Decoding Article 6 of the Paris Agreement

12 min readJan 6, 2024

The Paris Agreement’s Article 6 outlines rules for global carbon trading. It aims to facilitate cooperation between countries in reducing emissions through mechanisms like carbon markets (6.2), enabling transfers of emissions reductions, and creating a framework for international cooperation to achieve NDCs (6.4). Additionally, it acknowledges non-market approaches (6.8) to support countries in meeting their climate goals without relying solely on market mechanisms.

Article 6 from The Paris Agreement

Article 6.1. Parties recognize that some Parties choose to pursue voluntary cooperation in the implementation of their nationally determined contributions to allow for higher ambition in their mitigation and adaptation actions and to promote sustainable development and environmental integrity.
Article 6.2. Parties shall, where engaging on a voluntary basis in cooperative approaches that involve the use of internationally transferred mitigation outcomes towards nationally determined contributions, promote sustainable development and ensure environmental integrity and transparency, including in governance, and shall apply robust accounting to ensure, inter alia, the avoidance of double counting, consistent with guidance adopted by the Conference of the Parties serving as the meeting of the Parties to this Agreement.

Explanation for Article 6.2 (market):

Figure 1: Article 6.2 (Credit: The Nature Conservancy)

Countries have the flexibility to engage in bilateral or multilateral trading of Article 6 units. Article 6.2 allows a host country, nearing or surpassing its NDC target, to trade units (Internationally Transferred Mitigation Outcomes (ITMOs)) for investments, capacity-building support, and technology access not locally available. Buyers use these units to fill gaps in meeting their climate objectives. Although Article 6.2 pilots have launched, no bilateral trades have concluded due to host countries lacking domestic frameworks and the need for clearer reporting and tracking guidance from negotiations. Cooperation between countries can manifest in various ways: project-based units by private entities, government-generated jurisdictional units, and linking emissions trading systems (ETS) internationally. There are currently no limitations on the types of units that can be traded (including sectors, gases, methodologies, and standards), as long as they comply with Article 6 guidelines. Each country will craft its policy mechanisms to implement these trades.

Pros and cons of Articles 6.2

Pros:
Flexibility: Allows countries to create tailored bilateral agreements, offering the freedom to design rules and implement quality controls and safeguards that suit their preferences, within the guidelines of Article 6.2.
Speed: Attracts countries aiming for swift action, as it can be implemented faster than Article 6.4.
No Mandatory Fees: Does not require mandatory monetary contributions or automatic cancellations.

Cons:
Transactional and Political Costs: Establishing bilateral agreements demands additional time and capacity, potentially leading to complexity and negotiation challenges.
Less Predictability: The varied nature of agreements makes the process and unit eligibility less standardized compared to Article 6.4.

Article 6.2 Updates till now:

Status: No consensus reached at COP28 for guidelines regarding country-to-country carbon credit deals under Article 6.2.
Previous Guidelines: Major guidelines for Article 6.2 were agreed upon at COP26, allowing its continued operation.
Desired Guidance: Expectation for further guidance on reporting and rules on the authorization of Internationally Transferred Mitigation Outcomes (ITMOs).
Implementation Continues: Despite the lack of consensus, it’s still possible to implement Article 6.2 according to IETA, although additional guidance would have been ideal.

Article 6.3. The use of internationally transferred mitigation outcomes to achieve nationally determined contributions under this Agreement shall be voluntary and authorized by participating Parties.
Article 6.4. A mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development is hereby established under the authority and guidance of the Conference of the Parties serving as the meeting of the Parties to this Agreement for use by Parties on a voluntary basis. It shall be supervised by a body designated by the Conference of the Parties serving as the meeting of the Parties to this Agreement, and shall aim:
a. To promote the mitigation of greenhouse gas emissions while fostering sustainable development;
b. To incentivize and facilitate participation in the mitigation of greenhouse gas emissions by public and private entities authorized by a Party;
c. To contribute to the reduction of emission levels in the host Party, which will benefit from mitigation activities resulting in emission reductions that can also be used by another Party to fulfil its nationally determined contribution; and
d. To deliver an overall mitigation in global emissions.

