Beyond COVID-19: Crisis response or road to recovery?
Crisis response or road to recovery?
Jargon at international climate talks often acts as a barrier to quick understanding of the nature and status of key issues – Article 6, ITMOs, ‘corresponding adjustments’ and (my personal favorite) A6,4ERs are just a few of the phrases used. Many readers not focused on the climate talks associated with the Paris Agreement may have heard talk of Article 6 but little of the detail. In this blog we give a quick overview of what is being discussed and how close (or far) the key issues are from being resolved.
Article 6 is the key remaining issue in resolving the rulebook under the Paris Agreement. It covers the manner in which the emission reduction achievements by country parties may be transferred. It also covers the replacement of the Clean Development Mechanism. It is an area fraught with deeply held and often opposed perspectives. Much of that revolves around views on whether market based systems can be used to fight climate change more quickly or more cost effectively. Many countries and observers are vocal in views that market solutions come at great risk. This resolves down to arguments about the robustness of any Article 6 trading system. Will units traded represent strong environmental outcomes? For example, will it be clear that there is no risk of double counting such that two countries are effectively claiming credit for the same outcome?
The overall lead of the working group responsible for negotiating Article 6 has flagged that the COP25 talks in Madrid need not solve everything. It needs to solve key issues on Article 6.2, 6.4 and 6.8 in order to allow Article 6 to be operationalized.
Broadly, Article 6.2 relates to country-to-country transfers of mitigation outcomes (referred to as internationally transferred mitigation outcomes or ITMOs); Article 6.4 relates to the establishment of a Sustainable Development Mechanism (SDM) as a replacement for the Clean Development Mechanism under the Kyoto Protocol) and Article 6.8, which relates to non-market approaches.
The relevance for the private sector of these discussions are many. As climate risks become more evident, the scale and pace of investments in the 2020s are key. That in turn requires parties to the Paris Agreement delivering on their Nationally Determined Contributions (the heart of the Paris Agreement, being the commitments each party has made to reducing emissions). A robust and efficient country-to-country trading system relating to ITMOs will likely act as a means to transfer financial flows to developing countries, in turn supporting climate mitigation investments in recipient countries requiring private sector support and finance. It is also likely that countries will develop mechanisms by which public/private initiatives for a sector can directly access a share of the benefits arising from ITMO transfers that come from successful implementation. Similarly, the SDM (like the CDM before it) specifically recognizes the ability for private sector involvement in projects authorized under it. Absent a functional ITMO structure there is concern on the investor side that they will be unable to properly monetize their investments and, as such, they may abstain from investment.
We cover some of the core elements and issues on Article 6.2 and 6.4 below. These reflect text as it stands on Dec 8, 2019.
Article 6.2 concerns how country parties under the Paris agreement can transfer credit for mitigation outcomes under their NDCs. Article 6.2 in the original Paris Agreement did not provide the rules for this. Rather, it set guideposts for future discussions by calling on countries when voluntarily making ITMO transfers; calling for that to occur with robust environmental integrity and transparency, including avoiding double-counting (i.e. the same mitigation outcome being claimed by different parties).
The text relating to guidance on Article 6.2 sets out the core elements of skeleton for an operational system, covering:
Article 6.4 – The Sustainable Development Mechanism
Many of the elements being developed in respect of Article 6.4 would be familiar to those aware of the history of the Clean Development Mechanism. That has the advantage of assisting movement of some elements forward but some are of the view that the structure of the SDM is at risk of repeating past errors, not just in terms of environmental integrity (vis-à-vis the robustness of additionality claims) but also in terms of designing a mechanism that can drive significant investment efficiently and at scale. The carbon unit that will be issued under the SDM are referred to as A6,4ERs (perhaps the high water mark for obscure COP terminology).
Elements in the current text would form the basis of an operational system (which was the case with the CDM, with further detail being developed as the mechanism was implemented). The text elements are discussed below but the nature of the issues between the parties is such that it is difficult to see how a break-through is possible. Those issues are many but are centred around certain principle maters, including accounting (tons of carbon dioxide equivalent or allowing for other measures under NDCs), avoidance of double-counting and additionality (e.g. if all emission reductions need to be additional to what would have been achieved under an NDC, why should there also be a corresponding adjustment to the host country NDC).
We will be updating over week 2 of COP-25 on Article 6, during which many key issues are likely to be escalated for senior political discussions.
Businesses operating in the food and agribusiness sector need access to the latest changes and developments from a legal team who have extensive experience focusing on the whole of the food and agribusiness value chain, advising clients worldwide on all aspects of their operations, including domestic and foreign investment acquisitions, initial public offerings, joint ventures, scientific cooperation agreements, international trade, land matters and technology licensing.