New study highlights ways to cut risk in Article 6 trading

GENEVA, 11 May – A new legal gap analysis of Article 6 released today finds that the Paris Agreement offers a number of structural protections to deliver carbon market integrity. Importantly, it explores additional measures that can help mitigate risks and scale up market cooperation.

The analysis was carried out by Pollination, with financial support from the Children’s Investment Fund Foundation and IETA’s Markets for Natural Climate Solutions initiative. 

The goals of the analysis are to identify the current legal risks in transacting units under the Paris Agreement’s Article 6.2, understand the likely procedural requirements, review the best commercial practices and recommend prudent steps that can be taken to mitigate, manage or transfer the risks identified.

The COVID-related postponement of COP 26 has delayed completion of the rulebook for Article 6 of the Paris Agreement. But the climate imperative has meant that the desire of both companies and countries to cooperate on reducing emissions has continued to increase. Consequently, there is growing attention on Article 6.2, which allows countries to engage in carbon market cooperation, respecting the Paris Agreement’s principles of integrity and transparent accounting. 

“As Switzerland’s agreements with Peru and Ghana demonstrate, there’s nothing stopping countries engaging in carbon market cooperation under Article 6,” said Dirk Forrister, President and CEO of IETA. 

“This analysis offers fresh insights into the risk management techniques that businesses can use to bolster investor confidence in these growth markets, while the Article 6 negotiations are progressing,” he continued. “These legal tools can help deliver high environmental integrity in the global carbon market as it expands to meet the Paris goals.” 

Article 6.2 offers one route to an international trading system that brings emissions into balance with compensating removals from both natural and engineered solutions. But given the unfinished rulebook for Article 6, it also creates legal uncertainties around how international trading can work, both practically and commercially. 

The analysis reviews procedures and requirements laid out by the Paris Agreement and Article 6 draft guidance, and goes on to highlight a set of potentially valuable “structural risk mitigation measures” that cut across multiple risks and could further enhance market confidence. They include measures such as a buyer’s club with associated criteria and rules, the establishment of meta registries and the development of self-insurance pools. 

“Current Article 6.2 draft guidance includes core requirements to deliver integrity and avoid double counting, such as authorisation for unit transfers from host governments, commitments to make corresponding adjustments, and the tracking and reporting of unit issuances, transfers and retirements” said Rick Saines, Partner at Pollination. 

“But for Article 6.2 to scale, we need to develop common approaches for contracting parties, whether they be sovereigns or authorised private parties, on how to manage and allocate risk throughout the Article 6.2 transaction lifecycle.” 

A copy of the legal analysis is available here.