Momentum builds towards international carbon market

Introduction

The fiftieth session (SB50) of the Subsidiary Body for Scientific and Technological Advice (SBSTA) and the Subsidiary Body for Implementation (SBI) to the United Nations Framework Convention on Climate Change (UNFCCC) Conference of the Parties (COP) was recently held in Bonn, Germany. The outcome of the SB50 negotiations will feed directly into the negotiations at COP25 in Santiago, Chile due to take place in December.

Speaking shortly before SB50, UNFCCC Executive Secretary Patricia Espinosa stated: “My position is unchanging and unequivocal: international carbon markets—ones that put a price on carbon—are absolutely crucial if we’re to have any chance of stabilizing global temperature rise and avoid runaway climate change”, setting the tone for the recent negotiations.  

The outcome of SB50 was that negotiators agreed to a draft text for the implementation of Article 6 to the Paris Agreement.¹

In parallel to the UNFCCC process, there have also been significant developments in relation to the work of the UN’s International Civil Aviation Organization (ICAO) in relation to the implementation of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).

Article 6 negotiations

Status of the negotiations

SB50 was the first official international climate negotiation session since the COP24 negotiations in Katowice in 2018. 

The objective of SB50 was for Parties to the Paris Agreement² to start technical work on the implementation of the Paris Agreement Rulebook (largely agreed at Katowice) and advance negotiations on Article 6 of the Paris Agreement, which were not concluded at COP24.

SB50 was intended to progress negotiations on the rules, modalities and procedures of Article 6 ahead of COP25, where the Article 6 rules are expected to be adopted.

Overview of Article 6 

Article 6 represents voluntary cooperative approaches in the implementation of each Parties’ Nationally Determined Contribution (NDC) to allow for higher ambition in their mitigation and adaptation actions and to promote sustainable development and environmental integrity.  

• Article 6.2 allows for the use of internationally transferred mitigation outcomes (ITMOs) by Parties to meet NDCs.
• Article 6.4 establishes a mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development (A6.4ERs). Private entities authorised by a Party may participate in Article 6.4.
• Article 6.8 refers to a framework for integrated, holistic and balanced non-market approaches to assist Parties in achieving NDCs.  

Implementation of Article 6 will essentially establish the rules for emissions trading activities, either between Parties to the Paris Agreement or with the involvement of the private sector (for example, through the sale, purchase or creation of carbon credits).

The SB50 negotiations

Key issues for negotiation at SB50 included the: 

• Governance and scope of activities for Articles 6.2, 6.4 and 6.8.
• Kyoto Protocol’s Clean Development Mechanism (CDM) and Joint Implementation (JI) transition: whether the CDM and JI programme of activities, credits and methodologies could be transitioned under Article 6.4 and the implications for continuing existing projects and immediate credit supply under Article 6.4.
• Whether emissions reductions generated through Article 6 will apply to sectors outside of NDCs and relevant corresponding adjustments, accounting and reporting requirements.
• Treatment of ITMOs under Article 6.2 that are not used towards an NDC, i.e. whether they can be used towards CORSIA or voluntarily retired.
• Whether A6.4ERs that are transferred internationally are subject to Article 6.2 guidance. 
• Share of proceeds to cover administrative expenses and assist developing countries that are vulnerable to the adverse effects of climate change to meet the costs of adaptation under Article 6.4 and whether this should also apply to Article 6.2.
• Overall mitigation in global emissions requirements for Article 6.4 including whether a levy or discounting factor should be applied. Also whether these requirements should apply to Article 6.2.

The SB50 negotiations successfully produced a draft text for Article 6 that provides options to address the above issues.

Parties have been encouraged to consider the draft Article 6 text in the coming months with a view to recommending a draft decision for consideration and adoption at COP25. 

Please also see our update following COP23 on opportunities in the land sector including Article 6 here.

Other matters

SBSTA was also tasked with considering the Intergovernmental Panel on Climate Change Special Report on Global Warming of 1.5°C (Report), to strengthen the Paris Agreement 1.5°C goal (see our earlier update here). Unfortunately, the Parties could not reach agreement and SBSTA’s conclusions provide no way forward for the Report to be considered further in formal negotiations.

