Resolution to Article 6 of Paris accord high on market's list before COP26

Experts are seeking a resolution to the critical Article 6 of the Paris Agreement during the upcoming 26th UN Climate Change Conference of the Parties, or COP 26, in Glasgow, with a deal seen as crucial in the fight to reduce global carbon emissions.

The Article 6 of the Paris agreement entails promotion of integrated, holistic and balanced approaches to assist governments in implementing their nationally determined contributions, or NDCs, through voluntary international cooperation.

The COP26 conference, to be held as part of the United Nations Framework Convention on Climate Change, is scheduled in November.

Market participants have been exasperated by the lack of clarity and agreement among signatories to the agreement on the "rulebook" under Article 6, experts said. "Voluntary market participants were really keen on seeing international market signal as a result of the Paris Agreement, but participants felt quite disappointed with the lack of progress," said a London-based source.

"We were talking six years ago about the Paris Agreement and even still, six years later, the Article 6 rulebook has not been agreed. And it just goes to show the whole complexity of multilateral state, and broad stakeholder engagement process. There's so many voices and so many opinions and finding middle ground is a very difficult thing to achieve."

Article 6 contains three separate mechanisms for "voluntary cooperation" toward climate goals, of which two are market-based and the third is "non-market approach."

In its ideal form, the cooperation mechanism aims to make it easier to achieve reduction targets and raise ambition, however, its complex nature has done just the opposite.

Experts believe that "fixing Article 6" is critical for fighting climate change. If structured properly, Article 6 may help in avoiding dangerous levels of global warming and keep a check on emissions, they said. "I hope they agree on something that will finally let this market flow the way it should. I think that a political agreement will make the market grow significantly," another expert told Platts on condition of anonymity.

Climate funding

Another heated topic at the Convention is likely to be the funding promised by advanced economies to developing and least-developed economies to fight climate change. Even as the developed nations had agreed to deliver $100 billion climate funding per annum to the developing and least developed countries to support climate change projects, amount transferred has been way below what was pledged.

"Unless there is clarity on funds flow to developing countries, I don't think there will much to offer from these countries as there are no funds," an Asia-based source said.

Experts also said that the UNFCCC should work toward getting the countries on-board with emission targets needed to limit climate change and encourage them to submit their revised NDCs.

Developing nations like India have high hopes that one of the things to come out of Glasgow Conference will be a pathway for improved project financing.

Channeling capital toward worthwhile and effective projects remains one of the greatest constraints in the development of additional voluntary carbon credit projects, sources said.

"Developing nations want to see funds being delivered because it helps them to go out there and deploy these activities and help to improve livelihoods and all sorts of other things at the same time. So, it is chicken and egg and the longer the thing that keeps getting grayed out," another source said.

Aged carbon credits

Market participants are also hoping that the conference will offer some clarity over issue of aged carbon credits. Clarity over the unused credits under the Kyoto Protocol is also a key demand from countries like India, China and Brazil, who have billions of tons of carbon offsets.

These units were mostly generated under the Clean Development Mechanism, where projects in developing countries created 'certified emissions reductions.'

At COP25, these countries pushed for CERs to be made eligible under Article 6.4, arguing that private companies had made these investments in good faith and that it would be unfair on them to have their assets rendered worthless.

The European Union and other countries, however, were firmly against the transition of Kyoto units in COP25 as it would undermine already insufficient ambition by allowing targets to be met with "emissions reductions" that have already happened, in place of additional efforts being made to cut emissions in the future.

It is highly unlikely that these CERs would get clearance at the conference though, experts said. While the clearance for these credits would make it easier to reach the net-zero targets under Paris Agreement, it would disincentivize companies from setting ambitious emissions reduction targets going ahead.

Overall, environment experts and market participants hope that the Convention will dedicate more energy on ensuring execution of past climate goals and ironing out wrinkles in the current framework before setting more ambitious goals.

"Efforts should be made to reach the existing targets. There is no point in setting the targets that remain unachieved," a market expert told Platts.

While some market layers have high expectations from the conference, others who have been disappointed in the past conferences said that "we are not holding our breaths for the conference."