Explanation for Article 6.4 (market and non-market)

Figure 2: Article 6.4 (Credit: The Nature Conservancy)

Countries can engage in trading units that receive approval through a centralized mechanism. Oversight of Article 6.4 transactions falls under a United Nations (UN) body known as the Article 6.4 Supervisory Body, resembling the structure of the UN’s Clean Development Mechanism (CDM) during the Kyoto Protocol era. Article 6.4 operations can fulfill both market-oriented and non-market objectives, contingent on how these units are utilized. In a groundbreaking move in 2022, a new classification of units, termed “mitigation contributions,” emerged under Article 6.4. These units, not requiring authorization or corresponding adjustments, possess versatility, enabling their use for diverse purposes like results-based climate finance, domestic mitigation pricing schemes, or internal price-based measures aimed at reducing emission levels within the host nation. This flexibility extends their potential application to other markets, including voluntary carbon markets or domestic trade platforms.

Pros and cons between Article 6.4:

Pros:
Centralized Process: All units generated under Article 6.4 go through a centralized body with pre-approved methodologies, ensuring a more predictable process and eligibility criteria.
Utilization of Existing Infrastructure: As an update from the Kyoto Protocol’s CDM, some countries can leverage already established institutional frameworks for Article 6.4 trades, potentially streamlining the engagement process.

Cons:
Less Flexibility: Offers less flexibility in designing agreements compared to Article 6.2 due to its standardized approach.
Mandatory Contributions: Involves mandatory monetary contributions and automatic cancellations, which might limit financial flexibility for participating nations.

Article 6.4 Updates till now:

Setback and Delay: COP28 did not reach an agreement on guidelines for Article 6.4, delaying its operationalization likely until the next UN climate summit in November 2024 in Baku.
Sticking Points: Disagreements centered on rules concerning carbon removals and the guidance’s perceived lack of environmental integrity.
Scrutiny and Concerns: Scrutiny over the oversight of carbon removal credits due to perceived methodological shortcomings, raising integrity concerns.
Industry Reactions: IETA expressed disappointment over the lack of consensus, emphasizing the missed opportunity for a high-bar mechanism, while some remain optimistic, highlighting the need for further resolution.

Article 6.5. Emission reductions resulting from the mechanism referred to in paragraph 4 of this Article shall not be used to demonstrate achievement of the host Party’s nationally determined contribution if used by another Party to demonstrate achievement of its nationally determined contribution.
Article 6.6. The Conference of the Parties serving as the meeting of the Parties to this Agreement shall ensure that a share of the proceeds from activities under the mechanism referred to in paragraph 4 of this Article is used to cover administrative expenses as well as to assist developing country Parties that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation.
Article 6.7. The Conference of the Parties serving as the meeting of the Parties to this Agreement shall adopt rules, modalities and procedures for the mechanism referred to in paragraph 4 of this Article at its first session.
Article 6.8. Parties recognize the importance of integrated, holistic and balanced non-market approaches being available to Parties to assist in the implementation of their nationally determined contributions, in the context of sustainable development and poverty eradication, in a coordinated and effective manner, including through, inter alia, mitigation, adaptation, finance, technology transfer and capacity-building, as appropriate. These approaches shall aim to:
a. Promote mitigation and adaptation ambition;
b. Enhance public and private sector participation in the implementation of nationally determined contributions; and
c. Enable opportunities for coordination across instruments and relevant institutional arrangements.

Explanation for Article 6.8 (non-market)

Figure 3: Article 6.8 (Credit: The Nature Conservancy)

Countries have the option to aid other countries, providing financial or technical assistance, without anticipating any exchange of carbon units, adhering to a non-market approach. Under Article 6.8, a structure was established to develop a centralized UNFCCC website. This platform enables countries and stakeholders to present planned mitigation projects, specifying areas requiring support. The online portal functions as a voluntary tool, aiding in aligning projects with available financial and technical assistance across multiple focus areas. However, Article 6.8 remains less clearly delineated, lacking extensive details on its operational framework and functionalities.

Article 6.8 Updates till now:

Adopted Deal: COP28 saw an adoption of a deal on Article 6.8, providing opportunities for countries to collaborate on meeting their Nationally Determined Contributions (NDCs) without relying on carbon markets.
Operational Timeline: The agreement aims for the finalization of a UN web-based platform for Article 6.8, with full operationalization expected no later than June 2024.

