Schrödinger’s COP?

From the perspective of the UAE Consensus and the progress made on Loss and Damage, the COP process is very much alive and the UAE Presidency should be congratulated on all that they managed to achieve. But if you are a keen follower of progress on Article 6 of the Paris Agreement, a vibrant living and developing process was hard to see.

In this post, my colleague Malek Al-Chalabi discusses COP 28 from the perspective of the Article 6 negotiations. Malek co-Chairs the International Working Group within the International Emissions Trading Association and is the Senior Carbon Pricing Policy Adviser within Shell.

COP28, held in the UAE in December 2023, progressed many aspects of the international climate negotiations. This includes the first reference to transitioning away from fossil fuels, operationalising the Loss and Damage Fund,  the Canadian led Global Carbon Pricing Challenge and the UAE Consensus which sets the scene for COP30 when nations resubmit their Nationally Determined Contributions.

But while carbon pricing announcements featured heavily in and around COP28, negotiators failed to agree on specific issues related to Article 6 of the Paris Agreement, which is one of the foundation elements of a broader international carbon trading mechanism and by implication a catalyst for wider adoption of carbon pricing. Parties could not agree to provisions relating to Article 6.2 or Article 6.4 – despite lengthy consultations in the lead up to COP28 and many nights of long deliberations throughout the COP. What happened and what does this mean for Article 6? 

On Article 6.2, the EU, the Latin American and Caribbean Alliance (AILAC) and the Alliance of Small Island States (AOSIS) pushed for more oversight on Party-to-Party agreements, while the Umbrella Group (including the U.S., U.K, Australia, Canada and New Zealand) and the Like-Minded Developing Countries (LMDCs) group (including China, India and Saudi Arabia) opposed because they believed that the bilateral nature of Article 6.2 meant that it should be managed by Parties engaging in the bilateral trades and not by another authority. This difference could not be resolved in the negotiating room despite apparent clarity in the Article 6.2 rulebook where there is a statement to the effect that ‘guidance will not infringe on the nationally determined nature of nationally determined contributions’.   

On Article 6.4, another set of differences emerged across a variety of topics, including removals, methodologies, and registries. Notably, the Supervisory Body had worked on recommendations for removals and methodologies throughout the year and agreed drafts for both in November. However, at COP28, the EU and the Coalition for Rainforest Nations expressed strong opposition to the removals recommendation, while willing to accept the methodologies paper. However, the LMDCs and others were not willing to progress one recommendation and not the other, which could not be overcome, as many believed they needed to be adopted together. Differences also emerged on how registries would interact with countries unable to find compromise. 

Outside the negotiating room the EU called for advanced global cooperation on carbon pricing with the World Trade Organization, International Monetary Fund, and the World Bank, but in the negotiating room the EU was seen as one of the main blockers of progress on Article 6. Different reasons have been reported, from wanting to focus on quality and integrity of markets to blocking progress on Article 6 to focus on expanding the EU ETS and its own domestic removals certification system, as Article 6 is a tool that the EU says it is unlikely to use towards net zero. 

For context, the first carbon price that entered the market was in 1990 (Finland, Poland) and since then carbon pricing has taken a country specific and region-specific approach as it is not a global commodity. Therefore, it should not come as a surprise that when negotiating to develop a global carbon market framework (6.4) or rules to engage in bilateral trade (6.2) that different country and regional perspectives and preferences would emerge. What works in Brazil will be very different to what works in the UAE which will be very different to what works in Canada.  

Article 6 provides an opportunity to develop a global, UN-led carbon market – but the politicization of markets was on full display and did not foster the spirit of what was needed to progress the international carbon market agenda, which was disappointing as other obstacles had been overcome as highlighted above. 

There have been calls to end the politicisation of carbon markets in the Article 6 negotiating room and focus instead on developing the framework that is very much needed to achieve 1.5°C. As has been shown in the Shell Energy Security Scenarios and country Sketches such as the UAE and Singapore, Article 6 is one of the key tools that is required to help accelerate decarbonisation efforts across jurisdictions. It is also clear from the Sky 2050 scenario that countries such as Brazil hold huge potential to deliver net-zero emissions globally earlier than would be the case without them due to the carbon removal capacity they can create through land change practices. However, unlocking this removal potential requires a substantial cross border mechanism such as Article 6.

Looking ahead, the lack of progress on Article 6.2 means that the decisions that took place in Glasgow and Sharm El Sheik still stand. As a consequence, parties can continue to utilize Article 6.2, but individual bilateral decisions will prevail, rather than a more robust multi-lateral approach. This week Switzerland and Thailand concluded their first transaction under Article 6.2. The expectation is that further bilateral use of Article 6.2 will substitute for the absence of an operational Article 6.4. Some experts predict 2-3 years until 6.4 is operational. On Article 6.4, significant uncertainty now exists – including the scope of the Supervisory Body work plan for the future. The loss here could be literally thousands of project focused transfers and the significant emission reductions that they would bring, simply because there is no common standard available for project evaluation and credit issuance.

Bringing Article 6 to full operational status is required now more than ever – but next year will mark a decade since the Paris Agreement’s inception and the world is still unlikely to have an operational 6.4 mechanism by then. Ten years to deliver a working outcome from a key provision of the Paris Agreement is unacceptable, particularly when we know that the limited remaining carbon budget is now counted in single years and not in decades. As confidence in the COP process with regards carbon markets continues to waver, market players may look elsewhere to close the gap, such as making even more use of the voluntary carbon market. This might offer some hope and cause for optimism, but it is hard to see a voluntary mechanism doing the heavy lifting required to get the world to net-zero emissions in 25 years. And as argued previously, without a functioning Article 6 net-zero emissions may not be achieved at all in the desired time-frame.

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