EU Sees Big Risks in International Carbon Trading Under Paris; Suggests 5-Year Period to Limit Supply

The EU is suggesting 5-year crediting periods to limit the supply of emission credits under the Paris climate deal.

It sees big risks in international carbon trading because such trading may water down ambition.

(Warning: countries are in tense negotiations on climate action and proposals may reflect negotiation stances — they may not reflect what countries are willing to accept ultimately at climate talks in Glasgow in November).


Submission by Portugal and the European Commission
On behalf of the European Union and its Member States
Subject: Enabling ambition in Article 6 instruments to inform the SBSTA regarding the informal technical expert dialogues during the June session
2 June 2021

Enabling ambition in Article 6 instruments
The EU and its member states would like to thank the SBSTA Chair for the encouragement to
provide views ahead of the Article 6 technical dialogues. We welcome in particular this
opportunity to engage with Parties on enabling ambition in Article 6 instruments.
International cooperation can foster innovation, identify synergies and efficiencies in mitigation,
mobilize finance for abatement where public resources are insufficient, and enable higher
ambition in individual and in collective commitments, in line with the long term goals of the Paris
Agreement, provided arrangements are in place to ensure the appropriate ambition over the
long term. Guidance for Article 6.2, rules, modalities and procedures for the mechanism under
Article 6.4, and the work programme for Article 6.8, will need to avoid incentivizing cooperation
that undermines ambition or inhibits progression. Article 6 needs to contribute to
transformational change and sustainable development.

We need to consider recent developments. An increasing number of Parties has indicated they
will step up their ambition until 2030, until 2050, and beyond, but in many cases these intentions
need to be reflected in updated or new NDCs, or in long term strategies. At the same time stated
interest in international cooperation for the implementation of NDCs, particularly the use of
markets, has increased significantly. In addition, there is a growing number of non-state actors
committing themselves to more climate action and we note that their interest in using carbon
markets as an instrument to deliver such action has also grown.
At COP-26 we have an opportunity to agree to guidance for implementation of international
cooperation that supports these developments by enabling higher ambition in the new
generation of carbon markets. To do so we need to create the conditions that facilitate
innovative approaches to cooperation, move international cooperation on markets beyond pure
offsetting, and enable those with less capacity to participate in carbon markets, particularly with
the support of the new mechanism under Article 6.4.

Article 6 and the ambition gap
As pointed out in scientific reports, more effort is needed to limit the rise in global temperature
above pre-industrial reports. We know that current NDCs fall short of the long term mitigation
goal agreed in Paris and that the implementation of policies falls short of meeting targets
expressed in NDCs. International cooperation will not enable ambition in line with the Paris goals
if emissions reductions or removals are double counted, if they are not real, additional and verified, if they are not robustly accounted and tracked, or if they are based on weak reference
levels or baselines, crediting at historic or business as usual levels.

Article 6.1, which “recognizes that some parties may choose to pursue voluntary cooperation in
the implementation of their nationally determined contributions to allow for higher ambition in
their mitigation and adaptation actions”, provides the context for all cooperation under Article 6 The Paris Agreement, and in particular Articles 2 and 4, provides the context within which this
higher ambition is framed, including:
 a long term temperature goal to limit global warming to well below 2, pursuing efforts
to 1.5 degrees Celsius, compared to pre-industrial levels;
 early peaking of global emissions and pursuit of a balance between emissions and
 all parties to prepare, maintain and account for successive nationally determined
contributions at their highest possible ambition, and representing a progression;
 developed countries taking the lead and developing countries encouraged to enhance
their mitigation actions, and move towards economy wide emissions limitation and
reduction targets.

The IPCC in its special report on 1.5 degrees from 2018 concluded that there is a significant
ambition gap between what is needed to limit rise in global temperatures and what NDCs up
until then delivered in terms of mitigation, pointing to the need for rapid and significant
reductions in 2030 as well as reaching net zero C02-emissions in 2050.

UNEP, in their emission gap reports have consistently pointed to the significant emissions gap,
when comparing planned policies and NDCs with the long term goal of the Paris Agreement. The
most recent UNEP gap report (December 2020), concluded that by 2030 annual emissions need
to be 15 GtCO2e (range: 12–19 GtCO2e) lower than current unconditional NDCs for a 2°C goal,
and 32 GtCO2e (range: 29–36 GtCO2e) lower for the 1.5°C goal. Current policies still fall short 3
GtCO2e of meeting the level associated with full implementation of the unconditional NDC.

