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ASIAN DEVELOPMENT BANK

NATIONAL STRATEGIES FOR

CARBON MARKETS UNDER

THE PARIS AGREEMENT

MAKING INFORMED POLICY CHOICES

NOVEMBER 2023

ASIAN DEVELOPMENT BANK

NATIONAL STRATEGIES FOR

CARBON MARKETS UNDER

THE PARIS AGREEMENT

MAKING INFORMED POLICY CHOICES

NOVEMBER 2023

Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO)

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NATIONALSTRATEGIESFORCARBONMARKETSUNDERTHEPARISAGREEMENTMAKINGINFORMEDPOLICYCHOICESNOVEMBER2023ASIANDEVELOPMENTBANKNATIONALSTRATEGIESFORCARBONMARKETSUNDERTHEPARISAGREEMENTMAKINGINFORMEDPOLICYCHOICESNOVEMBER2023ASIANDEVELOPMENTBANKCreativeCommonsAttribution3.0IGOlicense(CCBY3.0IGO)©2023AsianDevelopmentBank6ADBAvenue,MandaluyongCity,1550MetroManila,PhilippinesTel+63286324444;Fax+63286362444www.adb.orgSomerightsreserved.Publishedin2023.ISBN978-92-9270-484-1(print);978-92-9270-485-8(electronic);978-92-9270-486-5(ebook)PublicationStockNo.TCS230558-2DOI:http://dx.doi.org/10.22617/TCS230558-2TheviewsexpressedinthispublicationarethoseoftheauthorsanddonotnecessarilyreflecttheviewsandpoliciesoftheAsianDevelopmentBank(ADB)oritsBoardofGovernorsorthegovernmentstheyrepresent.ADBdoesnotguaranteetheaccuracyofthedataincludedinthispublicationandacceptsnoresponsibilityforanyconsequenceoftheiruse.ThementionofspecificcompaniesorproductsofmanufacturersdoesnotimplythattheyareendorsedorrecommendedbyADBinpreferencetoothersofasimilarnaturethatarenotmentioned.Bymakinganydesignationoforreferencetoaparticularterritoryorgeographicarea,orbyusingtheterm“country”inthispublication,ADBdoesnotintendtomakeanyjudgmentsastothelegalorotherstatusofanyterritoryorarea.ThispublicationisavailableundertheCreativeCommonsAttribution3.0IGOlicense(CCBY3.0IGO)https://creativecommons.org/licenses/by/3.0/igo/.Byusingthecontentofthispublication,youagreetobeboundbythetermsofthislicense.Forattribution,translations,adaptations,andpermissions,pleasereadtheprovisionsandtermsofuseathttps://www.adb.org/terms-use#openaccess.ThisCClicensedoesnotapplytonon-ADBcopyrightmaterialsinthispublication.Ifthematerialisattributedtoanothersource,pleasecontactthecopyrightownerorpublisherofthatsourceforpermissiontoreproduceit.ADBcannotbeheldliableforanyclaimsthatariseasaresultofyouruseofthematerial.Pleasecontactpubsmarketing@adb.orgifyouhavequestionsorcommentswithrespecttocontent,orifyouwishtoobtaincopyrightpermissionforyourintendedusethatdoesnotfallwithintheseterms,orforpermissiontousetheADBlogo.CorrigendatoADBpublicationsmaybefoundathttp://www.adb.org/publications/corrigenda.Notes:Inthispublication,“$”referstoUnitedStatesdollars.ADBrecognizes“China”asthePeople’sRepublicofChina.CoverdesignbyEdithCreus.ContentsTable,Figures,andBoxesvForewordviPrefaceviiAcknowledgmentsixAbbreviationsxExecutiveSummaryxi1Introduction1DomesticCarbonMarkets2KeyConsiderationsforGovernments22LandscapeofInternationalCarbonMarketInstruments4InternationalCarbonMarketsunderArticle6oftheParisAgreement4OtherInternationalMitigationPurposes10CarbonOffsettingandReductionSchemeforInternationalAviation133LegalandPolicyFrameworkstoOperationalizeInternationalCarbonMarketsthroughArticle616Summary:CoreStrategyandNationalFrameworksforArticle6Operationalization16StrategyforAchievementoftheNationallyDeterminedContribution17GovernanceStructurestoSupporttheDevelopmentandImplementationofArticle6Policies22ClarityintheLegalNatureofCarbonCredits23ClarityinRightstoGenerate,Own,andUseCarbonCredits,IncludingPropertyRightsand23Land-TenureConsiderationsRelevanttoMitigationActivitiesRightsRelatedtoEligibleInterestHolders24ForeignDirectInvestmentthroughCarbonFinance24AppropriateFeesand/orLeviesontheInternationalTransferofMitigationOutcomes25MeetingPrerequisitesforInternationalCooperationunderArticles6.2and6.425AccountingandReportingInfrastructuretoSupportArticle6Operationalization26NationalOperationalizationofArticle6:LessonsfromGhana274Conclusion29ivContentsAppendixes1PrerequisitesforInternationalCooperationunderArticles6.2and6.4302LegalandInstitutionalRequirementstoAuthorizeMitigationOutcomesunder32Articles6.2and6.4forInternationalTransferGlossary41Table,Figures,andBoxesTableStrategicApproachesforLeveragingCarbonMarkets18Figures1BroadLandscapeofCarbonMarketInstruments12EmissionsReductionsfromMarketScenariosRelativetoCurrentPolicies,5withandwithoutForests3TreatmentandUseofaMitigationOutcomeundertheParisAgreement74CorrespondingAdjustmentIsMadebyCountryAafterItTransfersEmissionReductions8toCountryB5InterplaybetweenArticle6andtheVoluntaryCarbonMarket116TentativeListofUnitsEligibleUndertheCORSIAFramework137ImplicationsofUsingNon-authorizedversusAuthorizedMitigationOutcomes22forVoluntaryPurposes8LegalandInstitutionalRequirementstoAuthorizeMitigationOutcomesunderArticle6.226andArticle6.4forInternationalTransfer9Article6AccountingandReportingInfrastructure27Boxes1PotentialBenefitsofArticle6CooperationforCountriesinAsiaandthePacific62JointCreditingMechanismastheForerunnertoArticle6.293EffortsforaHighIntegrityVoluntaryCarbonMarket124ConsiderationsforTransitioningActivitiesfromtheCleanDevelopmentMechanism185NationalOperationalizationofArticle6—LessonsfromGhana27A1.1PartyEligibilityunderArticle630A1.2ActivityEligibilityunderArticle631A2.1CentralizedAccountingandReportingPlatform34A2.2Article6Database35A2.3NationalRegistryorInternationalRegistry35A2.4Article6.4MechanismRegistry36ForewordAsiaandthePacificisatthefrontlineincombatingclimatechangeandmeetingthetargetsundertheParisAgreement.Theregionisresponsibleforover50%ofglobalgreenhousegasemissionsandhighlyvulnerabletotheimpactsofclimatechange,suchasmoreintensefloods,droughts,cyclones,andheatstressthatareimpactingmillionsofpeople.Women,children,andpoorpeopleareamongthemostaffected.Urgentactionisneededatscaletohelptheregionpaveasustainableandresilientfuturefortheupcominggenerations.Mobilizingbothdomesticandinternationalsourcesoffinance,includingfromtheprivatesector,willbecritical.Well-designedcarbonmarketsareanintegralelementofthebroaderclimatepolicyarchitecturethatcountriescanadopttomitigateclimatechangeandenablethetransitiontolow-carboneconomies.Theseapproachescansupportthereductionofgreenhousegasemissionscost-effectively,enhancetheeconomiccompetitivenessoflow-carbontechnologiesbycreatingstrongpricesignals,andgeneraterevenuestreamsthatcanbechanneledtoclimateadaptationandresilience.AshighlightedinthenewEnergyPolicyoftheAsianDevelopmentBank(ADB),robustcarbonpricinginstrumentssuchascarbonmarketscanbeeffectiveinacceleratingthediffusionoflow-carbontechnologiesandincreasingtheuseofnon-fossil-fuelenergy.Carbonfinance—mobilizedthroughbilateral,regional,andglobalcarbonmarkets—canlowerfinancialbarriers,enhancetheshareofrenewablesintheelectricitysupplymix,andfosterregionalcooperationthroughpowertrade.ADBhasbuiltstrongexpertiseincarbonmarketsandcarbonpricingthroughitsCarbonMarketProgram.TheCarbonMarketProgramhasevolvedinresponsetotheParisAgreementandthechangingarchitectureofinternationalcarbonmarkets.IttakesaholisticapproachtoenhancingtheabilityofADBdevelopingmembercountriestodevelopandtakeadvantageofdomestic,bilateral,andglobalcarbonmarketstoachievetheirnationallydeterminedcontributionsandraisetheambitionovertime.ADB’sinitiativesoncarbonmarketsarepartofitswidereffortstoenhanceclimateactionandpursuegreengrowthintheregion.Tobetteraddresstheregion’spolycrisis,ADBhasupdateditsCapitalAdequacyFrameworkandunlocked$100billioninnewfundingcapacityoverthenextdecade.Thisexpansionofavailablefundswillbefurtherleveragedthroughmobilizingprivateanddomesticcapitaltomovefromthebillionstothetrillionsrequiredtotackletheclimatecrisis.Inthiscontext,thispublicationistimelyasitintroducesthelandscapeofcarbonmarketopportunitiesandprovidesaframeworkforcountriesonhowtobesttakeadvantageofthesemarkets.Ihopethatthisreportwillhelppolicymakersenhancetheireffortstodesignandimplementanefficientandintegratedapproachtocarbonmarketsaspartofthebroaderclimatepolicyarchitecture.ADBremainssteadfastinsupportingthemanditsdevelopingmembercountriestoeffectivelyutilizecarbonmarketsinalignmentwiththeirnationalcircumstancesandpriorities.BrunoCarrascoDirectorGeneralClimateChangeandSustainableDevelopmentDepartmentAsianDevelopmentBankPrefaceCarbonmarketsareanintegralelementofthebroaderclimatepolicyarchitecturesincetheycanreducegreenhousegasemissionscost-effectivelyandincentivizethediffusionoflow-carbontechnologiesandsolutions.Thereisabroadlandscapeofcarbonmarketinstruments,andtheycanbeappliedatthenationalorinternationallevel.Whilecompliancecarbonmarketsemanatefromnationaland/orinternationalpolicyorregulatoryagreements,buyerstypicallyparticipateinthevoluntarymarketforthefulfillmentoftheirvoluntaryclimatecommitments.ThereisgrowingmomentumandinterestfrommembersoftheAsianDevelopmentBank(ADB)totakeadvantageofthebroadlandscapeofcarbonmarkets.Indonesia,Kazakhstan,NewZealand,thePeople’sRepublicofChina(PRC),andtheRepublicofKoreahaveimplementeddomesticemissionstradingsystemsthroughwhichtheycaptheallowedamountofemissionsinthejurisdictionandallowthemarkettotradeemissionallowances.Meanwhile,Thailandhasavoluntarycreditingmarket,andthePRChasaCertifiedEmissionReductionsScheme.Themainbenefitofcarboncreditingmechanismsisthattheycanfacilitatetheidentificationofemissionreductionactivitiesandcontributetopricediscovery,whileprovidingflexibilitytoemissionstradingsystems.WhiledomesticcarbonmarketinstrumentscanhelpADBmembersachieveemissionreductiontargets,internationalcarbonmarketscanmobilizeadditionalinternationalfinance.Accordingly,countriesintheregionareestablishingnationalframeworkstoenableparticipationininternationalcarbonmarketsunderArticle6oftheParisAgreementandarealsobenefitingfromthevoluntarycarbonmarket.Severalcountriesareengaginginbothdomesticcarbonmarketsaswellastheinternationalmarkets.Internationalcarbonmarketshavegainedmuchattentioninrecenttimes.Thevoluntarycarbonmarkethasgrowntoavalueof$2billion,drivenbyincreasingcarboncreditissuanceandprices,particularlyfornature-basedcarboncredits.Atthesametime,concernshavebeenraisedregardingtheenvironmentalintegrityandqualityofcarboncreditsbeingsoldincarbonmarkets.ThemarketforcarboncreditsunderArticle6oftheParisAgreementisstillinitsinfancy;however,thelastcoupleofyearshaveseenasignificantmomentum.CountriesarepreparingforArticle6transactionsthroughestablishingbilateralagreementsandbuildingcapacitytoimplementtherulesandguidanceagreedbytheConferenceoftheParties(COP)totheParisAgreementatCOP26andCOP27.AsAsiaandthePacific’sclimatebank,ADBremainssteadfastincontinuingitsholisticsupportoncarbonmarketsbyprovidingtechnicalandcapacity-buildingsupportandmobilizingcarbonfinance.ADBrecognizesthattherearebothopportunitiesandchallengesofutilizingcarbonmarkets.Therefore,thereisaneedtosupportpolicymakerstounderstandthebroadlandscapeofcarbonmarketopportunitiesanddevelopframeworkstoactinoperationalizingandparticipatinginthesemarkets.Moreactionisneededandexpected,particularlyconcerningtheinternationalcarbonmarkets,whichcanhelpADBmembersattractmuch-neededcarbonfinanceanddiffuseadvancedlow-carbontechnologies.Carbonmarketsaremosteffectivewhenimplementedaspartofthebroaderclimatepolicyarchitectureandintandemwithotherpolicies,suchasremovingfossilfuelsubsidiesandcreatingregulatoryconditionsthatpromoteprivatesectorengagement.viiiPrefaceThisstudylaysthelandscapeofemergingcarbonmarketopportunities,focusingonArticle6oftheParisAgreementandthevoluntarycarbonmarket,andsharesinsightsontheirinterlinkagesandinteractions.Thestudyaimstoprovideaguidanceframeworktosupportpolicymakersonhowcountriescanengagewiththeinternationalcarbonmarketsinpursuanceoftheirclimateambitionwithdueconsiderationoftheirnationalcircumstancesandpriorities.Wehopethisstudywillhelppolicymakersincreasetheirunderstandingofthevarietyofavailablecarbon-marketinstruments,howtheinstrumentsfitinthelargerclimatepolicycontext,andthewayscarbonmarketscanbedesignedtosuitnationalclimateobjectives.AcknowledgmentsThisstudy,NationalStrategiesforCarbonMarketundertheParisAgreement—MakingInformedPolicyChoices,hasbeendevelopedbytheArticle6SupportFacilityoftheAsianDevelopmentBank(ADB)underitsCarbonMarketProgramwithinitsClimateChangeandSustainableDevelopmentDepartment(CCSD).VirenderKumarDuggal,principalclimatechangespecialist,CCSD,conceptualizedandguidedthedevelopmentofthisknowledgeproduct.MartijnWilderA.M.,andRichardSainesONMfromPollinationconductedtheresearchandproducedtheinitialreport,whichisdulyacknowledgedandappreciated.ThetechnicalinputsfromateamofADBexpertsincludingRastrarajBhandari,TakeshiMiyata,TakahiroMurayama,andJohanNylanderarealsoappreciated.ThisstudyhashugelybenefitedfromthepeerreviewconductedbyChristinaPak,principalcounsel,OfficeoftheGeneralCounsel,ADB;DanieleQuaggiotto,seniorcounsel,OfficeoftheGeneralCounsel,ADB;MarkJohnson,carbonmarketsbusinessmanageratRicardoPLC;andMischaClassen,managingdirectoratClassen.ThetimelypublicationofthisstudywasmadepossiblebythevaluablecoordinationandadministrativesupportofJanetArleneAmponin,AnnaLizaCinco,CherilleMiranda,RocilynLaccay,andGhiaRabanal.MelanieKellehereditedthisstudy.EdithCreusperformedthelayoutandcompositionandcoverdesign.MariaTheresaMercadoproofreadthisstudyandMarjorieCeliswhoswiftlyworkedonpageproofchecking.Theirdiligentinputsaregreatlyacknowledgedandappreciated.AbbreviationsA6.4ERsUnitizedmitigationoutcomesissuedundertheArticle6.4mechanismBTRBiennialTransparencyReportCDMCleanDevelopmentMechanismCERcertifiedemissionreductionCMAConferenceofthePartiesservingastheMeetingofthePartiesoftheParisAgreementCOPUnitedNationsFrameworkConventiononClimateChangeConferenceofthePartiesCORSIACarbonOffsettingandReductionSchemeforInternationalAviationETSemissionstradingsystemFPICfree,prior,andinformedconsentGHGgreenhousegasICAOInternationalCivilAviationOrganizationICVCMIntegrityCouncilfortheVoluntaryCarbonMarketIETAInternationalEmissionsTradingAssociationITMOinternationallytransferredmitigationoutcomeJCMJointCreditingMechanismNDCnationallydeterminedcontributionOECDOrganisationforEconomicCo-operationandDevelopmentREDD+Reducingemissionsfromdeforestationanddegradationandtheroleofconservation,sustainablemanagementofforests,andenhancementofforestcarbonstocksindevelopingcountriesUNFCCCUnitedNationsFrameworkConventiononClimateChangeVCMvoluntarycarbonmarketVCMIVoluntaryCarbonMarketsIntegrityInitiativeExecutiveSummaryCarbonmarketsofferamechanismtochanneldomesticandinternationalfinanceintoclimatemitigationactivities.Thereisabroadlandscapeofcarbonmarkets—bothattheinternationalanddomesticlevels—whichcanbeusedforvoluntarypurposes(i.e.,forthefulfillmentofvoluntaryclimatecommitments)andcompliancepurposes(i.e.,tomeetrequirementsestablishedbylawsorinternationalagreements,includingdomesticemissionstradingschemes,nationallydeterminedcontributions[NDCs]undertheParisAgreementthroughArticle6,ortheCarbonOffsettingandReductionSchemeforInternationalAviation).Thismeansgovernmentshavearangeofoptionswhenconsideringwhichcarbonmarketstoparticipateinandtheirlevelofengagement.PurposeandScopeofThisReportToengagestrategicallyincarbonmarkets,governmentsshoulddefinetheobjectivesofparticipationaswellasunderstandtheinteractionsbetweenvariouscarbonmarketapproaches.Countriescaneithercreatetheirdomesticcreditingschemestogeneratecarboncreditsoradopt(andpotentiallyadjust)internationalcarboncreditstandards.Countriescanusecreditsgeneratedwithintheirborderforavarietyofpurposes—dependingonthecountry—includingfordomesticcomplianceuse(e.g.,acarbontaxorcap-and-tradesystem),internationalcomplianceuse,orinternationalordomesticvoluntaryuse.Article6oftheParisAgreementrecognizesthatcountriesmaycooperatevoluntarilyinmeetingtheirNDCsthroughtheinternationaltransferofmitigationoutcomes.Whenimplementedwithenvironmentalintegrity,Article6canhelpaccelerateinvestmentsinclimatemitigationandraiseoverallambition.PartieshaveagreedonkeyaspectsoftheguidanceandrulesforoperationalizingArticle6,providingclarityonimplementationelementsandpavingthewayforcountriestocooperatevoluntarilythroughbilateralarrangements.Withthisguidanceandsetofrulesagreed,countriesmustnowturntobuildingthenecessarynationalframeworksandprocessestofacilitateinternationalcooperationunderArticle6.However,theymustdosowhilerecognizingtheinterlinkagesofcooperativeapproachesunderArticle6withtheirclimateambitions,suchastheachievementofNDCtargetsaswellasothercarbonmarketopportunitiesincludingdomesticcarbonpricingmechanismsandthevoluntarycarbonmarket(VCM).Formanycountries,participationininternationalapproachesunderArticle6willrequirenewdomesticregulationsandlegalframeworkstosupportcompliancewiththeArticle6guidanceandrules.Participationwillalsorequirecountriestoweighupseveralconsiderations,includingtheimpactofparticipationonthelong-termachievementoftheirNDC.Thiswillrequireadecision-makingframeworktodeterminewhichmitigationoutcomestoauthorizeforinternationaltradeaswellasadministrativecapabilitiestofacilitatecreditauthorization.WhileVCMstypicallyrunindependentlyofgovernmentregulation,VCMshavealwaysexistedinthecontextofnationallegalandregulatoryframeworks,andgovernmentsmayconsiderwhatactionscanbetakentosupportorconstrainVCMactivitiesintheirjurisdiction.xiiExecutiveSummaryThisstudyaimstoassisttheAsianDevelopmentBank’sdevelopingmembercountriesindevelopingandoperationalizingtheirstrategiesforengagingwithcarbonmarketsaspartofNDCimplementationthroughthedevelopmentofaguidanceframework.Thestudyprovidesanoverviewasof2023ofthelandscapeofcarbonmarketsandconsiderspathwaysforgovernmentstoparticipateinthosemarkets.TheguidanceframeworkoutlinesthelegalandpolicyframeworksrequiredforoperationalizingArticle6toaidcountriesastheydeveloptheircarbonmarketengagementstrategies.Thisstudyfocusesprimarilyonthemarket-basedapproachesunderArticles6.2and6.4anddoesnotaddressnonmarket-basedapproachesunderArticle6.8.GuidanceFrameworktoInformCountryEngagementwithCarbonMarketsAscountriesseektoimplementtheirNDCsandengagewithcarbonmarkets,includinginternationalcooperationunderArticle6,theyshouldaddressthefollowingstrategicelementsandoperationalrequirements:StrategicElements(i)EstablishastrategytoachievetheNDCthatagovernment,institutions,andcivilsocietyconsultonandsupport.Identifyprioritiesthatconsiderspecificcountrycircumstancesanddevelopmentneedsanddevelopaworkableroadmapofpolicyinstrumentsandfinancerequiredtoimplementthelong-termstrategy.(ii)EstablishacarbonmarketstrategywithclearobjectivesforcountryengagementwithcarbonmarketsandconsiderationoftheextenttowhichthecountryintendstoengageininternationalcooperationunderArticle6;theuseofdomesticversusinternationalmarkets;andtheroleofVCMsaswellasanynationalregulatoryortaxationrequirements,includingthosethatapplytointernationaltransfersunderArticle6.(iii)Consideringtheestablishedlong-termstrategy,developstrategicobjectivestounderpinengagementwithArticle6includingguidingprinciplesandcriteriaformitigationoutcomestobeeligibleforinternationaltransfer.Principlesshouldalsoincludeapproachestoensureinternationalcarbonfinanceisusedtowardsectorsthatareotherwisedifficultforthecountrytofinanceandmeanstomaximizebenefitstothecountryfromthesaleandinternationaltransferofmitigationoutcomes,suchasappropriateuseandsharingofthatrevenueamongbeneficiaries.OperationalRequirements(i)Establishclearprocessesforauthorizingtheinternationaltransferofmitigationoutcomesandthetimingforsuchauthorization.(ii)Formalizetheallocationofrolesandresponsibilitiesacrossgovernmentuponcross-ministerialconsultationtooperationalizeArticle6,ensuringappropriategovernancestructuresandsafeguardsareputinplaceanddecision-makingprocessesareasstreamlinedaspossible.(iii)DevelopprocessesforapprovingthetransitionofprojectsfromtheCleanDevelopmentMechanismtotheArticle6.4mechanisminlinewiththeprocessestobedevelopedandadoptedbytheConferenceofthePartiesservingastheMeetingofthePartiesoftheParisAgreement.(iv)EstablishclearcontactpointsforthenegotiationandconclusionofbilateralArticle6.2agreements,aswellasrelevantinterministerialorinteragencyapprovalprocesses.ExecutiveSummaryxiii(v)EstablishtheaccountingandreportingcapabilityandinfrastructuretomeettherequirementsofArticle6.(vi)AlthoughnotstrictlywithintheremitofArticle6,establishguidanceonclaimsthatcanbemadebyvoluntarypurchasersofmitigationoutcomesgeneratedinthecountry.ThisguidanceshouldseektoalignwiththepositionspromulgatedbykeycarbonmarketintegrityinitiativessuchastheVoluntaryCarbonMarketsIntegrityInitiativeandtheIntegrityCouncilfortheVoluntaryCarbonMarket.(vii)AlignArticle6transactionswithdomesticemissionspricingortradingschemes,asappropriate(forexamplewheredomesticemissionstradingsystemsarelinkedinternationally).ItwouldbeprudentforcountriestodevelopanArticle6policythatcoverstheseissuestoprovideclarityamonggovernmentstakeholdersandinternationalplayers,includingprivatesectorplayerslookingtotransact.CountriesshouldusethisguidanceframeworkinconcertwiththeArticle6guidanceandrulesagreedatthe26thand27thUnitedNationsClimateChangeConferencesoftheParties(COP26andCOP27),subsequentdecisions,andotherblueprintswhenseekingtooperationalizeArticle6.Theconsiderationscoveredinthisreportaimtoprovideclarityonthefoundationalrequirementsforacountrytoengageincarbonmarkets,aswellasoptionsforparticipationincarbonmarketstoreflectnationalcontextsandcircumstances.1IntroductionThereisstronginterestfromcountriesgloballyinutilizingcarbonmarketstofinancelow-carbondevelopmentopportunities.Carbonmarketmechanismsenableparticipatingentitiestotradegreenhousegas(GHG)emissionreductionsandremovalunits.Thereisabroadlandscapeofcarbonmarketopportunitiesthatisavailableforcountriesandtheprivatesectortoutilize.Carbonmarketinstruments,mechanisms,andschemescanbeimplementedinternationallyordomestically(i.e.,acrossorwithincountries).Buyersofunitizedmitigationoutcomesdrivetradeincarbonmarkets.Buyerscanparticipateinthesemarketsforvoluntarypurposes(i.e.,forthefulfillmentofvoluntaryclimatecommitments)andcompliancepurposes(i.e.,tomeetrequirementsestablishedbylawsorinternationalagreementsincludingdomesticemissionstradingsystems[ETS],nationallydeterminedcontributions[NDCs]undertheParisAgreementthroughArticle6,ortheCarbonOffsettingandReductionSchemeforInternationalAviation[CORSIA]).Figure1visualizesthisbroadcategorizationofcarbonmarkets.Figure1:BroadLandscapeofCarbonMarketInstrumentsCarbonMarketsGeographicInternationalDomesticScopeComplianceVoluntaryComplianceVoluntaryMarketDriverMechanismArticleIndustry-orCarbonMarketCreditingEmissionsCreditingTypecooperativesector-wideProgramsTypicallyMechanismsTradingMechanismsapproachescooperativeSystemsapproachesGovernedbyNGOsExamplesJCM,Article.,CORSIAInternationalSouthRepublicofThailandSustainableStandardsAfricaKoreaETS,VoluntaryDevelopmentCreditingNewZealandEmission(e.g.,VoluntaryMechanismETS,People’sReductionMechanism—CarbonRepublicofProgramArticle.Standard,ChinaETS(T-VER)GoldStandard)CORSIA=CarbonOffsettingandReductionSchemeforInternationalAviation,ER=emissionreduction,ETS=emissionstradingsystem,JCM=JointCreditingMechanism,NGO=nongovernmentorganization,T-VER=Thailand-VoluntaryEmissionReductionProgram.Note:Thisfigurehasbeenmadeforillustrativepurposestogainapreliminaryunderstandingofthebroadlandscapeofcarbonmarketinstrumentsthatareavailableasof2023.Thisisasimplifiedversion,anditistobenotedthattherearepotentialoverlapsbetweenthesemarkets.aArticle6.4ERsandinternationallytransferredmitigationoutcomesmaybepurchasedandusedbyvoluntarybuyersifdesired.Source:FiguredevelopedforthisreportbytheAsianDevelopmentBank.2NationalStrategiesforCarbonMarketsundertheParisAgreementInternationalcompliancemarketscanbefurthergroupedintotwocategories:cooperativeapproachesandindustry-orsector-wideapproaches.Themaindifferencebetweenthetwoistheextentofcontrolthattheapproachimposesonthemarket.Ingeneral,cooperativeapproachesarelinkedtotheimplementationofNDCtargetsthatareestablishedforanentireeconomyorspecificsectorswithinaneconomy.Theydonotimposetargetsonindividualentities.Acommonexampleofcooperativeapproachesisinternationallytransferredmitigationoutcomes(ITMOs)underArticle6oftheParisAgreementsuchasbilateralmechanismsundertheJointCreditingMechanism(JCM).Therearealsonewmechanismsthatareemergingthatcanbebestdescribedasindustry-orsector-widecooperativeapproaches.ThisincludesCORSIA,thefirstinternationalschemeofferingaharmonizedapproachtousingcarbonmarketstoreduceemissionsfromallentitiesoperatingwithinaspecificsubsectoroftheglobaleconomy.Internationalvoluntarymarketscanbeutilizedbyorganizations,typicallyintheprivatesector,tosupportinachievingmitigationoutcomes,suchasinpursuitofcarbonneutralityornet-zeropledges.Thesebuyers’targetsanduseofcarbonmarketsareself-imposedandnon-binding(i.e.,theydonotinvolveobligationsthatrequirecertainmitigationactionstobetaken).Activityinthiscontextisreferredtocollectivelyasthevoluntarycarbonmarket(VCM).TheVCMisnotcentrallygovernedoroperated.MostVCMtradeisinternational.Tradeoccursinbusiness-to-businesstransactionsandthroughcommodityexchangesandexchange-tradedfunds.DomesticCarbonMarketsManycountriesaredevelopingorhavedevelopedtheirdomesticcarbonmarketsthatsupportdecarbonizationeffortsintheirowncountryandthroughouttheirregions.DomesticcompliancemarketstypicallyrefertoETSoracombinationofbothanETSandacarbontax,andinsomecases,domesticcreditingmechanismsareintroducedtocreateflexibilityforregulatedentities.Domesticcreditingmechanismscanalsobevoluntaryandnotlinkedtoacarbonpricingmechanism,suchastheThailandVoluntaryEmissionReductionProgram(T-VER).AnETSisoneexampleofadomesticcarbonpricingmechanism.Itisdifferentfromacreditingmechanisminthatitisamarketmechanismthatsetsacapforemissionsinasectororseveralsectorsandallowsregulatedentitiestobuyandselltheseemissions(aspermitsorallowances)amongthemselvestostayunderthecap.ThetradedcommodityinanETSisreferredtoasanemissionsallowance.Oneallowancerepresentstherighttoemit1metrictonofcarbondioxideequivalent.Allowancesareallocatedbyagoverningagencytoregulatedentities—usuallyannually—eitherforfreeorthroughauctions.Aregulatedentitywhoseemissionsexceeditsannualemissionsallowanceisnormallychargedafeefornoncompliance.Regulatedentitiestradeallowancesamongthemselvestoavoidfees.Therearelinkagesandoverlapswithinthisbroadlandscapeofcarbonmarketinstruments,anddomesticmarketscanimpactsupplyanddemanddynamicsininternationalcarbonmarketsandVCMs.Specifically,therearelinkagesbetweeninternationalvoluntaryandcompliancemarkets,whichthispaperwillexpanduponfurther.KeyConsiderationsforGovernmentsCountryNDCswillinfluencedecisionsregardingtheuseofcarbonmarkets.CountrieswillneedtotakeastrategicapproachandstrikeabalancebetweenattractingadditionalcarbonfinancethroughthesaleofITMOsunderArticle6oftheParisAgreementandensuringthattheycanfinanceandmeettheirownNDCtargets,aswellasratchetambition.Introduction3Toengagestrategicallyincarbonmarkets,governmentsshoulddefinetheobjectivesofparticipationaswellasunderstandtheinteractionsbetweenvariouscarbonmarketapproaches.Domesticmechanismsmayrequirenewregulationsandlegalframeworks.ParticipationininternationalcarbonmarketswillultimatelyrequireanArticle6policyframeworktodeterminewhichmitigationoutcomestoauthorizeforinternationaltradeaswellasadministrativecapabilitiestofacilitatecreditauthorizationandcorrespondingadjustment.Governmentsmayconsiderwhatactionscanbetakentosupportorconstrainvoluntarymarketactivitieswithintheirjurisdictionormayevenregulatesuchmarkets.ThisreportaimstoassisttheAsianDevelopmentBank’sdevelopingmembercountriesindevelopingtheirstrategicengagementwiththecarbonmarketthroughthedevelopmentofaguidanceframework.Todoso,thisreportprovidesanoverviewofthelandscapeofcarbonmarketsandconsiderspathwaysforgovernmentparticipationinthosemarkets.TheguidanceframeworkthenoutlinesthelegalandpolicyframeworksrequiredforoperationalizingcarbonmarketsthroughthecooperativeapproachesunderArticle6—focusingonArticles6.2and6.4—toaidcountriesastheydeveloptheircarbonmarketengagementstrategieswhileexploringlinkageswithotherinternationalmarketopportunitiesundertheVCMandCORSIA,whicharereferredtoasotherinternationalmitigationpurposes.11Article6.8recognizestheimportanceofnonmarketapproachestohelpcountriesimplementtheirNDC.However,nonmarketapproachesdonotinvolvethetransferofmitigationoutcomesandarethereforenotconsideredfurtherinthisreport.2TheLandscapeofInternationalCarbonMarketInstrumentsInternationalCarbonMarketsunderArticle6oftheParisAgreementInternationalcooperationunderArticle6canhelpbuyingcountriestodelivertheirNDCgoalsinacost-effectivewayandsellingcountriestoraisefundstofinancetheirownNDCachievement.CooperationundertheParisAgreementcanaccelerateinvestmentsinmitigationandraiseoverallclimateambition.Article6oftheParisAgreementallowscountriestoauthorizeandinternationallytransfermitigationoutcomesforusetowardapurchasingparty’sNDCachievementorforothermitigationpurposes.Countriesaroundtheworldhavedifferentabatementcostsduetotheirexposuretorenewableandfossilresources,accesstogreentechnologies,orcapacitytostorecarboninforestsorgeologicalsinksthataccumulateandstorecarbonforanindefiniteperiodandtherebyremovescarbondioxidefromtheatmosphere.CountriesthatcanabateemissionsbeyondtheirNDCmorecost-effectivelythantheglobalaveragearemorelikelytobecomesellersofmitigationoutcomes,andcountriesthathavehighabatementcostsundertheirNDCaremorelikelytobecomebuyers.TheimplicationofthisisthatdevelopedcountrieswithrelativelylowemissionsmitigationpotentialcanfinancemitigationopportunitiesindevelopingcountriesandcountthosemitigationoutcomestowardtheirNDCs.ThishasbeenreflectedinArticle6.2transactionstodate,withfinancegenerallyflowingfromdevelopedtodevelopingcountries.Internationalcarbonmarketscanenabletheeffectiveuseofresources;enhancementofoverallambition;andsourcingofadditionalfinancingfordevelopment;climatechangemitigation;andadaptationpurposes.ComparedtocountriesindependentlyachievingtheirNDC,thisinternationalcooperationcanreducethetotalcostsofachievingindividualNDCsand,potentially,facilitateadditionalmitigationbeyondthecurrentNDCambition.Researchershavequantifiedthesebenefitsusingglobalmacroeconomicanalysismodelsandcomparingresultsbetweenindependentmitigationeffortsandcooperativemitigationefforts.2StudiessuggestthepotentialeconomicbenefitsofArticle6cooperationaresignificant.AstudybytheInternationalEmissionsTradingAssociation(IETA)incollaborationwiththeUniversityofMarylandestimatesthatcooperativeimplementationunderArticle6canreducethemitigationcostsofachievingNDCsby63%by2030,withfinancialbenefitsof$250billionperyear.Iftheseestimatedcostsavingsarereinvestedintoadditionalmitigation,thentheworldcouldfurtherincreasethecurrentambitionofNDCsatthesamecostsasindependentimplementationintheabsenceofArticle6.3TheEnvironmentalDefenseFundconductedasimilaranalysis,findingthatreinvestingthefullcostsavingspotentiallyachievableviaArticle6intogreateremissionsreductionscoulddoubleglobalclimateambitionwithoutadditionalcost,withhalfofthatdoublingcomingfromnaturalclimatesolutions,includingreducingemissionsfromdeforestationanddegradationandtheroleofconservation,2MoststudiesontheeconomicbenefitsofArticle6usetheGlobalChangeAssessmentModel(GCAM),aglobalintegratedassessmentmodelrepresentingandlinkingeconomic,energy,andland-useanalysis.3InternationalEmissionsTradingAssociation(IETA),UniversityofMaryland,andCPLC.2019.TheEconomicPotentialofArticle6oftheParisAgreementandImplementationChallenges.Washington,DC.TheLandscapeofInternationalCarbonMarketInstruments5sustainablemanagementofforests,andenhancementofforestcarbonstocksindevelopingcountries(REDD+)(Figure2).4AmetastudybyresearchersfromtheKielInstitutefortheWorldEconomyandtheOrganisationforEconomicCo-operationandDevelopment(OECD)foundthatmostresearchestimatesthecostreductionat58%–63%.5Box1highlightsthepotentialbenefitsofArticle6cooperation,specificallyforcountriesinAsiaandthePacific.Figure2:EmissionsReductionsfromMarketScenariosRelativetoCurrentPolicies,withandwithoutForests(TotalEmissionsReductionsfrom2020−2035inbilliontonsCO2e)reductionsconsistentwithCreductionsonintermediateambitionpathCurrentpoliciesGlobalmarket,Globalmarket,(ParisAgreementpledges)withoutREDDwithREDDC=Celsius;CO2e=carbondioxideemissionsequivalent;REDD+=reducingemissionsfromdeforestationanddegradationandtheroleofconservation,sustainablemanagementofforests,andenhancementofforestcarbonstocksindevelopingcountries.Source:EnvironmentalDefenseFund.2018.Thepowerofmarketstoincreaseambition—EvidencesupportseffortstorealizethepromiseofParis.Article6oftheParisAgreementrecognizesthatcountriesmaycooperatevoluntarilyintheimplementationoftheirNDCs.AttheUnitedNationsFrameworkConventiononClimateChange(UNFCCC)26thConferenceoftheParties(COP26)inNovember2021,partiestotheParisAgreementadoptedguidanceoncooperativeapproachesreferredtoinArticle6.2,andrules,modalities,andproceduresforthemechanismestablishedinArticle6.4.6Article6guidanceandruleswerefurtherelaboratedduringCOP27,withadditionalworktocontinueunderthenegotiations.74P.P.Cabezas,R.Lubowski,andG.Leslie.2019.EstimatingthePowerofInternationalCarbonMarketstoIncreaseGlobalClimateAmbition.5S.Thubeetal.2021.TheEconomicandEnvironmentalBenefitsfromInternationalCo-ordinationonCarbonPricing:AReviewofEconomicModellingStudies.EnvironmentalResearchLetters.16(11).6UnitedNationsFrameworkConventiononClimateChange(UNFCCC),ConferenceofthePartiesservingasthemeetingofthePartiestotheParisAgreement(CMA).2021.Decision2/CMA.3,GuidanceonCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement;andUNFCCC,CMA.2021.Decision3/CMA.3,Rules,ModalitiesandProceduresfortheMechanismEstablishedbyArticle6,paragraph4,oftheParisAgreement.7UNFCCC,CMA.2022.Decision6/CMA.4,MattersRelatingtoCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement;andUNFCCC,CMA.2022.Decision7/CMA.4,GuidanceontheMechanismEstablishedbyArticle6,paragraph4,oftheParisAgreement.6NationalStrategiesforCarbonMarketsundertheParisAgreementBox1:PotentialBenefitsofArticle6CooperationforCountriesinAsiaandthePacificThepotentialbenefitsArticle6mayoffercountriesinAsiaandthePacificwilldependuponwhetherthecountryispositionedtobeabuyerorsellerofmitigationoutcomes.UnderaglobalcarbonmarkettoachievenationallydeterminedcontributionsasmodeledbytheInternationalEmissionsTradingAssociation(IETA),India,Pakistan,SouthAsia,andSoutheastAsiaareprojectedtobesomeofthelargestsellersofcredits,resultinginlargefinancialtransfers.aCumulativelyby2050,thosecountriesorregionscouldsellapproximately4gigatonsofcarbondioxideequivalent,whichismorethan10%of2023annualglobalemissionsandcouldbeworthmorethan$40billion.CentralAsiaandotherAsianandPacificislandcountriesareprojectedbuyersofcredits.ThePeople’sRepublicofChinaisprojectedtotransitionfromalargesellerintoalargebuyerafter2050.bAsianandPacificislandcountriesmayseektoleveragetheopportunitiesforinternationalcooperationofferedbyArticle6toattractinternationalfinanceformitigationoutcomes.Thiscapitalcouldfinanceeconomicdevelopmentand,potentially,structuralshiftsintheireconomiestowardloweremissionsandenvironmentalimpact;forexample,throughthedevelopmentofrenewableenergy.Note:Theseresultsarederivedfrommacroeconomicanalysismodels.Suchanalysishelpsprovideasenseoftheorderofmagnitudeofthepotentialtradeflowsbutisnotsufficientlygranulartoinformcountry-leveldecision-making.aJointGlobalChangeResearchInstitute.TheGlobalChangeAnalysisModel(GCAM)v6Documentation:GCAMModelOverview.bIETA,UniversityofMaryland,andCPLC.2019.TheEconomicPotentialofArticle6oftheParisAgreementandImplementationChallenges.SeptemberSource:AsianDevelopmentBank.TheCOP26decisionrelatedtoArticle6.2establishedrequirementsandguidancefortheauthorizationoftheuseandtransferofITMOs“forusetowardanNDC”or“foruseforinternationalpurposesotherthanachievementofanNDC.”8Figure3demonstratesthepathwaysfortreatingandusingamitigationoutcomeundertheParisAgreement.WhilekeyaspectsoftheArticle6guidanceandrulesarestillbeingdeveloped,COP27providedprogressonimportantelements,includingamongotherthings:(i)ForArticle6.2:reporting,technicalexpertreview,andinfrastructure;and(ii)ForArticle6.4:transitionofCleanDevelopmentMechanism(CDM)activities,useofcertifiedemissionsreductions(CERs),useofArticle6.4emissionreductions(A6.4ERs),andratesforadministrativeexpenses(e.g.,registrationandissuance).TheinformationsubmittedbytheparticipatingpartiesonacooperativeapproachwillbereviewedbyanArticle6technicalexpertreviewteam,whichwillthenprepareareportonitsreviewwithrecommendationstotheparticipatingpartyonhowtoimproveconsistencywiththeguidanceanddecisionsoftheConferenceofthePartiesservingastheMeetingofthePartiesoftheParisAgreement(CMA),includingonhowtoaddressinconsistenciesinquantifiedinformation.98UNFCCC,CMA.2021.Decision2/CMA.3,GuidanceonCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.Annex,para.1.9ICAT.2023.TransparencyforcooperativeapproachesundertheParisAgreement:AguidetonavigatingthelinksbetweenArticles6and13.TheLandscapeofInternationalCarbonMarketInstruments7Figure3:TreatmentandUseofaMitigationOutcomeundertheParisAgreementTreatmentofMitigationUseofMitigationOutcomeOutcomeasDeterminedbyHostCountryAuthorizationStatusAcquiringcountryNDCAuthorizedforinternationaltransfer(CorrespondingOtherinternationalmitigationpurposesOtherAdjustmentrequired)(e.g.,CarbonOsettingandReductioninternationalUnittypeSchemeforInternationalAviation)MitigationITMOPurposesVoluntarypurposesWITHaMitigationIsthecorrespondingadjustmentoutcomemitigation(i.e.,emissionoutcome(Fulluseclaim)authorizedforreductionorinternationalremoval)transferAuthorizationStatusVoluntaryHostcountryNotauthorizedforpurposesNDCorinternationaltransferWITHOUTabroader(NoCorrespondingcorrespondingclimateAdjustment)adjustmentobjectivesUnittypeDomesticMitigationcontributionunit,carbonwhichmaybeaMitigationmarketContributionA.ERorVCUwithamitigationcontributionclaimA6.4ER=Article6.4EmissionReductionUnit,ITMO=internationallytransferredmitigationoutcome,NDC=nationallydeterminedcontribution,VCU=VoluntaryCarbonUnit.aItisahostcountry’sprerogativetodecideunderwhatcircumstancesamitigationoutcomeusedforvoluntarypurposesrequiresnationalauthorizationandacorrespondingadjustment.Source:FiguredevelopedforthisreportbytheAsianDevelopmentBankandPollination.AvoidanceofDoubleCountingArticle6requiresthatcountriesapplyrobustaccountingmeasurestoensuretheavoidanceofdoublecounting(akeypillarofArticle6)throughtheapplicationofacorrespondingadjustment.Acorrespondingadjustmentinvolvesaprocesswherebycountriesadjusttheircarbonaccountingatfixedintervalstoreconcilemitigationoutcomesimportedandexported.ThissteprequiresanexportingcountrytoaddbacktoitsinventorythevolumeofmitigationoutcomestransferredandanimportingcountrythatusesthemitigationoutcomesforitsNDCachievementtosubtractthesameamountfromitsNDCbalance.Thisapproachpreventstwocountriesfromseparatelycountingthesamemitigationoutcomes,whichisrequiredregardlessofwhetherthemitigationoutcomefallswithinthescopeoftheexportingcountry’sNDC.10TheprocessofapplyingacorrespondingadjustmentisshowninFigure4.TheavoidanceofdoublecountingisalsosupportedbyrequirementsunderArticle4oftheParisAgreementforpartiestopromoteenvironmentalintegrity,transparency,accuracy,completeness,comparability,andconsistency.10CorrespondingadjustmentsmadeforemissionsthatoccuroutsideoftheNDCareaddedtoahostcountry’sNDC-coveredemissions.8NationalStrategiesforCarbonMarketsundertheParisAgreementFigure4:CorrespondingAdjustmentIsMadebyCountryAafterItTransfersEmissionReductionstoCountryBAdjustmentmadeinthetransferringAdjustmentmadeinthereceivingcountry’sGHGinventorysothatonlycountry’sGHGinventorysothatonlythetonsthatarenotexportedarethetonsthatareexportedarecountedcountedtowarditsNDCtowarditsNDCEmissionERsdonotEmissionITMO/reductionscounttowardreductionsA.ERNDCassold()()()overseasActualAdjustedBAUemissionsITMO/ActualBAUActualemissionsemissionsreportedinA.ERemissionsemissionsemissionsreportedreportedreportedinNDC()NDC()inNDC()inNDCemissionsemissionemissionemissionbalanceTotalNDCbalancebalanceTotalNDCbalanceTarget()Target()()()()CountryA:transferringcountryCountryB:acquiringcountryBAU=businessasusual;GHG=greenhousegas;ITMO=internationallytransferredmitigationoutcome;NDC=nationallydeterminedcontribution.Source:FiguredevelopedforthisreportbytheAsianDevelopmentBankandPollination.Article6.2TheArticle6.2guidanceaffordspartiesoptionsintheuseofhigh-integritymarketapproachestoachievetheirNDCsandhasthepotentialtoincreasetheglobalflowofcarbonfinance.Article6.2guidancedoesnotspecifythetypeofactivitiesorhowanactivitycycleshouldbedesigned.Thedesignofthecooperationislefttotheparticipatingcountries.However,italsoimposesstepsandsafeguardsoncarbontransfers,includingrequirementsforauthorization,correspondingadjustments,androbustreporting,eachofwhichwillbecoveredingreaterdetailinthefollowingsections.WhilepilotArticle6.2transfersareunderdevelopmentbetweenseveralcountriesandsomecountrieshavebeguntoimplementArticle6governanceprocesses,mostcountriesarepreparingtherequiredinfrastructureandgovernanceprocedurestoenablefullimplementationofArticle6.2cooperativeapproaches.UncertaintiesremainonhowArticle6.2transactionswillbeeffectuated.Box2sharesinsightsfromtheJointCreditingMechanism,aproject-basedbilateralmarket-basedmechanisminitiatedbytheGovernmentofJapan,whichislargelyconsideredaforerunnertoArticle6.2oftheParisAgreement.TheLandscapeofInternationalCarbonMarketInstruments9Box2:JointCreditingMechanismastheForerunnertoArticle6.2TheJointCreditingMechanism(JCM)isaproject-basedbilateralmarket-basedmechanisminitiatedin2013bytheGovernmentofJapanincollaborationwithsevenpartnercountries.Itiswidelyviewedasaforerunnerforvoluntarycooperationusingmarket-basedmechanismsunderArticle6.2oftheParisAgreement.aTheJCMwillcontributetotheachievementofNDCsofthepartnercountriesandJapanwhileensuringtheavoidanceofdoublecountingthroughcorrespondingadjustments.TheJCMhasalreadydemonstratedhowabilateralcooperativeapproachcanbedesignedandimplementedtonotonlyfostermitigationactionsandgeneratemitigationoutcomesbutalsocontributetoachievingtheSustainableDevelopmentGoals.AsofJune2023,therewere26JCMpartnercountriesaroundtheworld,including16developingmembercountriesoftheAsianDevelopmentBank(ADB).SeveralfinancingmechanismsfacilitatetheimplementationoftheJCM.TheFinancingProgramforJCMModelProjectsimplementedbytheMinistryoftheEnvironmentofJapanisonesuchmechanism,withmorethan200projectsselectedforfinancialsupport.ADBalsohasatrustfundcalledtheJapanFundfortheJointCreditingMechanism,whichaimstoprovidefinancialincentivesfortheadoptionofadvancedlow-carbontechnologiesinADB-financedandadministeredsovereignandnonsovereignprojects.AfterCOP26,theJCMpartnercountriesandJapanhavebeenindiscussiontoincorporatekeyelementsoftheguidanceoncooperativeapproachesunderArticle6.2intotherulesandguidelinesoftheJCM,suchas(i)arrangementsforauthorizingtheuseofJCMcreditsasinternationallytransferredmitigationoutcomestowardtheachievementofNDCs,(ii)applicationofcorrespondingadjustments,and(iii)descriptionofhowtheJCMisconsistentwiththesustainabledevelopmentobjectives,amongothers.ForthedomesticprocessinJapantoalignwiththeguidance,theGovernmentofJapanestablishedtheJCMPromotionandUtilizationCouncilconsistingoffiveministries,andthecouncilhasformalizedtheproceduresfortheauthorizationandcorrespondingadjustmentregardingtheJCM.COP26=26thConferenceofthePartiesoftheUnitedNationsFrameworkConventiononClimateChange.aADB.2021.Article6oftheParisAgreement:DrawingLessonsfromtheJointCreditingMechanism(VersionII).Manila.Source:ADB.Article6.4Article6.4establishesacentralizedmechanismwithaUNFCCC-governedcreditissuancebodythatcanfacilitateinternationalinvestmentinmitigationactivitiesinexchangeforunitizedmitigationoutcomeswhilesupportingsustainabledevelopment.ThemechanismisalsointendedtosucceedtheCDMbutwithkeydifferences,forinstance,astrongerinvolvementofthehostcountry.TheinfrastructurerequiredforfullimplementationofArticle6.4wasfurtherdevelopedatCOP27.WithrespecttotheArticle6.4registry,thefollowingwereagreedupon:(i)theregistrywilltaketheformofastandardizedelectronicdatabase,whichwillalsomakenonconfidentialinformationpubliclyavailablethroughtheinternet;(ii)standardizationandautomatizationthroughthespecificationofelectronicformats;and(iii)interoperabilityofregistriesinstitutedunderArticles6.4and6.2witheachotherandanynationalregistriesofthepartiesthroughprovisionsdevelopedbytheSubsidiaryBodyforScientificandTechnologicalAdvice.10NationalStrategiesforCarbonMarketsundertheParisAgreementThenewmechanismwillultimatelyrequireprojectorprogramproponentstoregistertheiractivitywiththeSupervisoryBodybasedonapprovedmethodologies.TheSupervisoryBodydevelopsdetailedrulesandproceduresforapprovingmethodologies,validation,andverification.CountriesarealsoexploringallowableandefficientpathwaysfortransitioningCDMprojectshistoricallygeneratingCERsintoapprovedprojectsthatwillgenerateA6.4ERs.11AtCOP27,partiesagreedthattheArticle6.4mechanismregistryshalltrackA6.4ERsthatare(i)Authorizedtowardtheachievementofanacquiringcountry’sNDCorforotherinternationalmitigationpurposes—knownasAuthorizedA6.4ERs—which,whenauthorizedforinternationaltransfer,arealsogovernedundertheArticle6.2correspondingadjustmentandreportingrequirementstoensurenodoublecounting;or(ii)NotauthorizedforusetowardtheachievementofanNDCorotherinternationalmitigationpurposes,knownasMitigationContributionA6.4ERs.12BothAuthorizedA6.4ERsandMitigationContributionA6.4ERswillbeseparatelydesignatedinthemechanismregistry.UnliketherequirementsforinternationaltransfersunderArticle6.2,theArticle6.4mechanismrequirestheapplicationofashareofproceedswhereby5%oftheissuedA6.4ERswillbetransferredtoaregistryaccountheldbytheAdaptationFundtohelpvulnerablecountriesmeetthecostsofadaptation,aswellastheautomaticcancellationofatleast2%ofallA6.4ERstodeliveroverallmitigationofglobalemissions.OtherInternationalMitigationPurposesVoluntaryCarbonMarketsVCMsencompassthecollectionofstandardbodies,voluntarybuyers,andcarboncreditgeneratorsthatsellverifiedcarboncreditstobeusedforvoluntarypurposes.Carboncreditingprogramsorstandardssettherequirementsfordeliveringandmeasuringemissionreductionsandremovalsresultingfromamitigationactivity.ThetotalvalueofVCMsnearlyquadrupledin2021,reachingalmost$2billion.Afterseveralyearsofrapidgrowth,theVCMslowedin2022withadeclineinboththeissuanceandretirementofcarboncredits.Macroeconomicheadwindsaswellasgrowingscrutinyoncorporateuseofcarboncreditshavecontributedtothedecline.13Themarketcontinuestobedrivenbycorporatedemandforcreditstomeetvoluntaryclimatetargets(e.g.,netzeroby2050),increasedinterestfrominvestorsthatseethetradeofcarboncreditsasaninvestmentopportunity,andrisingcreditpricesdrivinginvestmentintocarboncreditsupply.WhilecorporatevoluntarydemanddominatestheVCM,theVCMisafractionofthecap-and-tradecompliancemarketwherecoveredentitiesarerequiredtosurrenderallowancesfortheiremissions.VCMscouldsupportthetradeofbothauthorizedandnon-authorizedmitigationoutcomes.Authorizedmitigationoutcomeshave,bydefinition,beenauthorizedbythehostcountryforinternationaltransferandaresubjecttoacorrespondingadjustmentinthehostcountry’snationalaccounts.Non-authorizedmitigationoutcomeshavenotbeenauthorizedbythehostcountryforinternationaltransferand,accordingly,havenotbeensubjecttoacorrespondingadjustment.11CDMprojectparticipantsmustcommunicatetheirrequesttotransitionactivitiestotheArticle6.4mechanismby31December2023totheUNFCCCSecretariatandthehostcountry.Thehostcountrymustapprovethetransitionby31December2025atthelatest.12UNFCCC,CMA.2022.Decision7/CMA.4,GuidanceontheMechanismEstablishedbyArticle6,paragraph4,oftheParisAgreement.AnnexI,para.29.13WorldBank.2023.StatesandTrendsofCarbonPricing2023.TheLandscapeofInternationalCarbonMarketInstruments11Thepresenceofbothauthorizedandnon-authorizedmitigationoutcomesislikelytocreatebifurcationinVCMs,wherebyauthorizedmitigationoutcomesthathavebeencorrespondinglyadjustedwillbeconsideredmorevaluablethannon-authorizedmitigationoutcomes.Somestandardsarealreadypreparingtotradebothauthorizedandnon-authorizedcarboncreditsbyintroducinglabelstotagcarboncreditsissuedwithintheirregistry(notingthatitisonlysovereigngovernmentsthatmaymaketheauthorizationandcorrespondingadjustment).Figure5demonstrateshowauthorizedandnon-authorizedunitsissuedfollowingArticles6.2and6.4interactwiththeVCM.Figure5:InterplaybetweenArticle6andtheVoluntaryCarbonMarketLEVERAGINGCARBONMARKETSFORArticle.VoluntaryLEVERAGINGCARBONMARKETSCOMPLIANCEPURPOSESCarbonMarketsFORVOLUNTARYPURPOSESInternationalTransferUNITTYPEofMitigationUNITTYPEITMOOutcomesITMO(ITMOs)USEUSEAcquiringPartyNDCorunderArticle.Voluntarypurposesinternationalaviationcarbonmarket(Fullclaimrights)(CORSIA)CentralizedUNcreditingUNITTYPEUNITTYPEAuthorizedA.ER(ITMO)AuthorizedA.ER(ITMO)mechanismUSEUSEVoluntarypurposesAcquiringPartyNDCorunder(Fullclaimrights)internationalaviationcarbonmarket(CORSIA)UNITTYPEVoluntaryCarbonUnit(VCU)UNITTYPEMitigationContributionA.ERUSEVoluntarypurposeUSE(mitigationcontributionclaim)Domesticcompliancemarketorresults-basedpaymentUNITTYPE(mitigationcontributionclaim)MitigationContributionKEYAuthorized:Non-authorized:USEWithcorrespondingadjustmentWithoutcorrespondingadjustmentVoluntarypurpose(mitigationcontributionclaim)A6.4ER=Article6.4EmissionReductionUnit,CORSIA=CarbonOffsettingandReductionSchemeforInternationalAviation,ITMO=internationaltransferformitigationoutcomes,NDC=nationallydeterminedcontribution,UN=UnitedNations.Source:FiguredevelopedforthisreportbyPollination.AsdemandforcarboncreditsandtheoverallsizeofVCMsgrows,organizations—includingnongovernmentorganizations,corporates,andgovernments—arepushingforgreaterintegrityofVCMsintermsofthecarboncreditscreatedaswellastheclaimsmadebypurchasers.Accurategreenhousegas(GHG)accountingacrossthefullvaluechainofcarboncreditsandavoidingperceptionsofmisleadingclaimsofhowcreditsareused,willbeincreasinglyimportanttotheintegrityofVCMs.Thisrequiresensuringthatemissionreductionsandremovalsunderpinningcarboncreditsarereal,measurable,additional,andpermanent,andavoiddoublecountingandleakage.Onthesupplyside,theIntegrityCouncilfortheVoluntaryCarbonMarket(ICVCM)issetting“definitiveglobalthresholdstandards”thatwillshiftthemarkettowardtradinginhigh-qualitycarboncreditsandefficientlymobilizefinancetowardurgentmitigationandclimate-resilientdevelopment.Similarly,onthedemandside,theVoluntaryCarbonMarketsIntegrityInitiative(VCMI)isseekingto“drivecredible,net-zeroalignedparticipationinvoluntarycarbonmarkets”bydevelopingrulestoguidecorporatesintheuseofcarboncreditstooffsetemissionsandthemakingofaccurate12NationalStrategiesforCarbonMarketsundertheParisAgreementclaimsregardingtheirclimatebenefits.Box3providesmoreinformationontheICVCMCoreCarbonPrinciplesandtheVCMIClaimsCodeofPractice,includingeffortsbetweentheorganizationstoworktogethertoenhanceVCMintegrity.Box3:EffortsforaHighIntegrityVoluntaryCarbonMarketTheIntegrityCouncilfortheVoluntaryCarbonMarket(ICVCM)hasissueditsCoreCarbonPrinciples(CCPs)toenhancesupply-sidevoluntarycarbonmarket(VCM)integrity,whiletheVoluntaryCarbonMarketsIntegrityInitiative(VCMI)hasissueditsClaimsCodeofPracticetoenhancedemand-sideintegrity.TheCCPsaimtoprovide“credible,rigorous,andreadilyaccessible”globalthresholdstandardsforhigh-qualityorhighintegritycarboncreditsthatcreatereal,additional,andverifiableclimateimpact,inlinewiththe1.5CelsiusgoaloftheParisAgreement,whileavoidingnegativeenvironmentalandsocialsideeffects.TheCCPsoutlineguidanceforassessingthequalityofcarboncredits.Theyseektocreateindustry-wideguidelinesandbecompatiblewith(andpromoteconsistencybetween)VCMcarboncreditingprogramsandstandardssuchasVerraandGoldStandard.Meanwhile,theClaimsCodeofPracticeaimstoprovideclearrequirements,recommendations,andsupportingguidancetocompaniesandothernon-stateactorsinthepursuitofclimatetargets,andtoprovideguidanceonassociatedclaimstheycanmakeregardingtheuseofcarboncredits.TheClaimsCodeofPracticefocusesonclaimsmadebycarbonmarketparticipantsbyprovidingthreetiersofcertificationrepresentingvaryinglevelsofrelianceoncarboncreditstomeetParis-alignedclimategoals.ItisworthwhilenotingthattheVCMIrequirescompaniestousethehighestqualitycarboncredits,andcarboncredituserstopubliclyreportkeydetails,includingwhethercarboncreditsusedareauthorizedandcorrespondinglyadjustedfollowingArticle6.InJune2023,ICVCMandVCMIannouncedthattheywouldcoordinatetheireffortstooperationalizehigh-integritycarbonmarketsandaccelerateglobalclimateaction.WithcoordinatedlaunchesoftheCCPsandClaimsCodeofPracticein2023,thetwoorganizationsseektosupporttheprivatesectorwheninvestingincarboncreditsaspartofeffortstorapidlydecarbonizeoperationsandvaluechains.Sources:ICVCM.n.d.CoreCarbonPrinciples;andVCMI.2023.ClaimsCodeofPractice.Oneofthedominantconsiderationsrelatedtointegrity—particularlyconcerningtheVCMI’sworkrelatingtoclaimsguidance—istheapproachtoaddressingdoubleclaiming.Doubleclaimingoccurswhenthesameemissionreductionorremovalis“claimed”bytwoentitiestowardachievingclimatemitigationtargetsorgoals.TheissueofdoubleclaimingbecomesmorecomplicatedinthecontextoftheParisAgreementbecauseeverycountryhasitsclimatetarget,buttheArticle6guidanceandrulesdonotprescribehowcountriesaccountformitigationoutcomesclaimedbyvoluntarybuyerstowardtheirclimatetargets.TheArticle6guidanceandrulesallowforcorrespondingadjustmentstobemadeforthetransferofmitigationoutcomesfor“otherpurposes.”ThiscouldincludethetradeofunitsvoluntarilyinVCMsiftherearebuyersthatprefersuchunits,aswellasforcomplianceuseunderCORSIA.WiththeavailabilityofauthorizedandcorrespondinglyadjustedcarboncreditsforVCMuse,thecontinuedtighteningofstandardsforcredituse—andthenatureoflegitimatecarbonclaims—theVCMisexpectedtoseeanincreaseddemandforauthorizedcredits,atconsiderablyhigherpricesthannon-authorizedcredit.However,itistooearlytomakeassertionsaboutthefuturemarketsizeofauthorizedversusunauthorizedcreditsintheVCMandtheoverallvolumeofVCMversusthecompliancemarket.TheVCMseemstobeatajunctionwherepricesaredepressedoverdoubtsbybuyersovertheintegrityofcreditsandbuyersunderstandtheimportanceofhighintegritycreditsandaredetermininghowtoassesscreditqualityandappropriateclaimsamidambiguousguidelines.14Itisalsoimportanttonotethatauthorizedprojectstendtorepresenthigherambition—tonotoverlapwiththedomestic14ReadmoreatS.TwidaleandS.Mcfarlane.2023.Carboncreditmarketconfidenceebbsasbignamesretreat.Reuters.2September.TheLandscapeofInternationalCarbonMarketInstruments13NDCimplementation—andwillbesoldathighercoststhanunauthorizedunitsundertheVCMsoalthoughtheygaininrobustnessandlegitimacy,thereisacosttrade-off.AnewbalancewillemergeasthefirstcountriesstartauthorizingprojectsforuseintheVCMandaParis-alignedglobalregimefurthersolidifies.CarbonOffsettingandReductionSchemeforInternationalAviationFigure6:TentativeListofUnitsEligibleIn2010,theInternationalCivilAviationOrganizationundertheCORSIAFramework(ICAO)anditsmemberstatesagreedtohaltaviationemissionsat2020levels,requiringcarbonCertainunitsunderthefollowingemissionsneutralgrowthfrom2020.TheinternationalreductionprogramsareeligibleundertheaviationmitigationmeasuresandrulesareoutlinedCORSIAframeworkthroughCORSIA,whichappliestointernationalaviationemissionsonly.CORSIAisexpectedtoAmericanCarbonRegistryresultinsignificantdemandforinternationaltradeinmitigationoutcomes,whichwillfallwithintheArchitectureforREDDTransactionscategoryof“otherinternationalmitigationpurposes”referredtointheArticle6guidelinesandrules.ChinaGHGVoluntaryEmissionReductionProgramAsofMarch2023,nineoffsetstandardswereCleanDevelopmentMechanismacceptedunderCORSIAforthe2021–2023complianceperiod;however,somespecificClimateActionReservemethodologiesunderthoseprogramshavebeendeemedineligible.15Forthe2024–2026complianceForestCarbonPartnershipFacilityperiod,onlyunitsfromtheAmericanCarbonRegistryandArchitectureforREDD+transactionsGlobalCarbonCouncilhavebeenacceptedunderCORSIA.16AsoutlinedinGoldStandardArticle6,mitigationoutcomesusedunderCORSIArequireauthorizationfromthehostgovernmentVeriﬁedCarbonStandardandtheapplicationofacorrespondingadjustmenttoavoiddoublecountingwithhostcountryNDCs.ELIGIBLEOFFSETSCORSIA’scorrespondingadjustmentrequirementrepresentsakeymarketsignalandsourceofdemandCORSIA=CarbonOffsettingandReductionSchemeforforcorrespondinglyadjustedunits.ThelistofunitsInternationalAviation,GHG=greenhousegas,REDD+=eligibleundertheCORSIAframeworkfor2021–2023Reducingemissionsfromdeforestationandforestdegradation,hasbeenvisualizedinFigure6,notingthattherevisedfosterconservation,sustainablemanagementofforestsandlistofCORSIAeligibleschemesforthe2024−2026enhancementofforestcarbonstock.complianceperiodandtheirscopewillbepublishedNote:Someofthelistedschemesareunderreviewandthistowardtheendof2023,subjecttotheconfirmationlististentative.ofcurrentschemesandnewapplications.Source:FiguredevelopedforthisreportbyPollination.15InternationalCivilAviationOrganization(ICAO).n.d.CORDIAEligibleEmissionsUnits.16ICAO.CORDIAEligibleEmissionsUnits.p.9.14NationalStrategiesforCarbonMarketsundertheParisAgreementDomesticCarbonPricingSystemsManyjurisdictionshaveimplementedand/orareconsideringimplementingdomesticcompliancecarbonpricingpolicies.Therearetwomainformsofdirectcarbonpricinginstruments:acarbontaxandanemissionstradingsystem(ETS):(i)Acarbontaxputsanexplicitcarbonpriceonemissions,imposedbythegovernment.Entitiesarethereforeincentivizedtoreducetheiremissionsandpaythecarbontaxontheirremainingemissions.