COP29 AND THE FUTURE OF CARBON TRADING: DECODING ARTICLE 6

THE CONTEXT: The 29th Conference of the Parties (COP29) to the United Nations Framework Convention on Climate Change (UNFCCC) in Baku, Azerbaijan, was marked by several significant events and controversies highlighting the complex challenges in global climate negotiations.

MAJOR EVENTS AND CONTROVERSIES AT COP29:

• • Argentinian delegation withdrawal: In a surprising move, Argentina’s newly elected right-wing President, Javier Milei, ordered the withdrawal of the country’s delegation from COP29. He has previously called climate change a “socialist lie” and eliminated Argentina’s environment ministry. This action raises concerns about the potential for other countries to follow suit and the impact on global climate cooperation.
  • LDCs and AOSIS temporary walkout: The Least Developed Countries (LDCs) and the Alliance of Small Island States (AOSIS) staged a temporary walkout during the negotiations. This dramatic move was prompted by their frustration with being excluded from the negotiation process and the perceived lack of attention to their concerns. This incident underscores the ongoing tensions between developed and developing nations in climate negotiations.
  • India and Nigeria’s opposition to the proposed climate finance deal: India and Nigeria publicly denounced the proposed budget of US$300 billion annually for developing countries by 2035. India’s representative called the agreement “an optical illusion” and stated it was “too little and too late.” Nigeria described the package as a “joke.” This opposition highlights the persistent gap between developing countries’ financial needs and developed nations’ commitments to climate change.
  • Lack of consensus on fossil fuel phase-out: The COP29 negotiations failed to reach a consensus on the phase-out of fossil fuels, mirroring the lack of agreement at the G20 summit earlier in the year. This failure to address one of the primary causes of climate change represents a significant setback in global efforts to limit temperature rise to 1.5°C above pre-industrial levels. The omission of any reference to fossil fuel phase-out in the G20 leaders’ declaration has caused concern among climate activists and negotiators.
  • Implications of another Trump presidency: Donald Trump’s re-election as president of the United States cast a long shadow over COP29. Trump’s campaign promises to withdraw the U.S. from the Paris Agreement for a second time and end many climate policies launched during the Biden administration have raised serious concerns about the future of global climate action.

COMPONENTS OF ARTICLE 6: It consists of three main components: Article 6.2, Article 6.4, and Article 6.8, each serving distinct purposes in facilitating global climate efforts.

• • Article 6.2: It establishes a framework for countries to cooperate by transferring Internationally Transferred Mitigation Outcomes (ITMOs). ITMOs represent emission reductions or removals that one country can transfer to another to help meet its Nationally Determined Contributions (NDCs). These transfers enhance flexibility and cost-effectiveness in achieving global emission reduction targets. Key requirements include:
    • Authorization: Countries must authorize the use of ITMOs, ensuring they align with national policies and international commitments.
    • Corresponding Adjustments: To prevent double counting, countries must apply corresponding adjustments to their national emissions inventories when transferring ITMOs.
    • Reporting: Participating countries must submit initial reports, annual information, and regular updates to the UNFCCC detailing the cooperative approach and ITMO transactions.
  • Article 6.4: Introduction of the Paris Agreement Crediting Mechanism (PACM), like the Kyoto Protocol’s Clean Development Mechanism (CDM), but with enhanced governance and scope. Unlike the decentralized nature of Article 6.2, PACM operates under a centralized UN framework, providing standardized procedures for generating and trading emission reduction credits.
    • Role of the Supervisory Board: Under Article 6.4, the Board is tasked with developing rules and standards for project registration, credit issuance, and compliance monitoring. This includes ensuring environmental integrity through baselines, additionality criteria, and measures against leakage and reversal risks.
    • Governance Structure and Responsibilities: Article 6.4’s governance structure involves centralized oversight by the Supervisory Board, which ensures that all projects adhere to international standards and contribute to sustainable development goals. This mechanism provides a more regulated environment than bilateral agreements under Article 6.2.
  • Article 6.8: Emphasize non-market approaches (NMAs) focusing on capacity building, technology transfer, and financial support through concessional or grant funding. These approaches aim to enhance mitigation and adaptation efforts without relying on carbon markets.
    • Promotion of Mitigation and Adaptation Efforts: NMAs under Article 6.8 facilitate cooperation in renewable energy deployment, energy efficiency improvements, and other sustainable development initiatives. The framework encourages countries to engage with the NMA Platform to implement their NDCs effectively.

