When negotiators meet in Sharm el Sheikh for COP27 in the middle of November, most of the attention will probably be on the failure to reduce emissions in line with the 1.5 °C target, finance mechanisms for loss and damage from catastrophic climate events, support for climate adaptation and ensuring that developed countries deliver on promises for climate aid already made. Luring under the surface is, however, another question of great significance – the further work to implement the Paris Agreement’s Article 6 on trade in outcomes that mitigate climate change.
The Voluntary Carbon Market (VCM) is eagerly trying to understand the implications of Article 6. The introduction of “other international mitigation purposes” at COP26 did little to clear the fog. While national diplomats sometimes are able to conclude difficult negotiations through “constructive ambiguity”, uncertainties currently slow down the VCM in general and high risk, high CAPEX projects for carbon removal with geological storage, such as BECCS and DACCS, in particular.
Noted, the inclusion of VCM projects/credits under Article 6 is voluntary. Strictly speaking Article 6 does not regulate the VCM or force voluntary trade of credits under the Paris Agreement. But concluding from that that the interpretation of Article 6 is of no importance for the VCM would be a mistake. This is so since projects under the article could be expected to heavily influence the standard for projects and credits traded outside the Paris Agreement, or in other words the VCM in general.
To be fair, the uncertainty felt by the VCM comes only partly from the difficulty to interpret Article 6, and more generally from a broader debate on “double claiming” and what it means for the VCM and how it is impacted by Article 6.
Double claiming – that two entities would claim the same mitigation outcome – should, of course, never be allowed within a single system of climate accounting, i.e. within the corporate accounting system or within the climate accounting system of nations. In relation to Article 6 and NDCs, this implies that a mitigation outcome should never be allowed to appear in two NDCs. The core of the confusion and controversy is that some NGOs and national authorities seem to argue that double claiming should be prohibited also across the climate accounting system of nations and that of corporations.
Often, the question of the “integrity of the claim” is raised as a key reason for this position. This argument somehow looks to put corporations on par with nations. In pondering whether this view is reasonable, it is recalled that counting the same mitigation outcome in the two systems has always been the norm. Nations sum up the outcome of climate measures taken and accounted by corporations on their territories, irrespective of whether they were undertaken by corporations for compliance or voluntary reason and whether the measures were subsidized or not. The reasonable, and as we shall see the climate friendly view, is that the question of integrity does not enter the equation when a claim of a mitigation outcome is made once in the corporate climate accounting system and once in the national accounting system. Once in each system. Just as climate outcomes are accounted today.
Another argument is that unless double claiming across the two systems is prohibited, then there could be a risk that the climate ambitions of the host country (where the mitigation outcome physically happens) would be lowered. Even if it is plausible that a very limited number of nations would lower ambitions, the proper way to avoid such outcomes is not to prohibit nations and corporations to claim the same outcome in their respective climate accounting systems. After all, the national accounting system is made up of the outcomes delivered by the corporate and other sectors in the economy.
With the view that double claiming across the two systems should not be allowed, climate projects could not receive government aid and revenues from the Voluntary Carbon Market for the same mitigation outcome, unless the corporation acquiring the carbon credit or the host nation refrains from including the outcome (e.g. a removed tonne of CO₂) in the fulfillment of its climate goals. Some even argue that this should apply also within a country/NDC (i.e. when the acquiring company is domiciled in the host nation). The senselessness of this logic becomes even clearer for cases when no state aid is involved.
Furthermore, when this view is based on fear of lower climate ambitions, it would represent a contradiction in terms for the type of high CAPEX projects mentioned above (BECCS and DACCS), since governments contributing aid to these industries are committed to ambitious gross emission reduction trajectories independent of the negative emissions, which they target for hard-to-abate residual emissions.
If the view that double claiming across the two systems should not be allowed would prevail, the result would be less private funding to climate projects, and more government funding would be required to achieve the same results. And this would be in a context where national climate budgets are already strained having to cope also with climate aid, climate adaptations and loss and damage from climate events. With fewer projects, transfers of knowledge and technology for climate mitigation would also slow down.
