The deal reached in Glasgow provides much needed clarity, yet building the market infrastructure will take time, and numerous questions remain on how buyers and sellers will adjust to the new rules.
Article 6.2 is essentially an accounting mechanism, by which countries can transfer carbon reductions, known as internationally transferred mitigation outcomes.
Article 6.4 creates a mechanism by which specific projects can earn carbon credits, with a similar design to the Kyoto Protocol’s Clean Development Mechanism .
The deal reached in Glasgow also addressed the extent to which historic carbon credits earned under the CDM can be carried over to the Paris regime – a key demand of countries with large inventories of such credits, such as Brazil.
Most observers welcomed the Article 6 deal as a sensible compromise between the use of historic CDM credits and the stringency of the new Article 6.4 rules.
Andrea Bonzanni, international policy director at the International Emissions Trading Association , agreed it was better for the environmental integrity of the system to allow for the use of some old credits than to open the door to less environmentally sound new credits.
The agreement at Glasgow was also important for what it did not do.
The fear before COP26 was Article 6 would require all international carbon transactions to be backed with corresponding adjustments – which means the reduction is deducted from the host country’s emissions inventory and added to that of the buyer’s.
“Article 6 is incredibly important since it allows buyer countries to take on more ambitious targets, which can be met through acquiring international credits,” explains Maria Carvalho, head of public affairs at South Pole, a Zurich-based advisory company and project developer.
Critically, it will be up to governments to decide whether transactions under Article 6.2 or Article 6.4 come with corresponding adjustments.
Countries might be willing to offer corresponding adjustments to attract carbon finance into harder-to-abate parts of their economy.
Bonzanni expects the voluntary market will split in two, with those credits that come with a corresponding adjustment trading at a premium compared with those that don’t.
However, Mark Kenber, the co-executive director of the Voluntary Carbon Markets Integrity Initiative , is concerned poorer developing countries will take the view it is simply not worth setting up the legal and regulatory frameworks to enable corresponding adjustments.
“Some of the countries we work with are wondering whether they want to spend the little money they have creating institutions and sophisticated registries for a carbon market they might not have much of a role in,” he says.
There is also considerable work to be done at the UN level to create the Article 6 mechanisms. “It is important that the 6.4 mechanism is operationalised as quickly as possible,” says Bonnazoni at the IETA.
“The whole process is not aligned with the urgency of the problem,” warns Charlotte Streck, co-founder of Climate Focus, an Amsterdam-based advisory company.
Before COP26, a key concern was avoiding double-counting, whereby a carbon offset is claimed both by the corporate buyer and the host country.
However, buyers hoping to quickly secure corresponding adjustments are likely to be disappointed, says Streck.
Meanwhile, corporate buyers should be cautious about demanding corresponding adjustments that risk the host country failing to meet its emission reduction pledges under Paris.
In other words, they will seek to sell emission reductions with corresponding adjustments while still claiming those reductions towards their national targets – especially given the system lacks an enforcement mechanism.
“It is also clear that carbon credits cannot be used by corporations to claim they have achieved their internal reduction targets.” The SBTi is shortly due to produce guidance on the use of corresponding adjustments.
“The question that hasn’t been tested yet is whether there is enough value to the corporate to direct large sums of finance to ,” says Shopley.
Bonzanni at IETA suggests companies planning to generate credits can begin monitoring, reporting and verifying their current emissions to create baselines against which reductions may be measured.