Finally, it is also clear from the recent UNFCCC NDC synthesis report (February 2021) that an
increase in NDC ambition is needed – both in the short and the long term – to close this
emissions gap. The assumption is thereby made, as noted in the report, that the aggregate effect
of NDCs assumes no double counting of outcomes of actions to reduce emissions will occur. The
synthesis report has also identified that interest in Article 6 for the implementation of NDCs has
almost doubled compared with previous NDCs and many Parties have set limits, a few limiting
voluntary cooperation to conditional mitigation or setting quantitative limits, many setting
qualitative limits.

Risks to ambition
Article 6 needs to be implemented in line with the objectives of the Paris Agreement. There are
valuable lessons to be drawn from experience of the Kyoto Protocol. However, the new context
requires particular attention for the framework within which international markets will be
operationalized. Its starting point is the need to maintain and enhance ambition of all Parties.

We note with concern particularly that some compromise proposals on the table now propose
to continue existing approaches indefinitely, or to avoid or defer rules that we consider essential
to managing risks, including those that directly undermine ambition. A shared understanding of
the risks to ambition posed by poor or inadequate rules for Article 6 could benefit future
We see risks in:
 Proposals that undermine, reduce or defer mitigation through carrying forward
historic surpluses, or that lead to double counting of efforts;
 Proposals that undermine Parties efforts in mitigation by providing for levels of
allocation or crediting inconsistent with NDCs or long term targets, locking in high
levels of emissions, incentivizing lower levels of ambition or displacing own mitigation

If a compromise is to be found at COP-26, it will be important that all proposals put forward
identify and, to the extent possible, quantify key risks, and that solutions offered ensure that
risks can be minimized or limited in scale and time, so as to allow Parties to assess and manage
the potential impact on their individual and collective ambition.
We know that no multilateral decision will ever completely avoid or manage all the potential
risks and that a failure to reach agreement has its own risks, leading to the adoption of a
multitude of bilateral approaches and standards.

We also know that many Parties currently lack
the capacity to assess and manage these risks and to secure and maximize the potential benefits
associated with use of international markets,
and that the absence of multilateral rules and
guidance will act to their disadvantage. We consider that support to Parties for implementation
is best achieved through multilateral rules and in particular the new mechanism.

Enabling ambition in Article 6.2
While we are of the view that all Article 6 rules need to enable higher ambition, there are
particular elements of the rules that Parties are negotiating under Article 6.2 that will have a
significant impact on this objective. Key amongst them are the accounting rules designed to
ensure the avoidance of double counting and the promotion of environmental integrity. As the
EU has expressed in past sessions, how Parties account for their participation in cooperative
approaches or in the Article 6.4 mechanism, needs to be comprehensive – through the general
application of corresponding adjustment, and needs to be representative in the sense that it
reflects the impact of such participation on their actual emissions and removals.
Specifically that means:
 Given the variety of NDCS, accounting for use of markets has to be emissions-based,
adjusting an emissions balance on an annual basis. The emission balance would be
derived from annual emission reductions and removals from sectors and GHGs
covered by the NDC;
 The impact of the use of markets on emission reductions and removals needs to be
clear and transparent, supported by robust reporting and review provisions and
common reporting tables, ensuring relevant information is provided at the earliest
stage, is publicly available and is supported by robust centralized infrastructures;
 Parties should identify how the cooperative approach they participate in, and in
particular the allocation methodologies that they adopt, contributes to the
achievement of their NDC and their low emission long term strategy leading to carbon
neutrality, and report on this regularly. We need to see a balance in what is expected
of Parties in ensuring environmental integrity, across Article 6.2 and Article 6.4;
 Parties need to demonstrate how mitigation outcomes are real, verified and additional
and in particular how they are resulting from the cooperative approaches. Clear
methodologies and guidelines are needed to enable Parties to report and guarantee
 Parties should make clear, through their reporting, how their application of accounting
rules ensures that there is no net increase in emissions within and between NDC
implementation periods. Understanding how this is ensured, is important given the
need for rapid cuts in emissions in the short term if we are to keep the temperature
goal within reach;
 When applying corresponding adjustments, host Parties should adjust their emissions
balances for the year in which the mitigation was achieved, by reducing emissions or
increasing removals. Accounting would thereby reflect when there is an impact from
the mitigation activity on the atmosphere;
 We need clear guidance to technical expert review to review the criteria on ensuring
environmental integrity.

Enabling ambition in Article 6.4
There are particular elements of the rules for Article 6.4 that will have a significant impact on
the objective of enabling higher ambition. We are of the view that the mechanism, given its
centralized nature, presents a particular opportunity for the international community to
facilitate and support those countries that face market barriers or require support in developing
their mitigation strategies. It will do so principally by enabling these countries to integrate use
of international markets in their NDC and their broader mitigation strategy. For this to happen
it will be important to get the governance right, by establishing cooperation between the
supervisory body and host Parties. Rules, modalities and procedures need to provide processes
whereby the supervisory body and host parties promote ambition in line with national priorities,
and ensure that there are enough resources available to participating countries to build the
necessary capacity to manage their own mitigation.