In addition, investors managing more than USD 34 trillion in assets made a strong call at the G20 Summit for governments to design and implement policies in line with the Paris Agreement goals. This represents an interesting development in the context of SB50.³

CORSIA implementation

Overview of CORSIA

The CORSIA framework was adopted by ICAO in 2016.  The ICAO process is separate to the UNFCCC process in relation to Article 6 of the Paris Agreement.  CORSIA is, in part, a framework for the implementation of a market-based mechanism to address CO2 emissions from the international aviation industry.  Although it is sector-specific, CORSIA is likely to be the first global emissions trading scheme established.  

The key goal to be facilitated by the CORSIA framework is the stabilisation of net CO2 emissions from the international aviation sector at 2020 levels, with carbon-neutral growth thereafter.  In order to meet this target, the CORSIA market mechanism will be complemented by a number of other measures, including improvements in technology, the development of sustainable aviation fuels, and other operational and infrastructure-based measures.

Implementation status

In June 2018, the first edition of the international Standards and Recommended Practices was adopted by the ICAO Council (SARP).⁴ In accordance with Article 2.1.1 of the SARP, all airline operators that produce annual CO2 emissions greater than 10,000 tonnes are required to measure and report on their emissions from international flights from 1 January 2019.  In order to ensure the integrity of the process, including in relation to the issue of possible double-counting, airlines’ annual emissions reports must be verified by an independent third-party in accordance with Article 2.4 of the SARP.

Although these reporting requirements have already commenced, airlines’ offsetting obligations under Chapter 3 of the SARP will not apply until the three-year pilot phase commences in 2021.  From 2021 onwards, at the end of each 3-year compliance period, airline operators will be required to cancel a certain number of carbon credits to offset their liability under the CORSIA framework.  This means that no airlines will be required to offset their emissions until 2023 (ie. at the end of the pilot phase).

In addition, ICAO member states have agreed to implement the offsetting requirements incrementally: 

• 2021-2026 - only flights between states that volunteer to participate in the pilot and/or first phase will be subject to offsetting requirements.
• 2027 onwards - all international flights will be subject to offsetting requirements (with certain exemptions relating to flights to and from developing countries, unless those states participate on a voluntary basis).

76 ICAO states currently intend to participate in the offsetting regime under CORSIA from the outset.  However, China, India and Russia have not volunteered to take part in the pilot phase.  According to the World Bank Group, this means that 76% of international aviation activity will be covered for the initial period.⁵

Eligible carbon credits

On 6 March 2019, the ICAO Council approved high-level eligibility criteria for CORSIA offsets.⁶  According to the published criteria, compliance offsets used under CORSIA will be required to meet the same criteria as widely-used existing offsets, including additionality, avoiding double counting and permanence.  On that basis, emissions units issued under the Kyoto Protocol and Paris Agreement processes could be eligible.  It is also possible that credits issued in accordance with voluntary offset standards and REDD+ will be eligible.  However, it remains unclear what vintages of offsets will be accepted under the CORSIA framework (for example, whether historical credits will be able to be used).  

Next Steps

Article 6 negotiations

UNFCCC Executive Secretary Patricia Espinosa urged Party leaders to take advantage of all opportunities in 2019 to continue making progress stating that “people are demanding results—whether that’s online or in the streets—and we must show we are taking responsibility. The Paris Agreement is clear: this is our job. We have the mandate to do this. We must deliver”. 

We look forward to sharing developments on Article 6 and the operationalisation of the Paris Agreement with you in the lead up to and during our attendance at COP25.

CORSIA implementation

Further technical recommendations as to the requirements for eligible offsets will be made by a Technical Advisory Body (TAB) to the ICAO Council.  Emissions unit programs can apply for assessment against the CORSIA emissions unit criteria by the TAB until 12 July 2019.⁷

Please contact a member of our Climate Change team if you require further information about the content of this update.