The 29th COP and its Achievements in Operationalizing and Managing Carbon Markets in accordance with Article 6 of the Paris Agreement - Hamidreza Yazdfazeli & Azam Amini

Hamidreza Yazdfazeli, Master Student of German law, University Passau, Germany;

Azam Amini, Assistant Professor of public International Law, Ferdowsi University of Mashhad
2024/12/17

The increase in greenhouse gas emissions, and consequently global warming and climate change, has become a universal issue that threatens human existence. If adequate attention is not paid, it will lead to severe damages to humanity. To address this critical challenge, the United Nations Framework Convention on Climate Change (UNFCCC) initiated a series of sessions called COP (Conference of the Parties), focusing on the aforementioned issue. COP refers to annual meetings held by member countries of the Convention with the aim of reducing greenhouse gas emissions, combating global warming, implementing national commitments to environmental protection, proposing sustainable solutions, and fostering international cooperation to support vulnerable countries in facing climate change impacts. Since the first COP in Berlin in 1995, nearly 30 years have passed, and this year, COP29 was held on November 11, 2024, in Azerbaijan. Since the Paris Agreement was adopted in 2015, the implementation of its commitments has also been a major focus of COP discussions.

One of the key topics of negotiation at COP29 in Baku, Azerbaijan, was Article 6 of the Paris Agreement, which addresses market-based approaches and, specifically, the operationalization of this article. Article 6 of the Paris Agreement establishes three mechanisms for voluntary cooperation among parties:

• Paragraphs 2 and 3 recognize voluntary cooperation among parties to enhance ambition and establish principles such as environmental integrity, transparency, and robust accounting for any cooperation involving internationally transferred mitigation outcomes (ITMOs).
• Paragraphs 4 to 7 create a mechanism for participation in greenhouse gas emission reduction and contribution to sustainable development.
• Paragraphs 8 and 9 define a framework for non-market approaches.

These provisions must be read alongside Paragraph 1 of Article 6, which states that the purpose of such voluntary cooperation is to achieve greater ambition in reducing emissions and to enhance environmental integrity. Each of these mechanisms explains specific aspects of cooperation and trade in greenhouse gas emission reductions. Article 6 allows member states to voluntarily collaborate to reduce greenhouse gas emissions, considering the established commitments and mechanisms (e.g., implementing reductions in another country) and to account for these reductions under their national commitments for emission reduction policies. Overall, Article 6 of the Paris Agreement emphasizes the importance of cooperation, transparency, and sustainable development in global efforts to combat climate change. To ensure proper functioning of these mechanisms, two entities—the Supervisory Body and the Secretariat—are tasked with distinct responsibilities. These entities oversee the mechanisms to prevent the double-counting of emission reduction units. COP29, which many analysts believe faced significant criticism and lacked success in several areas, nonetheless made progress in decisions related to operationalizing carbon markets. This achievement provides the basis for this discussion, which aims to describe and analyze these accomplishments in the context of the two mechanisms mentioned above.

Decisions Regarding Paragraph 2 of Article 6

The mechanism proposed under this paragraph is based on bilateral agreements between countries to reduce greenhouse gas emissions. Under such agreements, one country (hereafter referred to as the investing country) funds or initiates emission reduction projects in another country (hereafter referred to as the host country). As a result, the total reduction in emissions achieved in the host country is deducted from the investing country’s Nationally Determined Contributions (NDCs) or, in other words, the emission reductions in the host country are transferred to the investing country. Unlike the mechanism under Paragraph 4, which is more market-oriented, the mechanism in Paragraph 2 focuses on direct transfer of emission reductions between the countries involved. The bilateral or multilateral nature of cooperative approaches under Article 6.2 requires establishing a legal framework for agreements between two or more countries, consistent with international treaty law. This framework is typically formalized through cooperation agreements that provide the legal documentation to specify the type and scope of cooperation among countries. The framework must meet at least the minimum requirements established in the guidance for Article 6.2 and adhere to general international law on cross-border contractual arrangements (see page 26, reference here). The responsibility for overseeing this mechanism and preventing the double counting of internationally transferred mitigation outcomes (ITMOs) lies with the Secretariat. It is important to note that the Secretariat’s auditing role is exclusive to Paragraph 2, as no dedicated supervisory framework or body has been established for this mechanism (see page 25, reference here). The relatively broad definition of ITMOs indicates that these outcomes can result from a variety of activities (see page 27, reference here). For example, ITMOs may be generated through market-based carbon accounting systems (BACs) or emerge as linkages between domestic or regional emissions trading systems (ETS) or crediting programs. Alternatively, member states may collaborate outside the scope of existing trading or crediting systems through direct cooperation—for instance, by providing financial resources in exchange for the transfer of resulting emission reduction outcomes.

Three key components must be met for the use of transferable authorizations under this mechanism. First, there must be an agreement between two countries on the reduction of emissions. Second, the host country must authorize the transfer of the emission reductions to the investing country. Third, the transfer must be approved by the Secretariat. These three components help clarify the roles of all parties involved (governments, private entities, and carbon markets), ensuring transparency and accountability. This structure minimizes the risk of misuse or double counting of emission reductions. Each ITMO, which represents a quantified greenhouse gas emission reduction achieved in the host country, must possess specific attributes determined by the Secretariat. Under this mechanism, each ITMO, which represents a quantified reduction in greenhouse gas emissions in the host country, must possess attributes determined by the Secretariat, including the exact amount of the reduction, its intended use, the sector or area in which the reduction occurred, the type of activity responsible for the reduction, and the parties involved in the emission reduction process.