Specifically that means:
 Governance: in contrast to the Kyoto Protocol and the CDM, host Parties need to
ensure that when they authorize the transfer of mitigation outcomes from 6.4
activities, this is consistent with and contributes to achievement of their nationally
determined contributions, and their low emissions long term strategy. This means in
particular that:
o The supervisory body has a duty to ensure host Parties ambition, as expressed
by those Parties, is respected and met;

o Host parties need to make choices on how to distribute their mitigation
potential and the consequences for the achievement of their own goals;
o Host Party choices will be communicated to the supervisory body of the 6.4
mechanism, and any decisions made by the body should be within the
parameters set by the host country.
 Baselines: for the host Party to secure a proportion of the mitigation benefit from
participation in the 6.4 mechanism, as well as to enable ambition, crediting levels need
to be set not to credit improvements on business as usual or historic emissions.

Baselines should ensure crediting levels:
o that are forward looking performance standards, based on performance
standards, and set with reference to best available technology (or equivalent
o that incentivize long-term transition needed to get the economy to a balance
in emissions by sources and removals by sinks in line with the Paris
Additionality: Additionality testing needs to identify transformative activities within
sectors, and complement the more stringent approach to baselines.
Technologies or
approaches that lock-in too high emissions, such as coal, should be excluded. If NDCs
contain ‘hot air’, the transfer of non-additional ITMOs will reduce global ambition
compared to a situation where the ‘hot air’ cannot be transferred;
 Crediting periods: commitments to crediting need to reflect the ambition cycle of
NDCs and LTS [note – long-term strategy, I think], this means crediting periods should be limited in general to five years,
to reflect the ambition cycle under the Paris Agreement, with the possibility of limited
. In case of a renewal, the baselines and additionality assessment for activities
need to be updated in accordance with national policy ambition. Investment in more
sustainable longer term carbon removal activities should be encouraged compared
with shorter term sequestration activities;
 Capacity building: there needs to be a significant focus on this as host countries should
be able to secure support in aligning crediting of emissions reductions and removals
with their NDCs and long term strategies. This could and should be provided by
reallocation of resources from the CDM to the 6.4 mechanism. We need to ensure
resources are targeted to countries that are facing barriers in participating in markets,
and to generate capacity necessary for mitigation activities that lead to a progression
in NDCs in the future;
 Methodologies: there needs to be a dedicated effort to the development of
centralized methodologies that facilitate higher ambition.
Enabling ambition in Article 6.8
Cooperation through non-market approaches can deliver innovation and enable ambition
without the risks attached to market instruments. Such cooperation is fostered and realized
through a range of institutional arrangements and instruments, both inside and outside the
UNFCCC. The work programme under Article 6.8 represents an opportunity for Parties to explore
cooperative approaches that have significant potential to deliver higher ambition.

We see the work programme as a space for exchange of practical experience and examples, and
an incubator for catalyzing new ideas. The work programme is dedicated to identifying synergies
and efficiencies in existing modes of cooperation, and we would expect it to enable Parties to
explore and promote innovative and transformational approaches. To deliver these objectives,
existing institutional arrangements and instruments should be engaged, so that ideas and
proposals are informed by and addressed in the appropriate fora, for example in constituted
bodies under the UNFCCC.

Final remarks
Here, we have not addressed in detail other elements of the rules in Article 6 that we also
consider to be essential for a robust outcome at COP-26 in Glasgow. Some of these elements
have already been touched upon in the dialogues so far held, namely:
 The application of corresponding adjustments to the mechanism and clear guidance on
inside/outside NDC scope (Submission topic: Avoiding double use for outside the NDC
for Article 6.4);
 Increasing the scale and predictability of finance for adaptation, particularly for
vulnerable developing countries (Submission topic: Financing for adaptation / share of
proceeds – Article 6.2 and Article 6.4);
 Clarity on Article 6.2 reporting and review provisions; The need for rules, modalities and
procedures for the Article 6.4 body, its support structure and host Parties; Coordinated
CMA/CMP decisions on transitional elements (Submission topic: Ensuring rapid
operationalization – Articles 6.2, 6.4, and 6.8).
Other elements will come up in upcoming technical dialogues including particularly on
implementation of overall mitigation in global emissions, and treatment of other metrics.

Source: Climate Action Tracker snip, December

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