Article 6.9. A framework for non-market approaches to sustainable development is hereby defined to promote the non-market approaches referred to in paragraph 8 of this Article.

Host Countries Currently running ITMO pilots

Overview of ITMO (Internationally Transferred Mitigation Outcomes) pilots worldwide. Image: World Economic Forum and PwC

Addressing double counting authorization and corresponding adjustment

Double Counting and Corresponding Adjustments:
- Article 6 of the Paris Agreement addresses double counting through corresponding adjustments.
- Corresponding adjustments prevent the same emissions reductions from being counted twice by subtracting units sold internationally from the host country’s accounting while adding them to the buyer’s commitments.
- This measure ensures the accurate counting of emissions reductions and prevents the overestimation of mitigation outcomes.

Authorization under Article 6:
- Introduced by Article 6.3, an “Authorization” involves countries permitting the use of ITMOs (Article 6.2 units) towards their NDCs.
- Developed further at COP26, it’s a crucial part of Article 6, triggering commitment to corresponding adjustments and reporting requirements.
- However, there’s ambiguity about its specifics, likely to be defined by national legislation, such as what needs authorization, scope, format, timing, amendment, or revocation.

When Corresponding Adjustment is Required:
- Corresponding adjustments are necessary in Articles 6.2 and 6.4 for all units authorized by the host country, even from sectors beyond an NDC. For example, countries must apply a corresponding adjustment for units transferred to the buyer country’s NDC or for the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).
- Exceptions include pre-2020 Certified Emissions Reductions (CERs) under Article 6.4, which can be transferred without requiring a corresponding adjustment for the host country’s first NDC.
- Mitigation contributions, a new type of unit defined under Article 6.4 in 2022, do not require a corresponding adjustment. These units can be used for various purposes to contribute to emission reduction, presently limited to Article 6.4 but potentially applicable in other markets in the future.

Figure 4: When is a corresponding adjustment required

Article 6 and NDCs: Can countries use carbon markets to advance their climate goals?

Yes. Countries are increasingly looking to use Article 6 to help achieve NDCs. There are a range of factors to be taken into consideration:
Intentions and Engagement:
- According to an analysis by the International Emissions Trading Association (IETA), 80% of countries intend to use Article 6 for their NDC targets.
- 24% have begun engaging through pilots or bilateral agreements.

Trade-offs in International Transfers:
- Exporting emission reductions affects a host country’s mitigation against its NDC target.
- Host and buyer countries are exploring opportunities and costs of Article 6.

NDC Achievement vs. Investment Opportunity:
- Successfully achieving a host country’s NDC is essential if the country plans to trade Article 6 units with a corresponding adjustment.
- Host countries balance NDC achievement against the opportunity to sell carbon units.
- Uncertainty in trading prices and progress toward 2030 NDC targets complicates decision-making.
- Buyer countries face risks linked to host countries changing willingness to sell and underperformance in transferring units.

Price Implications and Mitigation Prioritization:
- Host countries may prefer keeping cheaper, easier mitigation for their own NDC targets.
- Trading might focus on higher-priced or “difficult” mitigation.
- To prevent overtrading, host countries may establish criteria limiting years, technologies, or sectors for Article 6 trades.

Development of Domestic Frameworks:
- Host countries need to develop frameworks for issuing authorizations, defining trade parameters, compliance reporting, etc.
- Monitoring progress toward their NDC requires additional processes.

Sectors “Outside” NDCs and Corresponding Adjustments:
- Host countries might authorize activities not included in their NDCs.
- Uncertainty exists on when and how corresponding adjustments will apply to sectors outside NDCs.
- Lack of clarity in Article 6 text regarding adjustments, potential for future guidance or individual country systems.

Figure 5: Article 6 and NDCs (Credit: The Nature Conservancy)

Article 6 and the VCM: How does the Paris Agreement impact the private sector?

