The ASEAN Member States (AMS) are at different stages of preparing to participate in international carbon markets under Article 6 of the Paris Agreement. This article will briefly summarize the status of AMS Article 6 readiness, examine what was decided at COP29 and then appraise whether these decisions will now unleash emissions reduction investment across the region.
As a “purchasing” country, Singapore has advanced its engagement through several bilateral agreements. Among expected host countries, Thailand is the only country that has issued ITMOs, and based on that, it could be regarded as the most prepared country in terms of Article 6 participation readiness. However, after the first issuance and transfer, Thailand decided to revise its approach, and a new decree (the Carbon Crediting Managing Guideline Mechanism) is coming.
Like Thailand several countries have drafted carbon market regulations (Viet Nam, Lao PDR). Indonesia has a new government that may give a new push for the international carbon market. Cambodia has an Operations Manual, but the mitigation activities pipeline seems quite limited. Malaysia has focused on promoting the voluntary carbon market and establishing a trading exchange.
Meanwhile, several countries in Africa have established national frameworks for international carbon markets: Ghana, Rwanda, Senegal, Zambia, and Cote d’Ivoire, to name a few. In comparison, ASEAN countries have been slow in preparing for Article 6, which has its causes (which may be the topic of another brief). A question that comes to mind is whether, given the finalization of the Article 6 Rulebook, AMS will now gear up for Article 6. Before answering, let’s examine what was decided.[1] The Article 6.2 decision focuses on authorization, first transfer, reporting, and the international registry.
Authorization of ITMOs
The text clarifies what authorization of ITMOs is, how it should be given, and under what conditions it can be revoked.
Authorization of ITMOs is a critical element of Article 6.2 guidance since it is the step where the selling country gives the purchasing country or entity the right to claim emission reductions. The host country cannot then use those emission reductions for its NDC targets.
For the carbon market actors, standard provisions on what the authorization should contain and when it should be made, as well as determining under what circumstances it can be revoked, reduce the risk of investment.
Project developers have been concerned about the prospect of a host country revoking the authorization. The agreed text rules out the possibility of revoking authorization for ITMOs that have already been first transferred unless specified in a bilateral agreement under Article 6.2 (by the Parties participating in the cooperative approach).
First Transfer
“First transfer” is a concept that was introduced to clarify when NDC accounting (corresponding adjustments) should be done. When a country exports an ITMO to another country, the first transfer is the actual transfer of the unit “out of the country.” When a country exports an ITMO for other use, e.g., for compliance with CORSIA or cancellation of the unit for achieving voluntary targets, then the host country has a choice of how to define the first transfer: at authorization, at the issuance of the unit, or the cancellation of the unit.
This flexible definition of “first transfer” arose because, for example, when a company uses an ITMO for offsetting, it can do so by canceling the ITMO unit, effectively indicating that no transfer has occurred. For the host country, knowing when to do the accounting (corresponding adjustment), makes compliance with Article 6 reporting and accounting requirements easier.
The agreed text clarifies that the first transfer can only occur once authorization has been made. It emphasizes that the host country must have a robust system to make its definition of first transfer transparent, ensuring that the host country gets notified about the action that constitutes the first transfer, and that corresponding adjustments be made accordingly.
Reporting and Inconsistencies
Participating Parties are requested to include additional information in their initial reports, not only on accounting technologies but also, for example, on how mitigation outcomes are shared between the selling and buying countries. The text clarifies how annual reporting should be made through the (revised) agreed electronic format and the biennial transparency reports. It also highlights that the initial report (where the country shows how it meets the participation requirements of Article 6.2) must be submitted before any annual reporting can be made.
Furthermore, the agreed text clarifies how to reconcile inconsistencies in countries’ Article 6 reporting. Inconsistencies in reporting can be identified through two different processes: the automated check by the UNFCCC Secretariat through the Article 6 database and the Technical Expert Review (TER) check. In the first case, the check uses the information that the Parties submit annually to the Article 6 database and alerts the Parties and the technical expert review teams about lacking or inconsistent data. Inconsistencies can also be identified in the TER when Article 6 information submitted as part of the Biennial Transparency Report is reviewed.
