the Parties to the Paris Agreement.

Thus, while additionality tests and reference levels should be updated to ensure carbon credit generating actions are still moving the dial, relative to national policies, the assertion that credit generating activities must be excised from NDC targets under Paris, Article 6 is incorrect.

The situation would be different if the buyers of credits insist upon the transfer of mitigation obligations from the implementing country to the buyer’s host country. The implementing country would first have to analyse changes to the national inventory to ensure that they could discern the effects of the mitigation actions; second they would need to ensure that by trading those mitigation obligations they could still achieve their NDC targets without negative economic consequences. Such requirements would be onerous and are unlikely to be undertaken on a voluntary basis, but could be justified within the realm of compliance trading.

In conclusion, accounting for carbon at corporate, project and country levels creates
overlaps but, as long as these are understood, do not lead to problematic double-counting. Project reference levels will need to be updated, over time, to ensure that crediting remains additional and keeps moving the dial relative to national policies.

Dr Richard Tipper MBE, NFS Program Director