MADRID — As two weeks of UN climate talks begin in Madrid on Monday, one contentious issue will occupy diplomats more than any other.

Under the Paris Agreement (the relevant section is Article 6), countries agreed to set up a new global carbon market system to help countries decarbonise their economies at lower cost.

Countries have tried and failed to agree the rules governing this mechanism. It is the last section of the Paris accord rulebook which remains unresolved and it has the potential to make or break efforts to curb emissions.

How are markets linked to the Paris Agreement?

A majority of national climate plans include the use of carbon markets to achieve cheaper emissions reductions. Most commonly this means governments and the private sector can trade emissions reductions.

But some governments may also look to buy carbon credits to develop green projects designed to cut emissions in another country. Others which have cut emissions beyond their target could sell their overachievement to countries struggling to meet their goals.

Not all countries will use these credits. Finland and the UK, for example, have said they will not use them to reach their net zero targets. Norway and Canada, on the other hand, will.

The Paris Agreement sought to establish a common set of rules to govern these transactions and ensure they lead to global emissions cuts.

Madrid climate talks to split nations into vanguard and laggard

What is Article 6? 

The framework defined by Article 6 of the Paris Agreement is divided into three sections.

Article 6.2 allows countries to strike bilateral and voluntary agreements to trade carbon units.

Article 6.4 creates a centralised governance system for countries and the private sector to trade emissions reduction anywhere in the world. This system known as the Sustainable Development Mechanism (SDM) is due to replace the Clean Development Mechanism (CDM), established under the Kyoto Protocol.

Finally, Article 6.8 develops a framework for cooperation between countries to reduce emissions outside market mechanisms, such as aid.

Under the Paris Agreement, a share of proceeds from the markets needs to be deployed to help developing countries adapt to climate impacts. Whether this applies to the centralised SDM market only or to all trading, including from bilateral agreements has not yet been agreed.

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What is at stake in the negotiations? 

While the text of the Paris Agreement is not up for discussion, Article 6 is just two pages long and fails to describe how these systems will work and what rules will ensure they lead to real emissions cuts.

The issue is paramount to the integrity of the Paris Agreement and negotiators have warned that weak rules could undermine the entire accord and even lead to an increase in emissions.

“How these rules are decided is really going to make or break the ambition of the Paris agreement,” said World Resources Institute senior associate Kelly Levin, adding that weak rules “could lead to an increase of global emissions”.

At the latest climate talks in Bonn in June, Costa Rican negotiator Felipe de Leon Denegri told Climate Home News: “Article 6, unlike almost anything else in the [UN climate negotiations], has the potential to do actual active harm.” He added there was a “quite substantial” risk of introducing loopholes that undermine the ambition of the deal.

“The risk is that carbon markets are used as a trick to meet emissions reduction targets on paper. They can be used as an excuse not to do very much in practice,” warned Gilles Dufrasne, policy officer at Carbon Market Watch.

However, a robust set of rules could help bolster ambition.

In talks that have now lasted several years, negotiators have been unable to overcome some major sticking points.

Sticking point 1: CDM credits

Brazil, China and India want to trade their surplus of old credits from the previous CDM regime on the new market set-up under the Paris Agreement. But the CDM has been mired in allegations of human rights abuses and corruption with a majority of projects found unlikely to drive emissions cuts.

Experts have warned this risked flooding the market with credits of no value and undermine global efforts to curb emissions. This is one of the thorniest issues in the negotiations, which require consensus. In 2018, Brazil forced this section of the Paris rules to be extended for an extra year even as the rest of the Paris rulebook was agreed.

Marina Grossi, a former negotiator and president of Brazil-based CEBDS, a non-profit organisation promoting sustainable development for companies, told CHN the Brazilian government wanted flexibility in the way the rules are implemented.

“The government is not trying to be an obstacle to Article 6” but rather act in way that “it can take advantage of this new market,” she said. Grossi suggested a period of transition during which old credits could be traded on the new market could bring Brazil on side.

Sticking point 2: The corresponding adjustment (or avoiding double counting)

Brazil has also pushed back against rules to prevent double counting emissions reductions. A majority of countries argue emissions cuts cannot be claimed by both the country that made them and the country that bought the offsetting credit.

To ensure a credible system, countries who sell credits to other countries will need to increase their own reported emissions by the same amount. But the rules remain under discussion, with Brazil arguing this so-called “corresponding adjustment” is not needed initially.

If emissions reductions are reported twice by two different countries, “there isn’t much point having targets in the first place,” warned Dufrasne.

Sticking point 3: Overall mitigation

Another key issue is to ensure the new market doesn’t allow transfers of emissions reduction across borders without generating additional cuts.

Countries need to agree on a way to ensure “overall mitigation” of the market. But there is disagreement over which of the three types of market (6.2, 6.4 and 6.8) will be governed by this principle. The Paris Agreement text only Article 6.4 includes this goal. More progressive negotiating blocs argue that all markets need to adhere to this principle or the system will be distorted.

How this is achieved is also up for debate, with some suggesting a systematic ‘cancellation’ of credits to the benefit of the atmosphere.

What stage have the negotiations reached?

A deal was very close to being done in Katowice, Poland last December. But since then the conjecture has widened, rather than shrunk, according to analysis of the number of square brackets (points of disagreement) in the negotiating text by Carbon Brief. In Katowice, the rest of the Paris rulebook was being negotiated and countries were pushing hard to agree everything. Now that Article 6 has been siloed, that pressure has dissipated.

The latest texts governing Article 6.2, Article 6.4 and Article 6.8 are riddled with 672 square brackets, all of which need to be resolved for the Madrid talks to close this issue.

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What happens if the talks fail?

Negotiations on carbon markets are technical but this doesn’t prevent highly politicised positions. Discussions are anticipated to be tough.

If an agreement cannot be found, the issue will be kicked further down the road to Cop26 in December next year.

Resolving Article 6 is the major agenda item for Cop25. But failure is a perception the UN, Cop hosts, national governments and parts of civil society traditionally try to avoid. If things drag on to 2020, expect a fudge to emerge from Madrid. This might come in the form of a ‘partial resolution’, where some points of disagreement are declared agreed with a narrower discussion tabled for 2020.