One of the final components of creating a rulebook for 2015’s Paris Agreement is fleshing out Article 6, a central feature of the negotiations at this year’s COP. Negotiators are focused on several technical issues and disagreements about the rules for the carbon trading accounting that Article 6 contemplates. These include a number of discrete points of contention, but a quick look at a couple of them can help illustrate some general dynamics of the debate. First, the parties disagree about the scope and size of proceeds that will be forwarded to vulnerable countries for adaptation from the financing for carbon transfers. Second, there are differing views about the stringency of requiring “corresponding adjustments” to avoid double-counting, or having both the buying party and the selling party claiming credit for the same emissions reduction activities.
Each of these are important considerations, and observers are paying close attention to how compromise about the various options might play out. Often, however, Article 6 development is framed as “establishing a global carbon market” and treated with corresponding weight. This perspective is not quite accurate, and thinking about Article 6 in more tempered terms–with a focus on transparency–might help to clarify the scope of a potential agreement during this COP and its true importance. Framing the debate around transparency and accounting might help to make the issues more palatable and make clearer what is really at stake: not countries’ ability to finance climate action abroad, merely their abilities to claim credit for doing so when they communicate their Paris Agreement goals and actions. The idea behind Article 6 is not to build a carbon market, it is to build ambition–to make the use of carbon trading more attractive so that we see greater investment in climate mitigation.
Much like the larger Paris Agreement itself, the international framework being developed in the Article 6 rules is not about who may trade with whom or how; rather, it is about what aspects of those trades must be transparently communicated and reviewed at the international level. The point of Article 6 is not to create and regulate a centralized carbon market but to create enough trust and transparency around disparate ongoing and future trading schemes to incentive greater ambition in mitigating carbon emissions. Numerous regional and intergovernmental (and private-sector) emissions trading schemes exist today, such as the net zero commitments that have been made by the EU, Japan, the state of California, and many other governments. A well-formulated Article 6 would simply encourage these initiatives to adopt this new accounting framework for adjustments under the Paris Agreement, and that centrality would help these efforts grow in scope and scale.
On the sharing of proceeds, Article 6, paragraph 6 of the Paris Agreement calls for a sustainable development mechanism overseeing voluntary mitigation trades and requires it to collect from those transaction funds “to assist developing country Parties that are particularly vulnerable to the adverse effects of climate change.” These trades are distinct from those under the direct goal-setting and reporting of individual countries’ “nationally determined contributions” (NDCs), which are accounted for under another Article 6 paragraph. Negotiators disagree about whether proceeds should also be shared under the latter mechanism, which was not specifically called for in the Paris Agreement. Countries dependent on adaptation funds want to see opportunities for them expanded, while some other countries worry that injecting them into the NDC trading scheme might diminish its use and argue that for that very reason the original Paris Agreement left them out.
Such funds are vitally needed by developing countries, but there is uncertainty about whether the required share of proceeds, depending on its level, will disincentivize mitigating actors from making trades under the accounting scheme. Importantly, nothing within these Article 6 rules will change anything about the purely voluntary nature of both the NDC and non-NDC trading possibilities. No one will be forced to use these new market mechanisms, and in reality, it’s a small cadre of players on the world stage that really plan to use them. That use may help place us on track to meet our stated climate mitigation goals, however. Transparency and trust are key: more trading will occur if there is more confidence in the reporting and review of that trading.
Thus, any potential rule about the share of proceeds will not be a regulation on the ability to do carbon trading (which already occurs internationally in many ways). Instead, it would be a means of collecting money from trades that have become more attractive, and hopefully more abundant, because they can be used to credit one’s achievements in the Paris Agreement’s robust accounting and goal-setting scheme. Negotiators must find a balance whereby carbon trading is attractive enough to be done ambitiously under the agreement. This increase in ambition and in trades would raise significant proceeds, which may mean setting a proceed percentage that does not discourage the same trades. Parties are therefore hotly debating the appropriate percentage of proceeds to share and whether these mechanisms should be used at all for trades that go towards NDCs. Because Article 6 and the Paris Agreement are more about transparency and goals than about strict emissions commitments, everyone must bear in mind that the best outcome might not be that which demands the strictest action; instead, it might be that which encourages the most engagement. More engagement and communication about goals–so the Paris Agreement theory goes–will lead to more ambitious climate action.
The debate around corresponding adjustments similarly may be clearer when viewed through the lens of transparency rather than market-building. The idea behind corresponding adjustments is that when an entity in one state sells its carbon reduction efforts to an entity in another state, both states must adjust the emissions reductions they report under the Paris Agreement such that the buying state adds the emissions reductions to its ledger while the selling state subtracts that progress from its own. Under the NDCs that are central to the Paris Agreement, rigid corresponding adjustments make easy sense. Article 6, however, also speaks to a voluntary market for carbon trading that might be outside the scope of the NDCs, through private investment and similar means. How stringent should the rules around corresponding adjustments be in this world?
In a perfect accounting system, everything would be duly tallied up and the math done just right. But again, the Paris Agreement framework and Article 6 are not rules for making all this trading happen–much of it already occurs, but people want to see it get more ambitious as quickly as possible. Instead, the now-developing Article 6 rules will govern how all this trading is communicated and reviewed. Trust and transparency at the review level might make it easier and more attractive to begin heaping private capital into global emissions trading. The trick is finding the right balance. If the rules around communicating about these trades are too onerous, they could counteract Article 6’s intended effect “to incentivize and facilitate participation” and “to allow for higher ambition.” Some in the private carbon trading world think that even if the rules in this particular part of Article 6 appear relaxed, the trading parties themselves will pressure each other to accurately report adjustments; those schemes that don’t do so will look like bad investments because if they ever make it within the scope of an NDC, their accounting will be no good. Others in the debate take the position that there should be no leeway for potentially poor accounting given the high stakes of combating climate change. What text ultimately finds its way into the Article 6 rules will thus reflect some compromise on the extent to which transparency can incentivize efficient trading, and whether total comprehensiveness is required to do so.
Thus, rather than viewing the debate over Article 6 as the end-all-be-all of establishing the global carbon market, it may be fairer and more constructive to view the process as a balancing act in establishing transparency that mobilizes ambition. Because Article 6 is one of the final pieces of the Paris Agreement to flesh out, there may be a certain dynamic by which interested parties seek to add complexity and cross-cutting issues to its rules–we’re nearing the last change to secure such textual commitments in some fashion. This rush to robustness, however, may be a contributing factor in making Article 6 contentious. It may lead to burdensome concerns about governing actions throughout the global carbon market itself, with the consequences of that sweeping picture. Focusing instead on how Article 6 contemplates transparency, and how transparency begets trust in future commitments and more ambitious and efficient trades, may be the lens that leads these negotiations to more productive ends at the close of the COP.