Compromise on Article 6 under the Paris Agreement was clinched at COP 26
Progress on Article 6 at the COP 26 summit in Glasgow has paved the way for an evolution of international carbon markets which will bring about both challenges and opportunities for the mining and metals sector.
A compromise on Article 6 under the Paris Agreement was finally clinched at COP 26 in Glasgow following years of discussions and setbacks. Article 6 is effectively a rulebook setting out accounting principles for international carbon markets.
Collaboration on carbon pricing and credits can help nations meet greenhouse gas (GHG) reductions targets as stipulated in their Nationally Determined Contributions (NDCs), which are medium-term energy and climate plans.
Such collaboration includes the transfer of carbon credits - or Internationally Transferred Mitigation Outcomes (ITMOs) - across borders. This means that nations can enter into an agreement whereby one party reduces carbon emissions and transfers those reductions to the other party which counts it towards its NDC targets. In other words, the receiving nation buys ITMOs from the selling nation that has achieved a reduction in carbon emissions. The seller then discounts the corresponding carbon emissions nationally to avoid double counting of emissions reductions.
The possible evolution of international carbon markets, supported by the Article 6 rulebook, opens up a number of opportunities and challenges alike for the mining and metals sector.
This is best illustrated by an example. A mining company, for example in India, could lower its carbon emissions by switching its on-site electricity supply from coal to solar power. The mining company could then sell the credits or ITMAs corresponding to the emissions reductions to the government of Japan. The emissions reductions would then count towards Japan's climate targets under its NDCs, but it would not count towards India's NDC. The emissions reductions would, however, count towards the mining company's climate targets.
This could be a cost-effective way for polluters to reduce emissions and attract finance. According to a recent report by the International Emissions Trading Association (IETA) and the University of Maryland School of Public Policy, the share of nations indicating planned or possible use of voluntary cooperation through Article 6 has nearly doubled since 2015, from 44% to 87% in the new or updated NDC submissions.
Supporters of international carbon markets are hopeful these schemes will help trigger large investments from the private sector, not excluding mining and metals companies.
"Public investment will need help from the private sector: companies will play a very significant role to play in driving the success of Article 6," a spokesman for IETA told Mining Journal.
Lessons from the past
Trading credits based projects and offsets are of course nothing new. Trading of Certified Emissions Reduction (CERs) credits, issued by the United Nations, was set up under the Kyoto Protocol in 2008 to count towards nations' emissions reductions. This system has been subject to much criticism, however, as prices collapsed in 2012 and have never recovered since. In Glasgow it was nevertheless agreed that CERs can count towards NDCs to some extent, but only for pre-2021 emissions.
Trading of project-based carbon credits will not take off without a robust and transparent regulatory framework. Many had hoped for substantial progress on Article 6 in Glasgow, and, at least to some extent, they got what they wanted. The Article 6 rulebook is finally beginning to take shape.
"After the failure to reach consensus in Katowice and then Madrid, this was the third and probably final chance for the UN to clarify how countries implement and account for international carbon markets under Article 6. Those rules are now in place, and the gaps to be filled over the next year have been identified," VERRA, a company that issues Verified Carbon Standard, said in a recent statement.
The rules set out in Article 6 - for example measures to prevent double accounting of credits - are designed to support trust and integrity in markets as they evolve. Yet there are still many details that need to be ironed out.
"There are still some elements of the accounting treatment that need to be better understood by all stakeholders, particularly in relation to how the voluntary and compliance markets will co-exist," said the IETA spokesman.
COP 27 preparations
Further progress on the regulatory framework is expected at the next COP in Sharm El-Sheikh, Egypt, in November next year.
"The Glasgow text sets up a supervisory body that will meet at least twice next year and start to set out the rules. The draft rules will likely be approved at the COP27 in Egypt next year," the spokesman said.
Article 6 also establishes rules for international linking of cap-and-trade carbon markets. A number of countries have introduced cap-and-trade schemes, with China being a notable addition this year.
In the EU, prices under the EU ETS have shot through the roof with the cost of allowances approaching €70/tonne. But prices in other jurisdictions have increased as well, notably in Australia. Higher carbon prices and potential linking of markets could push up operational costs for miners and metals producers and lead to additional administrative burdens in terms of reporting.
Some also question how effective carbon markets are in reducing GHG emissions compared with, for example, a carbon tax.
"Carbon markets are nascent. The world's CO2 emissions are approaching 35 billion tonnes, but there are only 300 million tonnes worth of carbon credits so that is not going to solve all the problems," Julian Kettle, Vice Chairman of Metals and Mining at Wood Mackenzie, told Mining Journal.
With the average price on carbon globally below US$20/t, it is cheaper to emit and pay for allowances than to invest in carbon abatement, he said.
"The way forward is a carbon tax, rising to about US$110/t by 2030," said Kettle.
It will likely take several years for international carbon markets to evolve. But the surge in prices for EU allowances illustrates that markets can deliver on emissions reductions, at least over time.