NDCS AND ARTICLE 6 EXPLAINED
What are NDCs?
In 2015, the Parties to the United Nations Framework Convention on Climate Change (UNFCCC) committed to keeping global average temperatures below 2°C above pre-industrial levels with the overall pursuit of limiting temperature increase to 1.5°C above pre-industrial levels. To reach this goal, all countries are obligated to set limitations on Greenhouse gas emissions (GHG) by setting targets known as nationally determined contributions (NDCs).
NDCs outline a country's long-term emissions reduction goals to meet the Paris Agreement targets and are revised every five years. The NDCs decided by each country will collectively demonstrate increased ambitions throughout the submission process and aim to meet the long-term climate goal of the agreement. The Paris Agreement text allows for the inclusion of nature-based solutions to climate change, such as restoring ocean and terrestrial habitats to store and sequester carbon.
What is Article 6?
Article 6 is a vital element of the Paris Agreement and provides rules and integrity to carbon markets alongside an international carbon trading mechanism. Article 6 and the Paris Agreement provide an opportunity outside the sphere of the voluntary carbon market for countries to meet their NDC emissions targets. Some countries that struggle to meet domestic emissions cuts can purchase emissions from nations with higher reductions than their NDC pledges. Finalized at COP26 in 2021, the new rules under Article 6 allow the transfer of emissions through the carbon trading of Internationally-Transferred Mitigation Outcomes (ITMO). ITMOs are a carbon dioxide equivalent traded between countries to meet NDC targets. ITMOs are traded between nations, and the quantity of emissions bought and sold is counted towards the buying country's climate targets. To ensure no two nations claim the same emissions reductions, the sale of one credit is added to the seller's accounting tally while the buyer deducts one. This process of international carbon accounting is known as corresponding adjustments (CA).
How does this affect producing or buying carbon offsets?
While not explicitly regulating voluntary carbon markets, the new agreement extends the coverage to both compliance and voluntary markets. Article 6 states that carbon sequestered by carbon projects will count to the host country's NDC. There are two alternatives to this default:
Firstly, emissions reductions can be authorized by the host country to be used elsewhere, such as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), voluntary carbon markets, or can be transferred as ITMOs to another country's NDC. Authorized transfers require corresponding adjustments to be made.
Secondly, emissions reductions produced by carbon projects that are not authorized for transfer count towards both the host country's NDC, and are available on the voluntary market. This is because corresponding adjustments for the voluntary carbon market are not compulsory. Currently, it appears to be assumed that offsets traded on the voluntary market will have been shown to be additional in order to be accredited, so the volume of any offsets counted twice will be low enough to not significantly impact carbon inventories at a national level.
For corresponding adjustments to apply in the voluntary carbon market, it is up to the discretion of national policies first, and the certifying standard second. Credits offered on the voluntary market where corresponding adjustments have been used to avoid double counting and ensure all emissions reductions are accounted for are likely to be considered of a higher quality and are expected to command a premium price and a higher level of demand. It is essential for both suppliers and purchasers of carbon credits to understand how rules on corresponding adjustments are applied in the country where the credits are produced.
Read the Article 6 text and Rulebook here.
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