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COP27: A Primer to Carbon Markets Under Article 6 and Why You Should Care

Written by Rachel Lee

Monday, January 23, 2023


It is undeniable that Loss & Damage was the standout issue of this year’s COP27. But greater attention should arguably be paid to carbon markets, an area where shining promises were made in last year’s COP26, but where delivery in this year’s COP27 has spectacularly failed.



What is Article 6?

One of the key milestones which countries managed to achieve in last year’s COP26 was agreeing on the rules in Article 6, which sets out rules for international cooperation through mechanisms for carbon trading (1). Parties reached an understanding on the creation of a UN-supervised global carbon credit market, which would facilitate trade between countries and businesses. This was the green light that policymakers and the private sector needed in order to assertively pursue carbon projects and investments. To regulate this growing market, it was decided that COP27 would further define this framework, setting out clearer definitions and stricter project requirements.


This would have been significant: since COP26, carbon trading has come under criticism for increasing rather than reducing emissions, igniting doubt about the credibility of carbon trading. COP27 would have been an opportunity for parties to clarify standards with the aim of coming down hard on projects with little to no positive impact, ensuring that companies are not greenwashing — buying carbon credits while still polluting.


As many might know, COP27 was plagued with disappointing outcomes, lack of consensus, and greenwashing. Article 6 discussions were not an exception to this rule.



The Good

Some progress was made in developing Article 6 rules. For instance, there was agreement on various aspects of Article 6.2, such as the definition of internationally transferred migration outcomes (ITMOs) (2), reporting formats and more. More progress was also made outside the negotiation room, by countries inking private carbon credit deals with each other. Singapore, for instance, participated in discussion about carbon trading deals with 20 countries, and was successful in signing agreements with Peru, Vietnam and Papua New Guinea. Switzerland, Ghana and Vanuatu also launched the first projects under Article 6 during COP27. These actions are indicative of the countries who are seeking to establish themselves as global hubs of carbon services and trading.



The Bad

Despite ten days of delayed negotiations (including talks through the weekend) there has been a general lack of consensus and progress between parties on determining key aspects of Article 6 infrastructure. This has delayed the activation of mechanisms. There has been criticism of countries pushing for more confidentiality around Article 6.2, such as by lowering the bar for reporting mechanisms to be non-standardised. Observers worried that governments would not be held fully to account, and that the lack of transparency would undermine the initiative in the world’s eyes.


Many questions surrounding definition and clarity remain unresolved. One example is whether ITMOs can be revoked by countries under Article 6.2 once sold. Discussions on Article 6.4 were also controversial for failing to define what elements such as carbon removal is. Experts say that ambiguous definitions risk accepting projects which do not legitimately and permanently remove carbon from the atmosphere. For example, carbon credits were sold for Californian forests which subsequently caught on fire during the heatwave (3). The lack of success in reaching clear consensus even when defining key terms has been frustrating, and perhaps also harmful — private carbon markets continue to flourish despite the lack of regulation, exacerbating the impact of illegitimate projects which increase, rather than reduce emissions.


There has been tension, too, between richer and lower income countries. Many from developing nations were unappreciative of efforts to involve the private sector more in providing climate finance.


“The private sector is about business, the private sector is not interested in equity. It is not interested in moving along with [the principle of] common but differentiated responsibility, it is not interested in climate justice,” said Diego Pacheco, the head of delegation of Bolivia. He claimed the private sector should play a role outside of carbon trading systems, accounting for the needs and priorities of local communities.


Developing countries are also seen to have different priorities, since for them climate finance is in short supply and quick action is needed — which is hampered by richer European nations focused on effective emission reduction, and are hence seeking to implement stricter standards.


An unregulated carbon market could also lead to significantly different carbon prices between countries. Gabriel Labbate, global team leader of the UN-REDD Programme, said that countries and indigenous communities were not proportionately compensated for their efforts to combat deforestation, and lacked direct access to payment. “The prices in the European carbon market are about $80/t, and we are paying developing countries $5–10/t, when they are high-quality emission reductions. I really can’t understand why.” (4)



The Ugly

Although carbon markets have been proffered as an ingenious solution to the climate crisis, they have a dark side: they can be used as a tool to exploit indigenous communities, which ironically should be one of the benefactors at the focus of climate action.


Many important forests, land and other carbon sinks targeted for offsetting schemes are held on land inhabited by indigenous communities. Research shows that this land is typically better maintained than land held by non-indigenous people. It is therefore clear that in order for carbon trading to flourish, those who are the best stewards of the land must have a key role in protecting it, and be compensated for it. Hence, it is critical that Article 6 mechanisms help, rather than hinder, indigenous communities, many of whom are low-income and lack secure rights to their land.


The REDD+ programme, adopted by the UN in 2013, is a climate mitigation solution which aims to address this issue. One such country which has invested heavily in this programme is Cambodia, which has scaled up the number of REDD+ projects taking place within its territory. “Many Cambodians live close to forests, where for generations they have been dependent on forest resources for their livelihoods, living sustainably and in harmony with the forests around them,” said Cambodia’s Minister of Environment, Say Samal. “In order to protect our culture and precious resources, we have planned for continuing economic growth and prosperity for our people while also protecting our country’s forests.” (4) Essentially, the programme provides a framework for local communities to receive direct investment that funds sustainable livelihoods and helps them safeguard their land, negating the need to deforest for subsistence or profit.


Investors and governments are becoming increasingly interested in REDD+ and similar offsetting schemes. But these programmes are coming under greater scrutiny for putting the communities in question at risk of land grabbing. Much of the territory considered by carbon schemes belongs to indigenous communities whose rights to the land have not been secured, rendering them vulnerable to companies and governments who seek to acquire their territory for commercial and industrial purposes, wrenching it from their control. Carbon trading would pose a ripe opportunity for such resources, and a highly significant threat.


David Boyd, UN special rapporteur on human rights and the environment, warned that the hastiness to conclude rules on global trading systems would leave human rights “largely ignored.” Indigenous activists have slammed the carbon mechanisms as a whole, for being solutions that are rooted in resource extraction and colonialism. They assert that as stewards of the land, they are fully entitled to the decision over managing their lands and resources.


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Carbon markets have the potential to double global emissions reductions within the next decade, slowing down global warming significantly. They could also become a dangerous loophole that could be exploited by others to continue polluting without consequences, further worsening the impact of the climate crisis. It is disheartening when climate solutions conceived with good intentions become weapons of exploitation, especially when they hurt those most vulnerable to the climate crisis. Designing solutions therefore necessitates a closer scrutiny of the underlying colonialism and power dynamics that underpin traditional approaches. We also need the world to stand firmer against those who seek to benefit selfishly from carbon markets,and sharpen its focus on the wider goal of reducing emissions.




Bibliography

(1) Articles 6.2 and 6.4 are the significant sections under Article 6. Article 6.2 allows countries to buy and sell emissions reductions to each other. Article 6.4 establishes a global carbon market overseen by the UN. Projects are created and issue credits, which can be bought by countries, private companies and individuals.

(2) ITMOs: emissions reductions which countries can trade with each other in the carbon market, measured in carbon dioxide equivalent (CO2e) or kilowatt-hours (KWh) of renewable energy.

(3) https://www.energymonitor.ai/policy/carbon-markets/cop-27-carbon-markets-article-6-is-contentious

(4) https://www.energymonitor.ai/policy/carbon-markets/the-interwoven-fortunes-of-carbon-markets-and-indigenous-communities


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