COP29*1, held in Baku, Azerbaijan in November 2024, is known as the Finance COP. This is because the main issue was to discuss the specific amount of financial support given by developed countries to developing countries. Furthermore, the reelection of former U.S. President Donald J.Trump during the COP, who had called for withdrawal from the Paris Agreement, had a significant impact on the funding issue. A final agreement was reached at $300 billion per year, a considerable deviation from the original request for $1.3 trillion from developing countries. Therefore, further discussions might take place, whether officially or unofficially, at COP30 in 2025.
Along with the financial issue, the last unagreed provision of the Paris Agreement, Article 6, the market mechanism, has been the focus of much attention. In this report, I will discuss the items agreed to at COP29, including the background, the content of the agreement, and its impact on the carbon market in the future, regarding Article 6.2 (cooperative approaches) and Article 6.4 (UN-managed mechanisms).
(*1)
COP stands for Conference of the Parties, the highest decision-making body of the UNFCCC (United Nations Framework Convention on Climate Change).
Left: COP 29 plenary hall (photo by the author)
Right: Plenary hall, after the end of the agenda (photo by the author)
First, I would like to talk about the necessity of introducing market mechanisms.
Unlike the Kyoto Protocol, under which only developed countries were obligated to reduce greenhouse gas (hereafter GHG ) emissions, under the Paris Agreement, all parties are required to submit reduction targets of GHG (hereinafter referred to as “NDC”*2). Under the Paris Agreement the targets are voluntary because of the pledge-and-review*3 method used. The targets will then be reviewed by a third party under the supervision of the United Nations to confirm their performance. However, it is an undeniable fact that because the goals are voluntary, some countries may submit them as mere ‘effort targets’ or set goals that are unrealistic. This is another institutional limitation of the Paris Agreement, which involves nearly 200 countries. Nevertheless, developed countries and emerging countries with high emissions are required to take a rational and sincere response from the viewpoint of national responsibility in the historical context.
When implementing reductions based on economic rationality, both companies and countries should start with initiatives that have the lowest cost per ton of CO₂ emissions, but the cost varies greatly from country to country and company to company. Therefore, as with trade based on the principle of comparative advantage*4, projects are implemented in countries and regions with relatively low CO₂ emission reduction costs, and the emission reductions generated are traded and transferred. This will not only satisfy economic rationality for individual countries and companies, but will also lead to cost reductions in the economy as a whole. This principle is the basis of the market mechanism discussed in this paper, which aims to increase the countries’ ambition and promote GHG reductions.
(*2)
Abbreviation for “Nationally Determined Contribution,” the GHG emission reduction target under the Paris Agreement.
(*3)
The term "pledge" refers to voluntary goals, and under the Paris Agreement, it is equivalent to NDC (Nationally Determined Contributions). The implementation process and outcomes of these pledges are reviewed under a system called the Technical Expert Review (TER), where technical experts assess the progress and results.
(*4)
The concept that global economic welfare is maximized when countries specialize and concentrate on highly productive sectors within their own countries and exchange the goods and services produced in those sectors.
The Kyoto Mechanisms are a UN-managed mechanism established as a flexible measure for developed countries that were obliged to reduce their emissions under the Kyoto Protocol, but are unable to achieve their GHG reduction targets through self-help efforts alone. This includes three mechanisms: Clean Development Mechanism (CDM), Joint Implementation (JI), and Emissions Trading.
Under the Kyoto Protocol, during the first commitment period (2008-2012), only developed countries were obliged to reduce their emissions, with Japan reducing its emissions by 6%, the U.S. by 7%, and the EU by 8% from the base year of 1990. Japan has decided not to participate in the second commitment period (2013-2020). The reasons given were as follows; Since the U.S., a major emitter, withdrew from the Protocol, and China and India were not obligated to reduce their emissions as developing countries, the countries with reduction obligations alone covered less than 30% of global emissions in the first commitment period, and there was a carbon leakage*5 issue.
In the second commitment period, doubts about the function and effectiveness of the Kyoto Protocol surfaced, leading to discussions about a new framework for the post-2020 period. In 2015, the Paris Agreement was adopted at COP21 in Paris as the framework for the post-2020 period. Under the Paris Agreement, all parties will have reduction targets, and Article 6.4 is the successor to the Kyoto Mechanisms as a flexible measure.
(*5)
Carbon leakage is also known as "market leakage", whereby a company exposed to intense international competition may relocate to a country with looser emission regulations, thereby increasing its emissions.
In the previous chapter, I mentioned the reason why Japan refrained from participating in the second commitment period of the Kyoto Protocol, but there was also a problem that energy conservation, which was Japan's specialty, was not easily recognized under the CDM. Therefore, the Japanese government decided to create a mechanism called Joint Crediting Mechanism (JCM) (originally called BOCM*6) to contribute to climate change issues by spreading Japan's advanced technologies to developing countries. So far, 29 countries have signed the JCM agreement, and the goal is to reduce emissions by 100 million tons by 2030 (see table below).
