What is Article 6 and how does it work?

PPF’s report The Missing Article examines how Canada can play a leading role in global emissions reduction through what’s known as Article 6. Here’s how the much-discussed article works, and why it could prove to be a valuable tool not just for Canada’s advantage, but for the global good.

What is Article 6?

Article 6 is the sixth article of the of the landmark 2015 Paris Agreement on climate change. It is the section of the treaty that allows the parties “to pursue voluntary cooperation” — the transfer of emissions credits — in reaching their nationally determined contributions (NDCs).

Recognizing that governments cannot solve the problem alone, Article 6 enlists markets, with their special talent for efficiency and innovation, to the cause. At a point when we are seeing growing resistance to the costs of the energy transition, it is estimated that such voluntary co-operation can cut that burden in half.

How does Article 6 work?

The Paris negotiators placed the responsibility for tackling global emissions on individual sovereign nations. But how to get them to work together through trade and investment, either bilaterally or multilaterally, for mutual benefit and a greater overall result? Article 6 provides the necessary encouragement for Country A to bring its advantages to bear on Country B’s emissions reductions. Simply put, Country B, where a mitigation act would occur, could enter into an agreement with the enabling Country A to transfer some share of those emissions reductions — called Internationally Traded Mitigation Outcomes or ITMOs — from one national balance sheet to another. There would also be multilateral vehicles.

What does it mean for Canada?

For a technologically advanced and well-regulated energy-exporting nation like Canada, Article 6 remains as enticing as it is elusive. Nowhere is this more pronounced than in Canada’s two most westerly provinces, home to some of the world’s most abundant and least carbon-intensive natural gas formations and world-leading methane reduction innovations. Those involved in developing these deposits — governments, corporations, First Nations — wonder, not unreasonably, why Canada should not be in line to receive ITMOs if the cleaner Canadian gas displaces the burning of higher emitting coal in Asia.

In recent years, there have been calls for Canada to take a greater leadership role in the shaping of Article 6 — a multilateral role that this country has already played in the founding of the G20 in the late 1990s, the creation of the Cairns Group of agricultural exporting nations in the mid-1980s and in advocating in the 1970s for adoption of a 200-mile economic exclusion zone within the Law of the Sea convention.

For now, though, it is an importing nation, Japan, that has taken the initiative to establish an Article 6 implementation partnership to “stimulate decarbonization markets and private investment.” Launched in late 2022, it now has 69 members, including Canada.

What does Article 6 say about international cooperation?

Article 6 creates two main mechanisms for international co-operation through carbon markets, and there are detailed rules and requirements. (For a deeper dive into how that work, see The Missing Link.)

• Article 6.2. Under Article 6.2, countries may voluntarily agree to co-operate on meeting their Paris targets (called nationally determined contributions, or NDCs) and enter into bilateral or multilateral arrangements to exchange ITMOs (internationally transferred mitigation outcomes). That co-operation is required to:
  (i) Be authorized by the countries;
  (ii) Allow for higher ambition in the countries’ GHG mitigation and adaptation actions;
  (iii) Promote sustainable development;
  (iv) Ensure environmental integrity and transparency (including in governance); and
  (v) Apply robust accounting to avoid double counting in accordance with the Paris Agreement.^[25]
  The Article 6.2 mechanism is most likely to be used by countries, or entities authorized by countries, to achieve compliance with their Paris NDCs or other international GHG compliance systems that are not covered by the Paris Agreement, such as the International Civil Aviation Organization’s Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).
• Article 6.4. Article 6.4 provides for a centralized multilateral crediting mechanism governed by the Article 6.4 Supervisory Body, which, as the regulatory body, makes decisions about how verified Article 6.4 GHG reduction/removal credits (known as Article 6.4 emissions reductions or A6.4 ERs) from qualifying projects may be created, which approved standards and methodologies will qualify for creation, and the detailed Article 6.4 procedures and rules. A global exchange for holding and transferring A6.4 ERs may be facilitated by the international registry that forms part of the Paris Agreement infrastructure and through the World Bank and Singapore-led meta registry called the Climate Action Data Trust. The Article 6.4 Supervisory Body is in the process of developing a project standard and validation and verification standards, as well as requirements for the development and assessment of Article 6.4 methodologies. When authorized A6.4 ERs are traded internationally, they become ITMOs governed by Article 6.2. The first Article 6.4 credits are expected to be issued in late 2024 or 2025.

What’s happened under Article 6 so far?

The 65 bilateral agreements reached since 2021 involve six different buyers in 42 host countries. The countries that have acted as a buyer are: Japan (number of bilateral agreements entered into: 28), Singapore (13); Switzerland (13), South Korea (6), Sweden (3), and Australia (2). Altogether, they are involved in a reported 136 pilot projects (or specific financed emission-reduction initiatives).^[33] As can be seen, Asia has taken the lead while Canada has not yet made it to the starting line.