Article 6 and the Voluntary Carbon Market (VCM):
Regulatory Influence: The Paris Agreement doesn’t directly regulate the voluntary carbon market (VCM) but indirectly impacts it through Article 6 rules.
Debate and Uncertainty: The concept of corresponding adjustments within Article 6 sparked debates within the VCM regarding whether voluntary credits can count towards a host country’s NDC while being claimed as offsets by companies aiming for net-zero targets.
Host Country Decisions: Host countries hold the discretion to decide how Article 6 rules apply to the VCM, potentially including corresponding adjustments, with some countries cautious and temporarily halting VCM credit issuance pending legislation finalization (e.g., Indonesia and India).
Market Dynamics: Corporate demand might drive the VCM towards credits with corresponding adjustments, influenced by standards (Verra, Gold Standard) and guidelines (IC-VCM, VCMI) sparking discussions on the necessity of corresponding adjustments.
Article 6 Impact: Article 6’s new concept of mitigation contributions (units not requiring corresponding adjustments) offers VCM participants considerations for climate action contributions or offsets, even though it doesn’t directly regulate the VCM.

Corresponding Adjustments in VCM Offsets:
Article 6 Influence: Article 6 doesn’t directly regulate the VCM, and voluntary transactions are expected to coexist alongside Article 6 collaborations among countries.
Lack of Clarity: Negotiations might not provide extensive clarity regarding private VCM transactions, potentially leading to regulatory decisions made by some countries or corporate-driven shifts towards credits with corresponding adjustments.

CDM transition: What was decided?

CDM Transition to Article 6.4 Mechanism:

Transition Period: Projects must request to transition from the CDM to Article 6.4 by the end of 2023 and the transition needs to be concluded by the end of 2025.
Host Country Control: Host countries play a significant role in approving and overseeing the transition process and must apply corresponding adjustments to units generated by transitioning projects.
Methodology Transition: Approved projects can continue using the original CDM methodology until the end of the current crediting period or December 31, 2025, after which they must adhere to Article 6.4 methodologies.

Usage of CERs towards NDCs:

Eligibility: CERs from projects registered post-2013 can be utilized for the first NDC compliance without requiring a corresponding adjustment by the host country.
Transfer Limitation: There’s a limit negotiated for the transfer of these CERs toward NDCs, impacting their usage timeline and volume.
Significant Decrease: The 2013 registration cut-off reduces the number of potential CER transfers significantly, compared to the larger volume before 2013, which was a point of contention in negotiations.

Differentiation between CERs and ITMOs:

CERs vs. ITMOs: CERs used toward the first NDC are distinct from ITMOs (Article 6.2 units).
CER Eligibility: CERs considered eligible for NDC usage are from the period between 2013 and 2020, while ITMOs are generated from 2021 onwards, defining their respective eligibility periods.

Discounts and Fees in Article 6: OMGE and SOP

Types of Fees:

SOP (Share of Proceeds): Required for all Article 6.4 issuances, comprising a 5% levy in volume of issued carbon units and a monetary contribution.
OMGE (Overall Mitigation of Global Emissions): Also mandatory for all Article 6.4 issuances, constituting an automatic cancellation of 2% of units in volume.

Mandatory vs. Voluntary Application:

SOP and OMGE in Article 6.4: Mandatory for all issuances under Article 6.4, both authorized and non-authorized.
SOP and OMGE in Article 6.2: Encouraged on a voluntary basis, although some countries might make them obligatory in bilateral deals (e.g., Switzerland, Singapore).

Payment Responsibility:

Host Country Burden: SOP and OMGE fees are to be paid by the host country, not the buyer, at the time of issuance.
Potential Cost Allocation: While the burden initially falls on the host country, the possibility of passing on costs to the buyer might arise once trades commence, though this remains to be seen.

Nature of SOP and OMGE:

SOP: Involves both a volume levy (5% of issued units) and a monetary contribution, with fees allocated based on project size and other factors.
OMGE: An automatic cancellation of 2% of units in volume, ensuring a net reduction in emissions rather than merely offsetting CO2 releases.
Purpose: Both SOP and OMGE aim to contribute to global climate action by supporting adaptation funds (SOP) and ensuring genuine emission reductions (OMGE) within the Article 6 framework.

Table 1: OMGE and SOP (Credit: The Nature Conservancy)