Article 6.2 of the Paris Agreement defines a cooperative approach. However, since the JCM adopts a method where rules and guidelines are determined by a joint committee established bilaterally, it is necessary to follow the guidance and rules aligned with Article 6.2 in order to operate under the Paris Agreement.
(*6)
BOCM is an abbreviation for Bilateral Offset Credit Mechanism.
Currently, besides Japan, mainly Singapore and Switzerland are actively promoting this cooperative approach. Other countries such as South Korea, Sweden, Norway, and Australia are also pursuing this approach, and it is undeniable that they may become competitors in terms of host countries and project discovery in the future (see table below).
(Prepared by the author based on the UNEP Article 6 Pipeline)
Reductions resulting from GHG reduction projects implemented under Articles 6.2 and 6.4 (discuss later) may require government approval, depending on their intended use. As shown in the figure below, government approval is required when the GHG reductions are used for other international mitigation purposes such as NDC and CORSIA*8. In this case, the government is the host country*9. The reductions that have been approved by the government are called ITMOs (Internationally Transferred Mitigation Outcomes), which require corresponding adjustment*10 when transferred internationally. This approval system will eliminate much of the concern about double-counting and at the same time enhance confidence in the quality of the credits, such as their integrity (environmental integrity). On the other hand, reductions that have not been approved can be used for purposes other than those mentioned above as mitigation contributions, and are not subject to the corresponding adjustment.
(*7)
This specific detail was also one of the key points of agreement at COP29.
(*8)
CORSIA is an abbreviation of Carbon Offsetting and Reduction Scheme for International Aviation.
(*9)
The host country is responsible for permitting activities and approving project participants, and participating countries other than the host country are responsible for approving project participants.
(*10)
A scheme that separates the emission reductions of countries obtaining credits from those selling credits based on their respective contributions, etc., to avoid double counting of emission reductions (absorption).
Article 6.4 is a mechanism centrally managed by the United Nations (hereafter PACM*11). This is often regarded as a successor to the CDM of the Kyoto Mechanism, which was a flexibility measure under the Kyoto Protocol, but it is also a successor to the JI, which is more similar to the JI in the sense that it is a project between countries with targets*12.
In other words, a country under the control of the United Nations (investor country) can implement a GHG reduction (absorption) project in another country (host country), and the amount of the reduction (absorption) can be counted in the amount of reduction by the investor country. As with Article 6.2, the use of GHG reduction (absorption) projects for NDC and other international mitigation purposes requires the approval of the host country, as well as corresponding adjustment. Currently, the reductions generated by this Article 6.4 are called A6.4ERs, and this A6.4ERs with government approval are deducted as a 5% share of the financial support for adaptation (SOP: Share of Proceeds) and at least 2% as a contribution to the global emission reductions (OMGE: Overall Mitigation in Global Emissions) *13. Furthermore, a corresponding adjustment is also required for this 2% or more.
On the other hand, Article 6.2 only “strongly recommends” these reductions.
(*11)
PACM is an abbreviation for the Paris Agreement Crediting Mechanism, a credit creation mechanism with a high degree of sufficiency.
(*12)
In the case of JI, however, credits could be transferred without verification by a third-party certification body if approved by the host developed country.
(*13)
The SOP portion is to be deducted by making financial contributions and the OMGE portion is to be deducted by retiring the equivalent amount of ITMOs.
Earlier, we noted that under the Kyoto Protocol's CDM projects, only developed countries had emission reduction obligations during the commitment period, so corresponding adjustments were not necessary. So, what was the process for JI projects, which are implemented in countries with emission reduction obligations? In fact, when an investor country implemented a project in a developed host country, it used the emission allowances (AAU: Assigned Amount Unit*14) held by the host country to make the adjustment. In other words, the same type of adjustments as those in the Paris Agreement had already been implemented.
As described above, the cooperative approach under Article 6.2 and the market mechanism under the UN-managed Article 6.4 PACM will enable the parties to achieve their NDC targets.
9 years after the conclusion of the Paris Agreement, a new UN-led carbon credit creation mechanism is finally underway, and the use of these Article 6 credits is expected to expand significantly in the next two to three years.
In the second part of this blog, I would like to discuss the cooperative approach in Article 6.2 and how the carbon market will be affected by the launch of PACM under Article 6.4.
(*14)
A tradable unit that represents the amount of greenhouse gas emissions a country is allowed to emit.
(*15)
REDD+ stands for Reducing Emissions from Deforestation and forest Degradation in developing countries, and the role of conservation, sustainable management of forests, and enhancement of forest carbon stocks.
The underlined part above are the + (plus) contents.