Article 6 and International Carbon Markets
Article 6 of the Paris Agreement creates new frameworks for international cooperation on carbon markets. After years of negotiation, rules were finalized at COP26 in Glasgow (2021). This lesson explains what Article 6 means for carbon pricing systems worldwide.
What Is Article 6?
Article 6 of the Paris Agreement allows countries to cooperate on emissions reductions:
Article 6.2: Bilateral cooperation through Internationally Transferred Mitigation Outcomes (ITMOs)
Article 6.4: A centralized mechanism supervised by a UN body, replacing the CDM
Article 6.8: Non-market approaches (cooperative action without trading)
Article 6 creates the legal basis for international carbon trading under the Paris Agreement. It addresses a critical question: how to prevent double counting when emissions reductions are traded across borders.
Article 6.2: Bilateral Cooperation
Article 6.2 allows countries to transfer emissions reductions bilaterally through ITMOs.
Key features:
- Country-to-country cooperation
- Flexibility in what can be traded
- Corresponding adjustments prevent double counting
- Parties set their own rules (within guidelines)
Corresponding adjustments:
When Country A transfers an ITMO to Country B:
- Country A adds the emissions to its account
- Country B subtracts the emissions from its account
- No double counting: the reduction is counted once, by the buyer
Corresponding adjustment example:
Switzerland agrees to purchase emissions reductions from Ghana.
Without adjustment:
- Ghana reduces 100,000 tons
- Ghana counts reduction toward its NDC
- Switzerland also counts it toward its target
- Same reduction counted twice
With corresponding adjustment:
- Ghana reduces 100,000 tons
- Ghana adds 100,000 to its emissions account
- Switzerland subtracts 100,000 from its account
- Reduction counted once by Switzerland
Ghana must achieve additional reductions to meet its own NDC.
Article 6.4: The New Crediting Mechanism
Article 6.4 creates a centralized mechanism supervised by a UN body:
Similarities to CDM:
- Project-based crediting
- International oversight
- Standard methodologies
- Third-party verification
Key improvements over CDM:
- Stronger additionality requirements
- Automatic corresponding adjustments
- Share of proceeds for adaptation
- Transition process for CDM projects
- Updated methodology approaches
Governance: The Article 6.4 Supervisory Body oversees the mechanism, approving methodologies and ensuring integrity.
The transition from CDM to Article 6.4 has been contentious:
What was decided:
- CDM projects can transition to Article 6.4
- Only credits issued for reductions after 2020 are usable under Paris Agreement
- Pre-2020 CDM credits cannot be used for Paris Agreement compliance
- Host country must agree to transition
Controversy: Some countries pushed for broader use of old CDM credits, which would have flooded markets with potentially low-quality credits.
Outcome: The compromise limits CDM credit use while providing a pathway for transitioning quality projects. This preserves environmental integrity while not completely abandoning CDM investments.
Implications for Carbon Pricing Systems
Article 6 affects domestic carbon pricing in several ways:
ITMOs for compliance:
Some systems may allow ITMOs to be used for domestic compliance, similar to how offsets are used today.
Export of reductions:
Countries can sell emissions reductions to others, but must adjust their own accounts. This creates revenue opportunities but affects domestic carbon pricing dynamics.
Quality standards:
Article 6 integrity requirements may influence domestic offset standards.
International linkage:
Article 6.2 provides a framework for linking carbon markets across borders.
Bilateral Agreements Under Article 6.2
Countries are negotiating bilateral agreements:
Switzerland:
Active in developing agreements with Peru, Ghana, and others for ITMO purchases.
Singapore:
Pursuing Article 6 cooperation with multiple partners for carbon credit imports.
Japan:
Developing bilateral frameworks under its Joint Crediting Mechanism, aligned with Article 6.
Key elements of agreements:
- Types of activities covered
- Methodology requirements
- Verification standards
- Corresponding adjustment procedures
- Dispute resolution
Challenges Ahead
Article 6 implementation faces challenges:
Registry infrastructure:
International registries for tracking ITMOs are still being developed.
Methodology approval:
The Article 6.4 Supervisory Body is working through methodology approvals.
Host country capacity:
Many potential host countries lack capacity for corresponding adjustments.
Market fragmentation:
Different bilateral approaches may create a patchwork rather than unified market.
Price discovery:
Without a centralized market, price transparency is limited.
Opportunities
Article 6 also creates opportunities:
Cost-effective reductions:
International cooperation allows reductions where they are cheapest.
Climate finance:
Carbon credit revenues can flow to developing countries.
Technology transfer:
Projects can transfer clean technologies across borders.
Ambition ratchet:
If implemented well, Article 6 can support higher ambition by reducing costs.
Article 6 creates the architecture for international carbon markets under the Paris Agreement. Whether it delivers on its potential depends on implementation quality, host country capacity, and maintaining environmental integrity through corresponding adjustments.
Looking Ahead
While governments implement carbon pricing through policy, companies are also acting through internal carbon pricing. The next lesson examines how corporations use internal carbon prices for decision-making.