At the recent conference in Baku, special provisions were introduced to facilitate collaboration under the Article 6.2 mechanism for developing and least-developed countries. The Secretariat was tasked with creating a capacity-building program for these countries. This program aims to enable them to participate more effectively in greenhouse gas emission reductions by addressing challenges such as limited financial resources, vulnerability to climate change impacts, and low technical capacity.

The program will include measures to identify and address these challenges, with an emphasis on technical and financial support. Additionally, member states of the Paris Agreement have been encouraged to provide voluntary financial contributions to a trust fund to support infrastructure development and technical assessments necessary for implementing emission reduction projects.

Decisions Regarding Paragraph 4 of Article 6

Paragraph 4 of Article 6 in the Paris Agreement serves as an international tool to reduce greenhouse gas emissions and helps member countries fulfill their environmental commitments through international projects focused on carbon reduction and removal. Unlike Paragraph 2, which emphasizes direct emission reductions transferred between countries, Paragraph 4 focuses on projects carried out by companies or governments that are marketable on a global carbon market. These projects, traded in carbon markets, are required to meet two main standards: the first relates to the methods of project development and evaluation, such as carbon reduction initiatives, and the second pertains to activities involving carbon removal from the atmosphere, such as afforestation or carbon capture technologies. These standards define how projects are assessed, approved, and executed to ensure their effectiveness in reducing greenhouse gas emissions.

As previously mentioned, in addition to the Secretariat, which is solely responsible for registration and validation, monitoring responsibilities lie with the Supervisory Body. This entity is tasked with finalizing and implementing the aforementioned standards and reporting their progress annually to the members of the Paris Agreement. The Supervisory Body mentioned in Article 6.4 must carry out all its activities under the guidance and oversight of the members of the Paris Agreement and is accountable to them. This accountability ensures that the member countries maintain adequate control and supervision over this body. In this regard, the Supervisory Body must establish principles to guarantee real reductions in greenhouse gas emissions in projects. These principles include baseline scenarios, downward adjustments, preventing pollution leakage outside the project boundary, ensuring the permanence of the reductions achieved, stricter standards for greater future reductions, and other related measures. Countries implementing this mechanism are required to allocate part of the revenue generated from the mechanism to the Adaptation Fund under the label of "Share of Proceeds for Adaptation." However, least developed and small island countries that implement the mechanism under Article 6.4 are exempt from contributing this share to the Adaptation Fund if they choose to do so.

Paragraph 4 is aligned with the Clean Development Mechanism (CDM) under the Kyoto Protocol and serves as a continuation of its principles. In this context, the transfer of forestry projects registered under the CDM to Article 6.4 has also been discussed. These projects may transition to the mechanism of Article 6.4 and be registered as relevant activities, provided certain conditions are met. First, the transfer request must be submitted to the Secretariat and the Designated National Authority (DNA) of the host country. Second, the request must be approved by the host country's DNA by December 31, 2025, and sent to the Supervisory Body.

One of the unique features of this mechanism is that it is intended to go beyond the mere transfer of emission reduction outcomes. At least 2% of the credits associated with this mechanism must be canceled annually and cannot be transferred or used for any other purpose. This mandatory cancellation means that 2% of all carbon credits generated under the framework of the mechanism in Paragraph 4 are permanently removed from circulation. The purpose of this cancellation is to ensure that, in addition to supporting countries in achieving their emission reduction targets, the mechanism also contributes to genuine reductions in global greenhouse gas emissions. This ensures that the system is not merely a tool for transferring credits between countries or companies but rather a means to eliminate a portion of emissions entirely, thereby contributing to an overall reduction in global emission levels (Page 23, reference here).

Conclusion

Participation in the Paris Agreement and the utilization of its various mechanisms, such as Article 6, not only create opportunities to reduce greenhouse gas emissions but also pave the way for attracting foreign investment and transferring modern technologies in clean energy. Iran's accession to the Paris Agreement under current circumstances could be a significant opportunity for the country. Considering the economic sanctions and global pressures that Iran faces, this agreement could serve as a foundation for international cooperation and an improvement in the country’s economic status.

Iran could leverage these mechanisms as tools to strengthen its economy and achieve sustainable growth. In addition to public entities, private companies can also capitalize on these opportunities. By engaging in projects aimed at reducing greenhouse gas emissions, these companies can not only enhance their profitability but also contribute to the national economy through increased foreign currency earnings. Participating in projects that support emission reductions and climate adaptation not only promotes the economic growth of these companies but also empowers the national economy as a whole. Moreover, given the special conditions for developing and least-developed countries, Iran can exploit the potential benefits of Article 6.4 of the Paris Agreement. This article allows member countries to engage in bilateral cooperation for emission reductions and add the results to their national commitments. Missing out on these opportunities could prevent Iran from fully harnessing its international and economic potential.