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Article 6 creates two kinds of carbon credits — what that means for business

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 The path forward for carbon credits now has more flexibility. Image courtesy of Shutterstock via OlegRi.

Using carbon credits toward corporate greenhouse gas emissions reductions has always been complex, and the passage of Article 6 during last month’s COP26 hasn’t made things any simpler.

What were the two most important developments from an agreement on Article 6? One, the creation of a taskforce to update and address the issues especially around the additionality concept laid out by the Clean Development Mechanism, a carbon offset scheme operated by the United Nations starting in 2006 that allowed countries to fund carbon reduction processes in other countries to meet internal targets. And second, the move to resolve the issues of double counting through the creation of an adjustment process that enables countries to fund emission reduction projects in other nations that count towards their own nationally determined contribution (NDC).

On the surface, the agreements made between countries on carbon emissions could seem irrelevant to businesses engaged in offsetting for their own internal goals. I sat down with Hugh Salway, the head of environmental markets at the Gold Standard, a standards body set up by the World Wildlife Fund to certify carbon reduction emissions projects, to understand how privately funded carbon reduction projects will work under Article 6, what changes are coming for carbon credits, and how verification and standard organizations could be affected. 

This interview has been edited and condensed for clarity. 

Jesse Klein: What does Article 6 mean for companies involved in purchasing offsets?

Hugh Salway: Article 6 is about one country wanting to purchase emission reductions from another one to use them towards its own target. It agrees that entities other than governments can use the emission reductions as well. And the host country will also have to make an adjustment for those. And that's where it starts to matter [for businesses]. 

There are two cases. And they’re talked about in cryptic language [in Article 6]. But one case is a government agreeing that emission reductions achieved can be used by airlines under the [Carbon Offsetting and Reduction Scheme for International Aviation]. And the other case is the voluntary market. So a government can agree that emission reductions achieved in its country can be used by a company towards its company target. And the host government won’t count those emissions reductions towards its NDC. The company has a unique claim. They own those, and the reductions are not counted towards the host government’s NDC. It's entirely the company’s to use and to claim. So that's where it does matter.

Klein: How would carbon credit projects work under Article 6?

Salway: In practice, you would have projects that generate carbon credits, and no government has anything to do with the funding. But the additional step is that the project could apply to the government asking for an authorization letter, which would mean the government agrees not to count those credits towards its NDC and to make an adjustment to their emissions reporting.

I think there’ll be some countries who move quite fast and set themselves up in such a way that they can get a lot of investment in this way. And they’ll have institutional processes in place where they can accept authorization, requests and give letters. 

Article 6 allowed host countries to agree to make corresponding adjustments for credits which will be used in the voluntary carbon market. But it also provided a space where they don’t.

There’ll be others who don't have the capacity or just decide not to do it. Because [Article 6] creates a route for companies to buy credits under Article 6, but that's not the only way you can do it. You don't have to have anything to do with Article 6; you can still run a project and credits can be counted towards the host country’s NDC.

Klein: What about trading the credit?

Salway: The Gold Standard and Verra will have credits on our systems that host countries have agreed to make adjustments for [and will be under Article 6], and then both of us will also have ones where they haven't. The difference comes down to how they can be used. Only credits which are adjusted for under Article 6 can be used towards another country’s NDC. 

Everyone agrees that you can buy and use credits which are adjusted, and you can use credits which aren't adjusted in the voluntary carbon market. What people don't agree on is what you can say for each of those. Can you use both of them to say you’re carbon neutral? Is there a difference between adjusted credits and non-adjusted credits? Article 6 didn’t give an answer on that. It provided the framework where you'll have both types, but it didn't say what they can be used for.

There’ll be business-funded projects that produce credits which are authorized under Article 6, where the host country makes an adjustment and then once which won't be authorized. And for the ones that won't be authorized, the impact of those projects will count towards the host country’s NDC. And that's good; companies are helping a country to deliver its NDC. So, if the accounting works well, countries will actually help a country go above and beyond what they have committed to [under the Paris Agreement]. We still have a big gap between what governments have agreed to and the 1.5 degrees [Celsius] target. And so companies investing in action that isn't counted towards NDCs are helping to fill that gap.

Klein: What does Article 6 mean for the standards such as The Gold Standard and Verra?

Salway: Over the next decade, I think the use of other standards will change a lot. Under the old system, governments could only use the CDM and they couldn't really use anything else. Whereas under the new system, there’s a lot of flexibility in terms of how governments acquire credits for their targets. We already have a partnership with the Swedish government under which the plan is that they would use The Gold Standard at least for part of their acquisition of international units under Article 6.

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We're entering a phase where the standards won’t just be used for the voluntary market but will be used by governments for compliance schemes and tax schemes. There will still continue to be action outside of Article 6, where there’s no authorizations that take place. But I think increasingly, we’ll see a move towards a lot of action coming under Article 6. So there being authorizations and adjustments, and governments using standards like us. So rather than there being this isolation between the voluntary market and compliance markets, you have kind of this greater carbon credit, which can be used in all these different markets. And I think that's good. That allows you to scale, because you’ve got all of these different uses that credits can be used for.

Klein: How will the development of a new version of the Clean Development Mechanism affect the already created standards?

Salway: There'll be a new U.N. mechanism, which is meant to be an improvement on the CDM, learning from some of the mistakes there. There’s a few things that we, Gold Standard, would update anyway regardless of [a new CDM] being put in place. We’ll need to make sure that baselines take into account policies that countries are putting into place. We will be looking at additionality in a different way. So we’re making sure that activities are additional to policies that countries create. So these would have happened anyway. But because [the new CDM] does exist and if it is successful with lots of buy-in, I think we’ll look at the types of approaches that they take under the new mechanism and we’ll align where we can. 

Klein: What didn’t Article 6 do?

Salway: One of the big questions that the voluntary market was looking towards Article 6 to provide an answer for was whether everything is going to be under Article 6 or will it have nothing to do with Article 6. And that wasn't really answered. Article 6 allowed host countries to agree to make corresponding adjustments for credits which will be used in the voluntary carbon market. But it also provided a space where they don’t. So there’s more work which still needs to be done to look at questions around those claims. What can companies credibly say about credits when they buy in different scenarios? And it didn't provide the full answers people wanted, but it was never going to do that. That’s not its role. So there's more work still to be done, basically outside of international negotiations, to answer those.

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