Under Article 6.2, where there is limited international oversight, reporting, transparency, and checking for inconsistencies is one way of creating public confidence in the carbon market.
The International Registry
A controversy concerned the functionality of the international registry, which is set up to support countries that lack the resources or will to establish national carbon registries. It has now been agreed that Article 6.4 Emission Reductions issued by the Supervisory Body in the Mechanism Registry can be transferred to the international registry if authorized for international transfer (as ITMOs). Some Parties objected to this and argued that these registries should be used only for pulling information and not making transfers.
Furthermore, Parties will be able to use the international registry for issuing units for countries planning to authorize the units as ITMOs or, if already authorized, as ITMOs. It is noted that the issuance of units in the international registry by no means has any endorsement from other Parties or the UNFCCC Secretariat. This is an alternative to countries doing the same thing in national registries.
The Paris Agreement Crediting Mechanism
Earlier at COP, the Parties had already approved the adoption of standards and methodologies by the PACM Supervisory Body. However, Parties will continue to make recommendations to the Supervisory Body, and we can expect negotiations on some issues over the next year, including the methodologies for emission removals. In its further work with developing standards, the Supervisory Body was requested to consult with local communities, and include the knowledge, science and practices of Indigenous Peoples.
The decision allows for the ex-post authorization of Mitigation Contribution Article 6.4 Emission Reductions (MCA6.4ERs). In an earlier decision, the Parties to the Paris Agreement introduced MCA6.4ERs as an alternative to authorized units, allowing the emission reductions to be counted toward the host country NDC while still being verified and registered in compliance with PACM rules. The decision enables the host country to authorize already issued MCA6.4ERs as ITMOs, thus coming with corresponding adjustments.
The Importance or a Finalized Article 6 Rulebook
These seemingly unremarkable provisions are expected to unleash “billions in investment into emission reductions and removals around the world.”[2] While that could indeed be a sincere hope, adopting the outstanding parts of the Article 6 rulebook does not provide a magic formula for boosting the international carbon market. Host countries still need to establish national procedures for authorizing ITMOs and reporting, establish national registries or define plans to use the international registry, and prepare for accounting through corresponding adjustments.
That said, the decision does reduce some of the risks relating to authorization and accounting, ensuring that authorization cannot easily be revoked and that countries will be checked to ensure that they do their accounting (corresponding adjustments) correctly. This, together with the adopted PACM standards, may boost the carbon market for the remainder of this decade.
Will ASEAN Carbon Markets now flourish?
What does it mean in practice for the AMS? Some countries have argued that the decision from COP26 in Glasgow is sufficient regulation of the international carbon market, and there has been quite some action in the absence of the finalized rulebook. However, for those who have waited for more clarity and more comprehensive international guidance, the COP29 decision provides an opportunity to finalize acts, regulations, decrees, and by-laws related to the carbon market. This may, for instance, help Thailand to finalize its CCMGM, and Viet Nam and Lao PDR to finalize their carbon market regulations.
However, for several AMS, finalizing acts, regulations, decrees, and by-laws involves more political issues. Integrating international carbon market mechanisms with emerging domestic carbon pricing schemes is one key issue. This relates to the more overarching issue of how to use carbon markets, domestic or international, for the achievement of the NDC. Particularly, this could mean looking at whether companies under compliance should be able to use domestic or international offsets. As an example, Singapore – due to the limited possibility of emission reductions inside the country – has allowed the import of ITMOs so that companies can comply with the carbon tax.
Only after these overarching decisions have been made will finalizing the authorization procedure or defining “first transfer” matter. This likely explains the relatively slow start of AMS compared to some African countries in preparing for Article 6. Thus, the absence of a final Article 6 Rulebook is only a minor part of the explanation. Nevertheless, the decision is important because the possibility of integrating international carbon market mechanisms with domestic carbon pricing schemes (and thus compliance demand) will definitely “unleash billions” of investments. Hopefully, the COP29 decision will facilitate this integration.
[1] Article 6.2 Decision Text, COP29, Baku, November 2024
[2] COP 29 Summary Report, IETA, November 2024