THE SIGNIFICANCE:

• • Cooperative Approaches: Article 6.2 allows countries to trade Internationally Transferred Mitigation Outcomes (ITMOs) in bilateral or multilateral agreements. This flexibility enables countries to meet their NDCs more cost-effectively by purchasing emission reductions from other nations that have exceeded their targets.
  • Centralized Mechanism: Article 6.4 establishes an UN-supervised mechanism for generating and trading carbon credits from specific projects, akin to the Kyoto Protocol’s Clean Development Mechanism (CDM). This mechanism ensures high-quality emission reductions and aims to foster sustainable development.
  • Non-Market Approaches: Article 6.8 promotes cooperation without relying on carbon markets, focusing on capacity building, technology transfer, and sustainable development initiatives. This approach is crucial for countries that may not be able to participate in market-based mechanisms.
  • Mobilizing Climate Finance: Article 6 can direct financial flows from developed to developing countries by enabling carbon credit trading. This mechanism can help channel investments into renewable energy, energy efficiency, and other low-carbon technologies in regions where these projects are most cost-effective. The World Bank estimates that well-designed international carbon markets could mobilize over USD 1 trillion by 2050.
  • Technology Transfer: Article 6 encourages the transfer of clean technologies by creating financial incentives for developed countries to invest in emission reduction projects in developing nations. This can lead to significant advancements in renewable energy deployment, energy efficiency improvements, and other technological innovations necessary for sustainable development.
  • Supporting Adaptation Efforts: A portion of the proceeds from carbon trading under Article 6.4 is allocated to the Adaptation Fund, which supports projects that build resilience against climate impacts in vulnerable communities. This ensures that climate finance not only addresses mitigation but also adaptation needs.

CHALLENGES IN IMPLEMENTATION:

• • Lack of Mandatory Disclosures: One of the primary challenges is the lack of mandatory disclosure requirements for countries participating in Article 6.2 cooperative approaches. While countries are expected to submit annual reports to the UNFCCC, there are no strict deadlines or penalties for non-compliance.
  • Inconsistent Reporting Standards: The absence of standardized reporting formats complicates the tracking and verifying ITMO transactions. This inconsistency can lead to discrepancies in how emission reductions are accounted for across different jurisdictions.
  • Unclear Processes: The process for authorizing ITMOs is unclear, leading to uncertainty about how countries should approve mitigation outcomes for international use. This ambiguity can delay transactions and complicate compliance.
  • Limited Guidance on Revocation: While changes to authorization after the first transfer are supposed to be limited to exceptional circumstances, the criteria for such revocations are not well-defined. This leaves room for interpretation and potential disputes.
  • Fragmented Registry Systems: Multiple parallel registries (national, international, and mechanism-specific) challenge the consistent tracking of ITMOs. Integrating these systems is crucial to prevent double counting and ensure seamless transactions.
  • Complex Transition Process: Transitioning projects from the Clean Development Mechanism (CDM) under the Kyoto Protocol to Article 6.4 involves complex procedural changes. This includes assessing additionality criteria and ensuring projects meet new standards.

INDIA’S APPROACH TO ARTICLE 6:

• • Strategic Selection: India has identified a list of high-cost mitigation activities suitable for trading under Article 6.2. These activities include advanced technologies and projects that require significant investment, such as offshore wind energy, green hydrogen production, and carbon capture utilization and storage (CCUS).
  • Implementation: The National Designated Authority for the Implementation of the Paris Agreement (NDAIAPA) oversees selecting and approving projects eligible for ITMO trading. This ensures that only projects aligning with India’s climate goals and international standards are considered.
  • Sectoral Focus: The Bureau of Energy Efficiency (BEE) has approved several key sectors under the Central Government’s Carbon Capture and Trading System (CCTS). These sectors include renewable energy, manufacturing, waste management, agriculture, and transportation.

THE WAY FORWARD:

• • Need for Transparency and Accountability: Strengthening institutional frameworks and capacity-building initiatives can help improve transparency. For example, the World Bank’s Climate Warehouse program supports countries in developing digital systems for tracking emissions reductions and enhancing data integrity.
  • Inter-Operational International Registry: Providing optional registry services through international platforms to bridge the gap. These services would include credit issuance, transfer capabilities, and corresponding adjustments necessary for compliance with Article 6 requirements.
  • Strategic Sector Selection for International Carbon Markets: Countries should align sector selection with their Nationally Determined Contributions (NDCs) and Sustainable Development Goals (SDGs) to ensure that carbon market activities support broader development objectives.

THE CONCLUSION:

A strategic blend of protecting domestic interests while actively engaging in international carbon markets. By doing so, countries can enhance their climate resilience, contribute to global emission reduction efforts, and drive sustainable development. This dual approach supports national objectives and strengthens global climate action, making it a critical component of the broader strategy to combat climate change.

UPSC PAST YEAR QUESTION:

Q. Discuss global warming and mention its effects on the global climate. Explain the control measures to bring down the level of greenhouse gases that cause global warming in the light of the Kyoto Protocol, 1997. 2022

MAINS PRACTICE QUESTION:

Q. Evaluate India’s approach to Article 6 of the Paris Agreement. How does this strategy balance domestic interests with international cooperation in addressing climate change?

SOURCE:

https://www.orfonline.org/expert-speak/cop29-and-the-future-of-carbon-trading-decoding-article-6