Offsetting writ large: Article 6 of the Paris Agreement and international carbon markets

This is part of a series of pieces on carbon pricing and related issues, to take stock of the current political moment and celebrate the work of the now-ended Zero Carbon Campaign.

What is Article 6?

In the last gasps of COP26 in November, Article 6 provisions were either agreed upon or set up for forward work, making it the last article to be implemented of the 2015 Paris Agreement. The Article lays out a framework for global carbon markets in several forms, and how these would interact with Nationally Determined Contributions (NDCs – national plans for climate action and emissions reduction) that countries submit under the Agreement. The two key clauses are:

1.       Article 6.2: This covers bilateral or multilateral “cooperative approaches” that are set up directly between countries. For example, if two countries combine their national Emissions Trading Schemes.

2.       Article 6.4: This article establishes a centralised global market, run by a Supervisory Body at the UN, for countries to buy and sell carbon credits (i.e. tonnes of CO2 mitigated or captured) connected to their NDCs. Private companies can also take part.

Article 6 could have such an impact on global climate ambition, finance, and delivery that it was thought it would “make or break” the Paris Agreement. So what happened?

“Making” the Paris Agreement

The essential idea of Article 6.4 is that if, say, Costa Rica cuts a tonne of CO2 more from its emissions than it had committed to in its NDC, it can then sell that one tonne “carbon credit” in a global market, and another country - say Russia - can buy it. Alternatively, a business in Russia could buy it from Costa Rica. Rules on “double counting” mean that the purchaser Russia would minus that tonne from its emissions (getting 1 tonne closer to meeting its NDC commitment), while the host Costa Rica would plus the 1 tonne it had captured back onto its total, leaving it on the same number it started on.

Advocates argue that this system will use the market to create investment for carbon capture and mitigation projects, particularly in the Global South. They hope that a wide range of projects, such as renewables or forest restoration, will become economically viable through this trading that would otherwise not have happened. The system could also create a clear financial incentive for countries to exceed their NDCs, adding another lever to diplomatic and popular pressure, as NDCs are not legally binding. 

“Breaking” the Paris Agreement

Despite the potential upsides, critics have highlighted key shortcomings in the regime that they believe could undermine efforts to cut emissions.

Firstly, there are the “zombie credits”. It was agreed that credits from the Paris Agreement’s predecessor, the Kyoto Protocol, could be carried over only if they were established from 2013 onwards, totalling about 320 million tonnes of credits. Countries can still sell these credits, and buyers can use them as offsets, even though their actual carbon impact has been disputed, as has whether the projects would have happened anyway without the original financial support.

Secondly, to aid overall mitigation, a fraction of the total credits traded were to be cancelled each year, meaning that the purchaser would no longer get to count them towards their NDC. The agreement reached mandated this at just 2%, when a significantly higher figure was hoped for. 5% of proceeds will also be “taxed” to go towards a global fund to help vulnerable countries adapt to climate change. This “tax” only applies to countries and businesses using the central marketplace under Article 6.4 and does not apply to bilateral schemes under Article 6.2.

Further criticisms leveraged against this scheme are in fact those generally associated with carbon offsetting of any kind:

1.       Mitigation: Is offsetting enabling the buyer to continue emitting unnecessarily? Would this emissions reduction have happened anyway?

2.       Timeframes: How long will the emissions reductions remain in place? When will they take effect?

3.       Communities: What will happen to the people who live where these projects take place?

To maximise mitigation, purchasers of offsets should be those who have either reduced their emissions as much as possible and are left with “residual” or “hard-to-abate” emissions, or have a credible plan to do so. The argument is that there simply isn’t enough space for everyone to maintain business as usual and buy their way out of the Paris Agreement with offsets. Article 6 currently does not seem to prevent over-emitters from buying credits. Another potential issue is that giving countries a financial incentive to exceed their NDCs may also be an incentive to keep their NDCs as they are rather than ratcheting up their ambition, in order to keep making money.

The rules on timeframes are not yet clear. Nature-based carbon capture (e.g. tree-planting) takes time to capture carbon, and these reductions need to remain in place long after they are sold to have the desired effect. But there are also questions of how they relate to targets set to specific timeframes. For example, if a country has a 2030 target, and it is doing better than planned in 2025, can it sell that difference even though the 2030 target has yet to be met?

Finally, there are widespread concerns about the impacts that carbon capture projects, particularly nature-based ones, will have on local communities and ecosystems (more on this can be found in our insight on nature-based solutions). As requested by Indigenous rights groups and campaigners, disputes over local rights and tenure will be submitted to an independent grievance process. The effectiveness of this remains to be seen.

What does it mean for businesses and carbon credit providers?

Businesses and carbon credit providers are now faced with a choice: they can either take part in this “authorised” market where purchases are added to NDCs, or they can stick with the “un-authorised” market that was already available. Some major companies like BMW have already announced their intention to specifically buy authorised credits, and some established credit providers like Gold Standard and Verra plan to take part. The market is predicted to expand quickly. But as we have seen, while the premise of aligning offsets with global NDCs makes sense, the Article 6 market is not yet a byword for quality. The work of the UN supervisory body for Article 6 may change this picture in the coming year, although even with the right rules the regulatory challenge is huge. All the familiar caveats about offsets being at best a last resort remain.