The good news is that Article 6.4 of the Paris Agreement allows for “unauthorized” VCM projects to issue carbon credit units (yes, “unauthorized” 6.4ERs). In these scenarios, the host nation would be able to include the mitigation outcome in its NDC at the same time as the carbon credit is traded (internationally or nationally) on what effectively would be the VCM hooked up to Article 6.4 (and accounted by the acquiring company). This is one of the approaches being considered by the UK government to support geological removals. It is also an approach embraced by the Leaf Coalition, where government agencies from the US, UK and Norway are participating. I also believe that the EU Commission supports the same approach, as it is otherwise hard to make sense of the recent initiative for Carbon Farming.
So the general set-up of Article 6 should work for the VCM, relying on “unauthorized” projects – and host governments and acquiring companies can ”co-claim” the outcome in their respective accounting systems. Article 6.2, on the other hand, deals only in “authorized” trade in mitigation outcomes where the nation of the acquiring company can claim the outcome towards its NDC, if the host country does a Corresponding Adjustment. Thus, also here both the acquiring company, logically for compliance purposes, and the nation of the acquiring company would be simultaneously claiming the same outcome, while neither the host country nor the company in the host country selling the credit would. The same should also be true for units under Article 6.4 that have been authorized.
If those two routes would not provide suitable means for achieving public-private co-funding through state aid (which is not a purchase) and VCM purchases, it is recalled that the Paris Agreement does not regulate the VCM and does not prevent a host nation from counting mitigation outcomes in its NDC that are traded nationally or internationally on the voluntary carbon market entirely outside of the Paris Agreement’s Article 6.
Depending on interpretation, the introduction at COP26 of “other international mitigation purposes” did, however, possibly create an unfortunate situation where trade will be limited in a way which may not have been intended. At least if the VCM is to be understood to be covered by “other international mitigation purposes”. The current wording seems to require that a host nation would have to give up its right to include a mitigation outcome in its NDC if an authorized trade take place for “other international mitigation purposes”.
This would be logical for ICAO/CORSIA/IMO and compliance purposes. But it would not make sense for true voluntary market purposes. Again, what is essential and protected in the examples above is that a mitigation outcome can only be counted once by a nation and once by a corporation. This should also be possible when the outcome eventually ends up with a non-host nation for NDC purposes and the corporate trade would land the credit with a company domiciled in a third country, i.e. neither the host country nor the country including the outcome in its NDC. Net-net, the mitigation outcome is still only accounted once on national level and once on corporate level. This may not be possible in the current framework of the Paris Agreement if “other purposes” is meant to imply the VCM. Negotiators at COP27 should clarify what application is targeted by “other purposes” (Annex to Decision 3/CMA.3 at COP26, paragraph 44) and, if not already the case, allow for the type of “decoupled” trade outlined above.
Is this rather technical discussion important? Following the IPCC AR6 report in 2022, there is broad consensus that the deployment of Carbon Dioxide Removal “to counterbalance hard-to-abate residual emissions is unavoidable if net zero CO₂ or GHG emissions are to be achieved [emphasis added].” The need for and the agreement to pursue comprehensive gross emission reductions are in no way called into question by this conclusion. Rather, it is a clear realization that both are needed. In the same IPCC report, it is predicted that BECCS should leave the largest technological contribution to the required volumes of CDR to limit global warming to 1.5 °C. The median view is that 2.75 Giga tonnes of BECCS CDR will be required per year by 2050. In comparison, total current annual emissions in the EU ETS system is around 1.1 Giga tonnes.
To scale a practically non-existent industry for CDR with geological storage to that volume by 2050 is enormously challenging and requires maximum cooperation between the public and the private sectors. If the international community fails to set up the appropriate framework for CDR with permanent storage, stabilizing global warming will not be possible.
The idea that double claiming should be prohibited across the two accounting systems is already slowing down high CAPEX CDR industries since the uncertainties make both producers and VCM buyers hesitate in their decisions required to move ahead with full steam. The uncertainty must be resolved without delay.
The Parties to the Paris Agreement and VCM actors should welcome and promote public-private co-funding for the achievement of NDCs. Of course, such co-operation should not lower ambitions or slow down climate mitigation. The way to do that is to be explicit about the commitments of nations, requiring every country, per economic sector, to set up binding reduction trajectories for national gross emissions reductions as well as separate trajectories for removals.
The VCM and private capital are ready to help nations achieve these NDC trajectories, with nations and corporates booking the outcome in their respective climate accounting systems.
Stockholm Exergi will be participating at the UN’s climate conference COP27