Can nature-based offsets be traded? | Nature and Article 6 carbon markets at COP27

Given that COP26 left many questions relating to carbon markets yet to be clarified, there remains a big question mark as to how nature-based offsets will be treated and operate under Article 6. In this article, we explore how nature-based offsets in these carbon markets will work in practice.

International climate negotiations COP26, the first COP hosted by the UK, was highly anticipated and was touted as a potential driver of change. Indeed, it has made progress on many issues, including Article 6 of the Paris Agreementwhich allows parties to cooperate using voluntary market-based and non-market-based approaches to implement their Nationally Determined Contributions (NDCs).

Article 6.2 does this by allowing two or more countries to trade GHG emission reductions, known as “internationally transferred mitigation outcomes” (ITMOs). Article 6.4 establishes a central carbon credit mechanism that will allow credits to be generated and traded, known as “Article 6(4), Emission Reductions” (A6.4ER). Together, these mechanisms are called carbon markets.

Given that COP26 left many questions relating to carbon markets yet to be clarified, there remains a big question mark as to how nature-based offsets will be treated and operate under Article 6. In this article, we explore how nature-based offsets in these carbon markets will work in practice.

Carbon credit or carbon offset?

First, it will be useful to establish the difference between a carbon credit and one carbon offset. Carbon credits refer to a certificate that gives its holder permission issue one metric ton of carbon dioxide equivalent (CO2e). Similarly, carbon offsets also represent one metric ton of CO2e. However, in contrast, a carbon offset represents the reduction or deletion CO2e from the atmosphere achieved by a particular project. These projects must qualify for a carbon offset certificate by meeting various criteria, such as permanence and additionality. Once purchased, a carbon offset certificate can be used by the purchaser to demonstrate that their emissions generated at one location have been offset or “offset” by an emission reduction or carbon removal elsewhere.

What was agreed at COP26?

During COP26 in November 2021, progress was made on many topics:

  • Double counting
    • This occurs when the reduction achieved by a mitigation outcome is accounted for by more than one country, threatening the integrity of carbon trading. Therefore, COP26 agreed to apply the corresponding adjustments to all ITMOs and A6.4ERs so that a reduction is only counted once.
  • Kyoto Protocol Transition
    • The Clean Development Mechanism (CDM) of the Kyoto Protocol will enter a transition period. CDM projects can switch to the Article 6.4 mechanism, provided the project complies with the new rules. In addition, CDM credits (called CERs) from projects registered in 2013 or later can be used for countries’ first NDCs.
  • Product Sharing
    • The UNFCCC Secretariat will receive a “revenue share” from the A6.4ERs. This money will be donated to the UNFCCC Adaptation Fund, to help climate-vulnerable countries with their own adaptations. The ‘revenue share’ is therefore sometimes referred to as the ‘adjustment levy’.
  • Global Mitigation of Global Emissions
    • The UNFCCC Secretariat will cancel at least 2% of issued A6.4ERs, recognizing that offsetting emissions does not lead to overall mitigation, thereby reducing overall amounts of offsets over time.
  • Additionality
    • An activity under Art. 6.4 must achieve “additional” GHG emissions mitigation, meaning that the activity would not have taken place in the absence of the mechanism’s incentives.

Access to the Article 6 carbon market

The infrastructure necessary for the proper functioning of Article 6 is extensive. At the national level, especially for developing countries, the ability to implement the rules of Article 6 is likely to be important for accessing international carbon markets. In addition, the ability of low- and middle-income countries to access carbon markets will require support, focusing on assessing these countries’ potential carbon market opportunities, as well as building their measurement capacity. , accounting and verification.

Since many low- and middle-income countries have unspoiled natural wealth, it is important for them to understand how Article 6 carbon markets will apply to nature-based carbon offsets. Article 6.2 and Article 6.4 do not expressly exclude forest-related activities or nature-based solutions from the scope of ITMOs and A6.4ERs. Activities such as avoidance of deforestation, afforestation and reforestation could therefore theoretically be placed on both carbon markets. However, it remains for COP27 to decide whether avoidance activities in any sector, including forestry, qualify as ITMO or A6.4ER, given the additionality issues that these activities raise.

Access to adaptation finance

While adaptation finance remains voluntary under an Article 6.2 carbon market, a mandatory adaptation tax of 5% on centralized market transactions will be paid into the Adaptation Fund from each transaction. In addition, the Adaptation Fund received commitments of $356 million at COP26.

Accredited National Implementing Entities (NIEs) were able to directly access this funding and manage all aspects of climate change adaptation and resilience projects. Low- and middle-income countries were able to designate an entity for accreditation as an NIE under the Adaptation Fund to gain direct access to adaptation finance.

The Adaptation Fund also offers a Climate Finance Readiness Program which is designed to help NIEs gain accreditation to receive and manage climate finance. Ecological monitoring center in Senegal is an example of an approved NPI. All relevant documents for the accreditation process as well as an application can be found here. Relevant information and documents for project funding can be found here.

Carbon Market Case Studies

Some Parties already have mechanisms in place to prepare for carbon trading in Article 6 markets.

Switzerland’s carbon trading agreements

Switzerland is said to have signed carbon trading agreements with Peru, Ghana, Senegal, Georgia, Vanuatu and Dominica. The agreements enact aspects of carbon markets by providing a framework for verifiable carbon offsets that the Swiss government will use, as part of its method of attempting to meet its NDCs.

Under the agreements, Switzerland would only recognize projects that have “additional” benefits, meaning benefits that otherwise would not have occurred in the selling country. However, under its carbon trading agreement with Peru, mitigation results can include projects to prevent “negative environmental and social impacts, including on air quality and biodiversity”. This may include reforestation and afforestation projects, which are unlikely to be considered “additional”.

Switzerland has published an open call for Parties interested in entering into bilateral carbon trading agreements on its Federal Office for the Environment websitewho can be contacted by e-mail at [email protected]. Types of projects that have already been funded by the Swiss government include the installation of stoves in Ghana and the development of a clean and resilient electricity system in Dominica. Specific projects are verified via the Foundation for Climate Protection and Carbon Offsetting (KliK), which is also responsible for funding. Lists of KliK websites all projects funded to date.

Japan Joint Credit Mechanisms (JCM)

from Japan JCM is another example of how carbon markets can be implemented; the JCM would understand 65 projects valued at over US$500 million in 17 low- and middle-income countries. The objective of the JCM is to implement Article 6 of carbon trading between Japan and partner countries in order to contribute to Japan’s achievement of its NDCs.

Under the JCM, Japan has entered into bilateral agreements with several countries, including Ethiopia, Kenya, The Maldivesand the Philippines. Most of these projects focus on solar, hydroelectric and battery storage. However, a project proposal with Cambodia in 2019 focused on reducing deforestation and forest degradation through forest conservation; again, it is unclear if this would be considered “additional” under Article 6 of the carbon markets. It is hoped that the COP27 negotiations in November 2022 will address this point.

In 2021, the JCM has published a call for papers on his proposed methodology to reduce emissions from deforestation and forest degradation by controlling shifting cultivation in Laossuggesting that the JCM is open to nature and forest-based offset projects.

World Bank’s Transformative Carbon Asset Facility (TCAF) and Carbon Partnership Facility (CPF)

FASD is a trust fund established by the World Bank, which helps countries implement market-based carbon pricing. It works with the private sector and governments in developing countries to help them prepare for carbon markets under Article 6. It focuses on a wide range of sectors including agriculture, energy efficiency and renewable energies. TCAF can be contacted via [email protected].

CPF is a partnership between sellers and buyers in carbon markets set up by the World Bank. It brings together buyers from industrialized countries and sellers from developing countries, as well as their respective governments, with the aim of supporting low-carbon development. CPF-supported programs include solid waste management, renewable energy and recycling. The CPF can be reached via [email protected].

Outlook for COP27

In conclusion, COP27 has a lot of work to do to clarify the functioning of Article 6 carbon markets: for example, the process for implementing the transition of CDM activities to Article 6.4 still needs to be refined. . However, it is important to also focus on whether avoidance activities in any sector, for example avoiding deforestation, qualify as ITMO or A6.4ER. Until this is clarified, the role of nature-based carbon offsets in Article 6 carbon markets remains unclear.

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