(ii)AnETS(ordomesticcarbonmarket)setsaquantitativelimitorcaponemissionsandrequiresparticipantsto“surrender”anallowanceforeveryunitofGHGtheyemitwithinacomplianceperiod.Participantsareeither“allocated”unitsforfreeormustpurchasethemfromanauctionorthemarket.Byallowingtrade,apriceforallowancesemergesbasedonthelowestcostofabatement,whichvarieswithsupplyofanddemandforallowances.Inpractice,manyjurisdictionsimplementsomecombinationofbothsystems,suchasanETSwithpricefloorsorbothcarbontaxesandETSswithdifferentspecificationsinthesamejurisdictions.Further,somejurisdictionsallowcoveredentitiestofulfillpartoftheircarbontaxorETSobligationsthroughthepurchaseofdomesticorinternationalcarboncredits.Suchdomesticcreditscancomefromdomesticcreditingmechanisms—suchastheSouthAfricacreditingmechanism—orindependentcreditingschemes.Dependingonsystemdesign,domesticcarbonpricingsystemscaninteractwiththeinternationalcarbonmarketinvariousways.Forexample,strongincentivestogeneratecarboncreditsforuseinadomesticcarbonmarketsystemmayreducetherelativeincentivestodevelopmitigationprojectsforutilizationundereitherArticle6orinVCMsgenerally.Thiswillparticularlybethecasewherethedomesticcarbonpricemechanismsupportsahigherpricethanthatavailableontheinternationalcarbonmarket.Alternatively,domesticcarbonpricingsystemsmayalsoallowinternationalcreditstobesurrenderedforcompliance.Article6.4willcreateaninternationalcarboncreditmechanismthatcouldbeusedforcompliancethroughinternationalmitigationoutcomesandthuscreateindirectlinksacrossdomesticcarbonpricinginstruments.17Tobalancethebenefitsandrisksoflinkingwiththeinternationalmarket,domesticcarbonpricinginstrumentscanadoptqualitativeandquantitativerestrictionsoncredituse.Suchrestrictionsarecommonacrosscarbonpricinginstruments.CarbonPricingExperienceinAsiaandthePacificAnincreasingnumberofcountriesinAsiaandthePacifichaveadopteddomesticcarbonpricinginstruments(eitheracarbontaxoranETS)inrecentyears.18Asof2023,therearesevencarbonpricingsystemsinAsiaandthePacificatthenationallevel,includingtwocarbontaxesandfiveETSs.CountriessuchasMalaysia,Pakistan,Thailand,andVietNamareconsideringtheimplementationofadirectcarbonpriceinstrument.17IfdomesticpricingschemesaretocontributetotheachievementoftheNDCswhenincludingflexibilitythroughinternationaloffsets,exports,andimportsofmitigation,outcomesfromthesectorscoveredbyaschemeshouldincludecorrespondingadjustments.Inthissense,itistheaccountingframeworkunderArticle6.2thatcreatestheindirectbilaterallinkingofdomesticcarbonpricinginstruments.18Here,domesticcarbonpricingpoliciesarelimitedtocarbontaxesandETSs.TheLandscapeofInternationalCarbonMarketInstruments15Examplesofdomesticpricingsystemsintheregioninclude:19(i)Indonesiahaslaunchedamandatory,intensity-basedETSfortheelectricitygenerationsectortocommencein2023.ThisETSisintendedtoeventuallyoperatealongsideacarbontax.IndonesiainitiallyintendedthecarbontaxelementtobeintroducedinApril2022,butithasbeendelayedto2025.ItisnotclearyethowthecarbontaxandETSareintendedtointeract.IndonesiahasalsoissuedregulationstogovernthetradingofcarboncreditsgeneratedinIndonesiaintointernationalmarkets.(ii)Japanhasacarbontaxonemissionsfromthecombustionoffossilfuels,withsomeexceptionsforparticularsectors.ThecitiesofTokyoandSaitamahavebothimplementedemissionstradingasanapproachtolimitemissionsfromtheirbuildingsectors.(iii)KazakhstanlauncheditsETSinJanuary2013andby2020,thesystemcoveredabout50%ofthecountry’sGHGemissions.(iv)NewZealandhasanETScoveringelectricitygeneration,industry,waste,andtransport,withthehighestcarbonpriceinAsiaandthePacificasof2023.(v)ThePeople’sRepublicofChina(PRC)hasimplementedanETSthatapplies(asof2023)toelectricitygenerationandisthelargestcarbonpricingschemeinAsiaandthePacific(andtheworld)asof2023.Italsoplanstocoverindustrialemissionsinthefuturebuthasnotpublishedatimeline.BeforethelaunchofthenationalETS,thePRCgainedvaluableexperiencewithemissionstradingthroughtheimplementationofsevensubnationalpilotsystems.20(vi)TheRepublicofKorea’sETSwasthefirstnationalmandatoryETSsysteminEastAsia.Itcoverselectricitygeneration,industry,buildings,waste,anddomesticaviation.TheRepublicofKorea’sETSalsoallowslimiteduseofdomesticcarboncreditsexternaltoitsETSaswellasinternationalCDMCERsdevelopedbycompaniesintheRepublicofKorea.(vii)Singaporehasintroducedacarbontaxonemissionsfromallsectorsforentitiesaboveacertainemissionsthreshold.Aspartofitscarbontaxrevision,theGovernmentofSingaporewillallowentitiestooffsetaproportionoftheircarbontaxobligations(5%)throughthepurchaseofhigh-qualityinternationalcarboncreditssubjecttoArticle6.2guidance.Inadditiontothesecountries,therearedifferenttypesofdomesticcarbonpricingsystems—albeitthosethatpricecarbonindirectly—inAsiaandthePacificincludingcreditingmechanismssuchastheThailandVoluntaryEmissionReductionScheme(T-VER)andschemessuchasthePerform,AchieveandTrade(PAT)inIndia.Inaddition,theGovernmentofIndiahastakenstepstowardtheimplementationofacarbonmarket.AsoutlinedbytheBureauofEnergyEfficiencyinadraftblueprint,Indiaisproposingaphasedintroductionofavoluntarymarketfollowedbyacompliancemarketwithmandatoryparticipationforcoveredentities.SomenationalandsubnationalgovernmentsoutsideAsiaandthePacifichave“linked”theirdomesticcarbonpricingschemes,allowingforcarboncreditsorallowancestobetransferredacrossbordersinserviceofmeetingtheircomplianceobligations.2119ThefollowingsummariesarebasedonthoseprovidedbytheInternationalCarbonActionPartnership;WorldBankStatesandTrendsReport2023.InternationalCarbonActionPartnership.2023.OffsetUseAcrossEmissionsTradingSystems.January.20Beijing,Chongqing,Guangdong,Hubei,Shanghai,Shenzhen,andTianjin.21Forexample,CaliforniaintheUnitedStatesandQuebecinCanada.LegalandPolicyFrameworks3toOperationalizeInternationalCarbonMarketsthroughArticle6Asinternationalcarbonmarketsareanevolvingspace—withactivityintensifyingfollowingtheresolutionoftheArticle6guidanceandrulesatCOP26in2021—manyjurisdictionslacktheserequisiteframeworks,andsomerequirecapabilityandresourcingrequirementstodevelopthem.WhilesometechnicalelementsoftheArticle6guidanceandrulesremainundernegotiation,thereisalreadyenoughdirectionforcountriestodevelopthenationalframeworksnecessarytoparticipateinArticle6.ToparticipateincooperativeapproachesunderArticle6andleveragetheopportunitiesforexternalfinancingthattheypresent,countrieswillneedtoensurethattheappropriatelegal,policy,andinstitutionalframeworksareinplaceatthenationallevel.ThischapterhighlightsthepathwaysforengagementwithinternationalcarbonmarketsbysheddinginsightsonkeyissuestobeconsideredinestablishingcorelegalandpolicyframeworksthatwillberequiredtooperationalizeArticle6atthenationallevelandthekeyconsiderationsonwhichcountrieswillneedtoreachapositionwhendeterminingtheirapproach.Summary:CoreStrategyandNationalFrameworksforArticle6OperationalizationThereareseverallegal,regulatory,andinstitutionalframeworksthatcountrieswillneedtoestablishtooperationalizeArticle6transparentlyandeffectively.Thecoreframeworksrequiredincludethefollowing:(i)StrategyfortheachievementofthenationallydeterminedcontributionsandArticle6policy.CountryengagementwithArticle6mustbeinformedbylong-termplanningfortheachievementoftheirNDCs,includingtheratchetingofambition.Thiswillbeimportanttoinformthesuitabilityofmitigationoutcomesforinternationaltransfer.(ii)Legalandpolicyframeworkstodefineeligibility,managetheactivitycycle,trackmitigationoutcomes,andauthorizeinternationaltransferunderArticle6.ToengagewithArticle6effectively,hostcountrieswillrequirelegalandpolicyframeworkstosupportthecreation,verification,andaccountingofmitigationoutcomes—includingA6.4ERs—andeffectuatetheirtransfer.22LegalandregulatoryframeworksmustprovideclarityonapprovalsunderArticle6processes,theformal“authorization”ofITMOsforuseandtransfer,andthelegaltitleassociatedwithmitigationoutcomestransferredthroughthoseprocesses.22Notethatthecreation,verification,andaccountingofA6.4ERsaregovernedbytheSupervisoryBody.Countriesmaystillcreatesupportinglegalandpolicyframeworksthatcreateanenablingenvironmentfortheseprojectsandenforcenationalprovisions,suchasbenefit-sharing.LegalandPolicyFrameworkstoOperationalizeInternationalCarbonMarketsthroughArticle617(iii)Accounting-and-reportinginfrastructurethataccommodatesArticle6operationalization.Article6transactionsmustbereflectedincountryNDCtrackingandaccountinginfrastructurethroughcorrespondingadjustmentsimplementedfollowingtheArticle6guidanceandrules.CountrieswillalsoneedtobepositionedtocomplywiththereportingrequirementsspecifictoArticle6.Theimplementationoftheseframeworkswillrequirecollaborationacrossministriestoensurealignment.Effectiveimplementationmayalsorequirethedevelopmentoftechnicaland/orregulatorycapacity,aswellasawareness-buildingandeducationintheprivatesector.StrategyforAchievingtheNationallyDeterminedContributionCountrieswillneedtomakeasetofstrategicdecisionsregardingthenatureoftheirparticipation,ifany,intheinternationalcooperationestablishedbyArticle6.CountrystrategiesshouldinformthesedecisionstoachievetheirNDCs.Ideally,thepolicyimplicationsofthesestrategicdecisionsregardingArticle6participationwillbearticulatedinapubliclyavailableArticle6policy.Thispolicyshouldclearlyarticulatethecountry’spositiononArticle6transactionsincludingprocessesforauthorization,whoisallowedtoparticipateinArticle6transactionsandunderwhatconditions,andtheprocedures(includingpaymentoftaxesorfeesifrelevant)forparticipation.CountrieshaveseveralavenuesthroughwhichtheycouldengageincarbonmarketstosupportmitigationactivitiesforNDCachievementand/orbeyondNDCmitigation.Thefollowingtableprovidesanoverviewofthesestrategicapproachesalongwiththeadvantagesanddisadvantagesassociatedwiththem.Table:StrategicApproachesforLeveragingCarbonMarketsLeveragingmarketsforNDCachievementLeveragingmarketsforbeyond-NDCmitigationBeneﬁtsDomesticCarbonNon-authorizedInternationalAuthorizedunitsChallengesPricingunitsusedforcarbontradingusedforvoluntaryunderArticlepurposes(VCM)aEconomiceciencyvoluntarypurposesPublicrevenue(VCM)DiplomaticAdditionaldemandcooperation(egvoluntarybuyersPrivateinvestmentforseekingunitswithaNDCachievementAdditionaldemandcorresponding(egCORSIA)adjustment)ComplexandtimeUncertaintyofdemandconsumingtosetupAdministrativeburdenAdministrativeburdenHighercostsforbusinessesandconsumersCORSIA=CarbonOffsettingandReductionSchemeforInternationalAviation,NDC=nationallydeterminedcontribution,VCM=voluntarycarbonmarket.Source:TabledevelopedforthisreportbytheAsianDevelopmentBankandPollination.TheleftsideofthetablecomparestheprosandconsofacountryleveragingcarbonmarketsforNDCachievement,specificallycomparingdomesticcarbonpricingandnon-authorizationofmitigationoutcomesforvoluntarypurposes.TherightsideofthetablefocusesonoptionsandimplicationsforleveragingcarbonmarketsformitigationthatgoesbeyondtheirNDC,i.e.,marketapproacheswheremitigationoutcomesarecorrespondinglyadjustedfromtheNDC,whicharebestconsideredbycountriesinthecontextofattractingfinanceformitigationinadditiontotheNDCtarget.18NationalStrategiesforCarbonMarketsundertheParisAgreementThesestrategicapproachesandtheavailablemechanismsthatsitwithinthemarenotmutuallyexclusiveandmaysynergize,evenwithinasector.Forexample,acountrymaychoosetoimplementdomesticcarbonpricingpoliciesforcertainsectorsoractivitiestosupporttheNDCachievement,whilealsoundertakinginternationalcooperationinothersectorsthroughArticle6bytransferringmitigationoutcomesbeyondwhatisneededtomeettheNDCtargets.SuchapproachesareunderdiscussioninIndonesia.Ineithercase,countriesshouldestablishthenationalarrangementsandthelegalarchitecturetosupportcarboncreditauthorization,evenifthereisnodecisiontousemarketsforbeyond-NDCmitigation.Thedemandandpricefornon-authorizedandauthorizedcreditsmaychange,asisthenatureofdemand-drivenmarkets.Asacountrymaywanttoadaptitsstrategy,establishingaregulatoryframeworkthatwillsupportfutureparticipationincooperativeapproachesunderArticle6isprudent.Countriesmayalsoconsiderlinkingtheirdomesticcarbonpricinginstrumentstointernationalcarbonmarkets.Forexample,Singaporeallowscompaniestousecorrespondinglyadjustedinternationalcarboncreditstopayforaportionoftheirdomesticcarbontaxliability.23AnotherconsiderationforcountriesastheydevelopastrategyfortheachievementoftheirNDCanddeterminetheirapproachtoengagingwithinternationalcarbonmarkets,istotakestockoftheirpreviousexperiencewithinternationalcarbonmarkets,suchastheCDMoftheKyotoProtocol.TheArticle6RulesguidetheactivitiesandcreditsthatcanbetransitionedfromtheCDMtotheArticle6.4mechanismoftheParisAgreement(Box4).Inaddition,countrieshaveahostofexperience,aswellashumanandtechnicalcapacityfromtheCDMthatcanbeusefulwhilesettingtheinstitutionsandframeworkstooperationalizeArticle6oftheParisAgreement.ThreeadditionalthingsareparticularlyimportanttoconsiderwhendevelopingastrategyforNDCachievement:clarityoncarbonandclimatefinance;implicationsofcorrespondingadjustmentsfornationalclimateobjectives;andtreatmentofVCMsinthecontextofArticle6.Box4:ConsiderationsforTransitioningActivitiesfromtheCleanDevelopmentMechanismAspartofabroaderArticle6engagementstrategy,countriesmaywishtoleveragetheirportfolioofCDMprojectstojumpstarttheirengagementinArticle6.UndertheArticle6.4rules,modalities,andprocedures,eligibleCDMprojectsmaytransitiontotheArticle6.4mechanismprovidedtheymeettheArticle6.4requirementsandhavehostcountryapproval.aProponentsofCDMprojectsintransitioningtotheArticle6.4mechanismmustcommunicatetheirrequesttotransitiontotheUNFCCCSecretariatandthehostcountrynolaterthan31December2023,andhostcountrieshaveuntil31December2025toconsiderandapprovetheserequests.CDMprojectsfortransitionmaycontinuetouseCDMmethodologiesuntil31December2025,oruntiltheendofthecurrentcreditingperiod,whichevercomesfirst.bFrom2026,transitionedprojectsmustutilizeArticle6.4methodologiesandfulfillallArticle6.4requirements.Article6.4.TheSupervisoryBodyisdevelopingand/orapprovingmethodologies,whichisakeyelementthatmustbeinplacetofacilitatetheCDMprojecttransition.AtCOP26,countriesagreedthatCERsundertheCDMmaybecountedtowardNDCachievementduringthefirstNDCperiodonly,providedtheprojectwasregisteredonorafter1January2013.cCERscanbeinternationallytransferredandusedbyanacquiringcountrytowarditsNDC;however,transferredCERsarenotconsideredITMOs,asITMOs,bydefinition,aregeneratedfrom2021onward,whereasCERsarepre-2021.continuedonnextpage23IETA.2022.CarbonMarketBusinessBrief:Singapore.June.LegalandPolicyFrameworkstoOperationalizeInternationalCarbonMarketsthroughArticle619Box4continuedTransferofCERsfortheuseofthefirstNDCswillneedtobecarefullyconsideredandmaynotbethebestcauseofactionforallcountries.TheAsianDevelopmentBankpublishedareportwithanin-depthdiscussionofthetransferofCERs.dCDM=CleanDevelopmentMechanism,CER=certifiedemissionreduction,COP26=26thConferenceoftheParties,ITMO=internationallytransferredmitigationoutcome,NDC=nationallydeterminedcontribution,UNFCCC=UnitedNationsFrameworkConventiononClimateChange.aUNFCCC,ConferenceofthePartiesservingasthemeetingofthePartiestotheParisAgreement(CMA).2021.Decision3/CMA.3,Rules,ModalitiesandProceduresfortheMechanismestablishedbyArticle6,paragraph4,oftheParisAgreement,Annex,para.73;andUNFCCC,CMA.2022.Decision7/CMA.4,GuidanceontheMechanismEstablishedbyArticle6,paragraph4,oftheParisAgreement.Annex,ChapterI.bUNFCCC,CMA.2021.Decision3/CMA.3,Rules,ModalitiesandProceduresfortheMechanismEstablishedbyArticle6,paragraph4,oftheParisAgreement,Annex,para.73.cUNFCCC,CMA.2021.Decision3/CMA.3,Rules,ModalitiesandProceduresfortheMechanismEstablishedbyArticle6,paragraph4,oftheParisAgreement,Annex,para.75.dAsianDevelopmentBank.2021.FromKyototoParis—TransitioningtheCleanDevelopmentMechanism.Manila.Source:AsianDevelopmentBank.ClarityonCarbonandClimateFinanceVariousformsoffinanceareavailabletocountriestosupportNDCimplementation,andinplanningfinanceneedsforNDCachievement,countriesshouldconsiderthecostsandbenefitsofaccessingthebroadrangeoffinancethatisavailableforcountriesincludingbothclimatefinancethatdonotinvolvetheuseofcarbonmarketsaswellascarbonfinance.Generally,“carbonfinance”referstofinancemobilizedfromtheuseofcarbonmarketbasedmeasuresincludingparticipationincarbonmarketswithoutapplyingcorrespondingadjustments(e.g.,VCMactivitywithoutcorrespondingadjustmentsordomesticcarbonpricingpolicies).Whilecarbonfinanceisinherentlyresults-basedfinance,carbonmarketscanalsobeutilizedtomobilizefinanceininstanceswhereemissionunitsaregenerated,buttheyarecanceledwithoutanypartyclaimingorcountingitaspartoftheirclimateambition.Thisisclassifieddifferentlythan“otherclimatefinance”whichgenerallyreferstopublicfinancedeliveredtowardthe$100billionfinancegoalandunderArticle9oftheParisAgreement.CountriescanutilizebothsourcesoffinancetoachieveanNDC.Generally,actionwithdomesticmeansandclimatefinancecanbeusedtoachievethepledgedunconditionalNDCtargets.Theseareusuallylow-hangingfruits,inthattheycanbeachievedwithoutadditionalinternationalsupport.Meanwhile,carbonmarketscanbeusedforsectorsthatareundertheconditionalNDCorperhapsevennotmentionedintheNDC,whichwouldbehigh-hangingfruitsthataredesiredbythehostcountrybutnotachievablewiththemeansavailable.Deliveringonsuchsectorsmayrequireadditionalinternationalsupportthrough,forexample,technologytransferorcapacitybuilding.Tothisend,thosemeasurescontributetoinnovation,improvedlivelihood,investment,andjobcreation,whilenotlimitingtheabilityofthecountrytoachieveitspledgedtarget.Additionally,mitigationactionsthataremorecostlytodelivermayberemuneratedwithahigherprice,asshouldmitigationoutcomesthatdeliverassociatedenvironmentand/orsocialco-benefitsforwhichabuyermaypayapremium.20NationalStrategiesforCarbonMarketsundertheParisAgreementImplicationsofCorrespondingAdjustmentsforNationalClimateObjectivesTheinternationalcooperationfacilitatedbyArticle6isintendedtoenablepartiestoraisetheirambitionundertheParisAgreement.However,countriesmay“over-export”ITMOs,whichcouldresultinthecountryfailingtomeetitsNDCtargetordisincentivizingitfromincreasingitsNDCambition.AnycountrythatallowsITMOexportsandsubsequentlyfailstomeetitsNDCriskscriticismthatitover-exportedITMOs,irrespectiveofwhetherthereasonforfailingtomeetitsNDCbearsanyrelationtothetransferofITMOs.WhilefailingtomeetNDCtargetscouldbeviewedasaseparatematterbeyondthescopeofArticle6transfers(providedcorrespondingadjustmentsareproperlyapplied),NDCunderachievementbypartiesexportingITMOsmaynegativelyimpactthefutureuseofArticle6asatoolforenhancingambition.Whiletheexportingpartylargelybearsthisrisk,therecouldpotentiallybebuyer-siderisksthatmayconcernbothsovereignsandauthorizedprivatepartiestransactinginITMOs.24Oversellingcanbearesultof25(i)Sellinglow-costmitigationoutcomesthatarenecessaryformeetingtheNDCtarget;(ii)Sellingmitigationoutcomesthatdonotrepresentreductions;(iii)Sellingmitigationoutcomesforwhichthereductioninemissionswillnotbecapturedbythetransferringcountry’sGHGinventory;or(iv)SellingmitigationoutcomesgeneratedoutsidethescopeoftheNDC,sinceguidancerequirescorrespondingadjustmentsforthesetransfers.Thehostcountrycanadoptseveralstrategiestoavoidoverselling.Thesecanbecategorizedintofourbroadgroupsofstrategies:(i)EnsuringthatmitigationoutcomesthatthecountryintendstousetoachieveitsNDCarenotauthorizedforinternationaltransferunderArticle6.(ii)Nottransferringallthemitigationoutcomesthataregeneratedfromcooperativemitigationactions.(iii)Implementingpricingstrategiesthatcreateapooloffunds,potentiallygeneratedfromthesaleandtransferofITMOs,toinvestinadditionalmitigationifnecessarytoachieveitsNDC.(iv)Usingconservativebaselinestoreducetheriskofoverstatingmitigationoutcomes.Toavoidascenariowhereacountryover-exportsITMOs,thehostcountryshouldundertakeadetailedassessmentofitsNDCtargetsanditsimplementationplantoestimatethelikelymitigationoutcomesofthoseefforts(NDCimplementationplan)toprojectwhetherthehostcountryisonatrajectorytomeetandexceeditsNDCtargets(takingintoconsiderationbothconditionalandunconditionalelementsofthesetargets).EstablishingappropriateaccountingandreportinginfrastructureformitigationoutcomesandITMOswillbeimportantforcountriestobeabletotrackprogressinachievingtheirNDCsandavoidoverselling.Inadditiontohostcountrystrategies,prudentcountriespurchasingITMOscanalsoobservetheabilityofhostcountriestomeettheirNDCwhileparticipatingincooperativeapproachesunderArticle6,particularlyunderArticle6.2.Forexample,SwitzerlandwilldiscontinuecooperationwithacountryifitbecomesevidentthatthecountrywillnotreachtheNDCtargets.24Forfurtherreadingonbuy-sideriskconsiderations,pleaseseePollination.2021.LegalGapAnalysisforTransactionsinPreparationforArticle6.May.25R.Spalding-Fecheretal.2020.Practicalstrategiestoavoidover-selling.Oslo,Norway:CarbonLimits.LegalandPolicyFrameworkstoOperationalizeInternationalCarbonMarketsthroughArticle621Article6guidancedoesnotpreventcountrieswithNDCtargetsdefinedinnon-GHGmetricsfromparticipatingincooperativeapproaches.However,ifthecooperativeapproachisimplementedusingnon-GHGmetrics,thecountrywillneedtoquantifyanynon-GHGmetricsusedintheNDCintoGHGmetrics,followingtheguidanceforArticle6.2.26TreatmentofVoluntaryCarbonMarketsintheContextofArticle6FinanceraisedthroughparticipationinVCMscanbeconsideredaformofcarbonfinancetobeevaluatedbyhostgovernmentsindesigningtheirapproachtocarbonmarkets.Typically,countrieshavenotregulatedVCMs;however,theyexistinthecontextofnationallegalandregulatoryframeworksandgovernmentshavevariouslegal,policy,andregulatory“levers”theycanpulltoinfluencetheircountry’sinteractionwithVCMs.AkeyprerequisiteforcountriestoharnessVCMstosupporttheirNDCgoalsistohavevisibilityoverVCMactivityinvolvingdomesticmitigationprojectsandbeabletotrackandtracetheassociatedemissionsreductionsandremovals.Article6guidancedoesnotapplytotheuseofnon-authorizedcarboncreditsbyvoluntarybuyersintheVCM.However,countriescanbenefitfromdevelopingpolicypositionsregardingtheroleofVCMsinmeetingitsNDC,i.e.,whetheritwillauthorize(andconsequentlycorrespondinglyadjust)creditsforusetowardavoluntarytarget,orwhetheritwillnotauthorizetheexportofthosecreditsandwillcounttheGHGreductionsorremovalsunderpinningthosecreditstowarditsNDC.Intheabsenceofcorrespondingadjustments,thebuyerwouldbesharingtheclaimofemissionreductionsorremovalswiththehostcountrysoitwouldnothaveanexclusiverighttotheclaim.Acountry’sdecisiononwhichmitigationoutcomestoauthorizeforuseinVCMswillneedtobeinformedbyanalysisregardingtheNDCtrajectory,costsofimplementation,andwhichsourcesoffinancearemostappropriatetomeetthosecosts.Countrieswillalsoneedtoconsiderbuyerperspectivesandthesizeofthedemandforauthorizedversusnon-authorizedunits.Countriescouldmakethispolicydecisiononacase-by-casebasisforeachcarbonfinancingopportunityorprovideblanketpolicypositioningapplicabletoallVCMactivities.ThedecisiononArticle6.4atCOP27introducesaunit(mitigationcontributionA.64ERs)forthecaseswherenoauthorizationisdone.27Theunitcanbeusedforresults-basedclimatefinance,domesticmitigationpricingschemes,ordomesticprice-basedmeasures,tocontributetothereductionofemissionlevelsinthehostparty.Figure7showstheimplicationsofusingnon-authorizedversusauthorizedmitigationoutcomesforvoluntarypurposes.26UNFCCC,CMA.2021.Decision2/CMA.3,GuidanceonCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.Annex,para.22(d).27UNFCCC,CMA.2022.Decision/CMA.4GuidanceonthemechanismestablishedbyArticle6,paragraph4,oftheParisAgreement.Annex.para.29(b).22NationalStrategiesforCarbonMarketsundertheParisAgreementFigure7:ImplicationsofUsingNon-authorizedversusAuthorizedMitigationOutcomesforVoluntaryPurposesNON-PRICINGPOTENTIALIMPLICATIONSFORAUTHORIZEDLikelyalowerpricewhencomparedBUYERSCARBONUNITwithauthorizedcarbonunitsMitigationcontributionclaimrecommendedUSEDFORMAINBUYERSVOLUNTARYCorporatebuyerstomeetvoluntaryPOTENTIALIMPLICATIONStargetsthathavepledgedclimateFORSELLINGCOUNTRYPURPOSEScontributionactionCouldbeusedtowardachievementofNDCEMISSIONSPRICINGREDUCTIONMorevaluablehigherprice(duetoPOTENTIALIMPLICATIONShigherdemandandalsotheneedtoFORBUYERSREMOVALcompensategovernmentsfortheFullclaimrightUNITadjustmenttotheirnationalemissionsbalanceandorNDC)POTENTIALIMPLICATIONSFORAUTHORIZEDSELLINGCOUNTRYCARBONUNITMAINBUYERSCorrespondingadjustmentimpliedCorporatebuyerstomeetforauthorizedunitsHostcountriesUSEDFORvoluntaryemissiontargets(net-cannotcountinternationallyVOLUNTARYzero)orcompliancerequirementstransferredunitstowardtheirNDCachievementPURPOSESCORSIAliableentitiesCORSIA=CarbonOffsettingandReductionSchemeforInternationalAviation,NDC=nationallydeterminedcontribution.Source:FiguredevelopedforthisreportbytheAsianDevelopmentBankandPollination.GovernanceStructurestoSupporttheDevelopmentandImplementationofArticle6PoliciesCountrieswillrequireagovernancestructuretosupportthedevelopmentandimplementationoftheirArticle6policy,includingassigningrolesandoversightforkeyoperationalfunctions,monitoringandevaluation,anditeration.ThesegovernancebodiesareparticularlyimportantwherelegalframeworksforcarbonmarketengagementandArticle6areabsentorunderdevelopment,astheycanplayaroleinguidingthedevelopmentoftheselegalframeworks,includingprocessesformakingdecisionsregardingcarbonmarketengagementandnegotiatingbilateralagreements.Thesegovernancebodiesmaybeformallyestablishedunderlegislationorusingotheradministrativepowersofgovernmentdepartments.Countriesneedtoestablishacross-ministerialdecisiongroupthatcanreconcile,totheextentrequired,differentministryperspectivesandprioritiesinachievingtheNDC.Further,thecountriesshouldseekendorsementfortheArticle6policyfromcorestakeholders—includingtheprivatesector,environmentalgroups,andcivilsociety—toensurethereisalignmentandsupportfromalllevelsofgovernmentandvariousministries,aswellasthebroadercommunity.LegalandPolicyFrameworkstoOperationalizeInternationalCarbonMarketsthroughArticle623ClarityintheLegalNatureofCarbonCreditsCarboncreditsrepresentarelativelynovellegalconcept.Globallytherearearangeoflegalformsthatcarboncreditshavetaken.Theseincludeformsofintangibleproperty,personalproperty,financialinstruments,orsimplycontractualrights.28Thelegalnatureofcarboncreditsinfluencesrightstogenerate,own,andusecarboncredits,andthewaythattheyareaccountedfor,regulated,andtaxed.29Assuch,clarityinthelegalnatureofcarboncreditsisrequiredtosupportmarketparticipation.ClarityinRightstoGenerate,Own,andUseCarbonCredits,IncludingPropertyRightsandLand-TenureConsiderationsRelevanttoMitigationActivitiesClarityintheallocationofrightstogenerate,own,andusemitigationoutcomesisvitalforcarbonmarketstofunctioneffectively,andcoretocarboncreditpurchaserduediligence(footnote29).Theinabilitytoestablishthepropercarbonrightsholdermayhamperaseller’sabilitytotransferunencumberedcarboncredits,whichimpactstheperceivedintegrityofthecreditandultimatelyitsvalueinthemarket.Accordingly,countriesthatfailtoprovideclarityintheallocationoftheserightsmaycompromiseprivatesectorinvestmentopportunities.30Inparticular,hostcountriesmusthavelegalframeworksinplacetoprovideclarityonpropertyrightsandlandtenureformitigationactivities;legalownershipofmitigationactivities;whethertitleistransferable;theownershipoflandwheremitigationactivitiesarelocated(includingareaswherepropertyrightsaretypicallymorecomplex,suchasthecoastalzone);andcustomarylandrightsandcontrols,ifany,overforeignownershipofland.Thepropertyrightsandtenurerequirementsrelevanttomitigationactivitiesandresultingcarbonassetsdifferbetweenjurisdictions.Insomecountries,underlyingrightstoemissionsreductionsandremovalsareownedbythegovernment,allowingitsubstantialcontroloverthesaleanduseofcarboncreditsgeneratedthroughcarbonmitigationactivities.Forinstance,Peruhastakenacentralizedapproachtocarbonrights,withthePaymentforEcosystemServicesLaw,LawNo.30215declaringthatcarbonsequestrationandstorage—includingfromREDD+activities—isthe“patrimonyofthenation.”31Entitiesthatachievetheseecosystemservicesare,however,entitledtoreceivecompensationfordoingso,providedtheyseekapprovalfromtheGovernmentofPeru,andthegovernanceandfinancialarrangementsaredocumentedinacentralregistry.InothercountriessuchasAustralia,legalandregulatoryframeworks—specificallystate-basedpropertylaws—provideprivatelandholderswithfullrightstocarboncreditsgeneratedontheirland,andtheabilitytoprotecttheserightsbyregisteringtherightsonthepropertytitle.28GoldStandardFoundationandEYLaw.2022.CarbonCreditRightsUndertheParisAgreement.Forexample,carboncreditsgeneratedunderseveralindependentstandardsrepresentprivate,tradeablecertificatesthatensureagivenactivityhasmetcertaincriteriaandreducedorsequesteredadefinedquantityofcarbonemissions.Thelegalnatureofsuchcarboncreditsisanenforceablecontractualobligationbetweentwoprivateparties.29GoldStandardFoundationandEYLaw.2022.CarbonCreditRightsUndertheParisAgreement.30Carbonassetissuingbodiestakedifferingapproachestoprovinglegaltitletocarboncredits,whichcancreateambiguityanddisputesoverownershipanduseofthecarboncredits.31GranthamResearchInstituteonClimateChangeandtheEnvironment.2014.MechanismsofCompensationforServicestoEcosystems.LawNo.30215.24NationalStrategiesforCarbonMarketsundertheParisAgreementRightsRelatedtoEligibleInterestHoldersCountriesmustensurethattherightsofeligibleinterestholdersaresafeguardedunderanymarket-basedmeasuresoperatingintheirjurisdiction.Thisincludesgrievancemechanismsinplacetosupportstakeholderstoprotecttheirrights.Thismustalsoincludeensuringtherightsandknowledgeofindigenouspeoplesandlocalcommunitiesareprotected,andthattheprincipleoffree,prior,andinformedconsent(FPIC)isadheredto.TheprincipleofFPICisenshrinedininternationalconventions:theUnitedNationsDeclarationontheRightsofIndigenousPeoples,theConventiononBiologicalDiversity,andtheInternationalLabourOrganization’sIndigenousandTribalPeoplesConvention,1989(No.169).32WhiletheCancunSafeguardsonlyapplytoREDD+programs,theycanhelptoinformbestpracticeapproaches.33CountriescouldalsohavereferencetoindustrycodessuchastheAustralianCarbonMarketInstitute’sAustralianCarbonIndustryCodeofConduct,whichcontainsspecificadviceonestablishingprojectownershipandengagingwithinterestholders.34TheAustralianIndigenousCarbonIndustryNetworkhaspublishedabest-practiceguideforcarbonprojectdevelopers,SeekingFree,Prior,andInformedConsentfromIndigenousCommunitiesforCarbonProjects,whichmayalsousefullyinformtheapproachcountriestaketostandardsettingformitigationactivitiesoccurringinitsjurisdiction.35TheapproachtakeninvoluntarycarboncreditverificationstandardssuchastheClimate,CommunityandBiodiversityStandards—whichrequireprojectstomeetarangeofparticipationcriteria,includingobtainingFPIC—mayalsobeusefulinthisregard.36Benefit-sharingmeasuresarealsoimportanttoensurethattheadvantagesandfinancialbenefitsderivedfrommitigationactivitiesaresharedequitablywithstakeholders.Whilebenefit-sharingarrangementsareprimarilysetattheprojectlevel—inlinewithstakeholderexpectationsandtherequirementsofcarbonandco-benefitverificationstandards—jurisdictionscanalsoplayaroleinmandatingminimumbenefit-sharingrequirementsforprojectsoccurringintheirjurisdiction.ForeignDirectInvestmentthroughCarbonFinanceThereisarangeofmattersregardingforeigndirectinvestmentthroughcarbonfinancethatwillneedtobeconsideredandmanagedbycountries,strikingabalancebetweenappropriatecontrols,incentivizinginvestmentinactivitiesalignedwithgovernmentpriorities,andnotundulyhinderingforeigninvestment(whilealsomanagingnationalsecurityconsiderations).Theseconsiderationsinclude(i)whethergovernmentapprovalforforeigninvestmentinmitigationactivitieswillberequiredandwhethertherewillbeanyrestrictionsonforeignownershipofassets,suchaslandinvolvedinmitigationactivities;(ii)whetherthecountrywillseektoimposealevyorshareofproceedsregimeonforeigninvestment;(iii)whetherthecountrywillrestricttherepatriationofprofitsthroughforeignexchangecontrols;and(iv)whetherthecountrywillhavestrategiesfortheuseofrevenuesorproceeds.32UnitedNations.2008.UnitedNationsDeclarationontheRightsofIndigenousPeoples;UnitedNations.1992.ConventiononBiologicalDiversity,Article8(j);InternationalLabourOrganization(ILO).1989.IndigenousandTribalPeoplesConvention(No.169).33UNFCCC,ConferenceoftheParties(COP).2011.Decision1/CP.16,TheCancunAgreements:OutcomeoftheworkoftheAdHocWorkingGrouponLong-termCooperativeActionundertheConvention.AppendixI.34AustralianCarbonIndustry.2021.CodeofConduct(Version2.0).35IndigenousCarbonIndustryNetwork(ICIN).2020.Seekingfree,priorandinformedconsentfromIndigenouscommunitiesforcarbonprojects:Abestguideforcarbonprojectdevelopers.36Verra.2022.TheCCBProgram.LegalandPolicyFrameworkstoOperationalizeInternationalCarbonMarketsthroughArticle625Animportantthingtoconsideristheuseofadditionalrevenuegeneratedfromengagementincarbonmarkets.Countriescanagreetousepartofthefinancingthroughothermitigationandadaptationstrategiesinthecountrybeyondthoseinvolvedinthetransfer.ThiscanbeachievedbyapplyingashareofproceedsonITMOstobeusedbythetransferringcountrygovernmentforfinancingothermitigationoradaptationmeasures.InthecaseofArticle6.4,thecontributionofresourcesbyparticipatingpartiestotheAdaptationFundismandatory.MultiplecountriesareconsideringagreeingtoashareofproceedsincooperativeapproachesunderArticle6.2(footnote9).AppropriateFeesand/orLeviesontheInternationalTransferofMitigationOutcomesCountrieswillneedtodeterminewhethertheyintendtotaxtransactionsdealingwiththeinternationaltransferofmitigationoutcomes.Doingsocouldformpartofacountry’sapproachtoensuringcarbonfinanceisraisedbythegovernmentthroughArticle6participationeitherthroughreinvestingofashareofproceedrevenuesintoclimateaction,orinvestmentofcarbonrevenuesfromprojects.Thiscouldtakeseveralforms,includingretainingaproportionofcarboncreditsissued,taxingrevenuesassociatedwiththesaleofcarboncredits,orchargingfortheauthorizationofmitigationoutcomesforinternationaltransfer.Thesepolicysettingscouldbedeployedtogearinvestmenttowardcertainmitigationopportunitiesalignedwithgovernmentpriorities.Indeterminingtheirapproach,countriesshouldconsiderhowtaxationoftransactionswillaffectdomesticmarketplayersandtheirabilitytoexportmitigationoutcomes(i.e.,thecompetitivenessoftheircreditsintheinternationalmarket)and,iftaxationistooccur,howtheresultingrevenueswillbeused.UnderGhana’sArticle6framework,administrationfeesvaryaccordingtothecategoryofmitigationactivity,withforestactivitiessubjecttolowerfeesthanlarge-scalenon-forestryprojects.Bycomparison,Tanzania’sadministrativefeestructureforArticle6authorizationsdoesnotdifferentiatebysector,butratherbythecitizenshipstatusoftherequestingindividual,withahigherapplicationfeebeingchargedtonon-citizenapplicants.MeetingPrerequisitesforInternationalCooperationunderArticles6.2and6.4ThereareafurthersetoflegalandinstitutionalrequirementscountrieswillneedtoputinplacetooperationalizeArticle6.2andArticle6.4incompliancewiththeParisAgreement,includingthefollowing:(i)Mechanismstotrackandrecordmitigationoutcomesachieved.Countrieswillneedtodevelopaccountingframeworksandregistries(orhaveaccesstoaninternationalregistry)tomeasureandtrackmitigationoutcomesachievedwithintheirjurisdiction,aspartofthesystemfortrackingprogresstowardtheachievementofthecountry’sNDC;37and37Theestablishmentofmechanismstotrackandrecordmitigationoutcomesachievedisakeypracticalmeasuretoallowacountrytoenforcelegalandregulatoryframeworksforcarbonmarketsandavoiddoublecounting.Countriescouldenforcetheuseofthesetrackingmechanismsbyusingfinesfornoncompliance.26NationalStrategiesforCarbonMarketsundertheParisAgreement(ii)AuthorizationproceduresalignedwiththeArticle6guidanceandrules.ForcountriestoparticipateintheinternationaltransferofmitigationoutcomesunderArticle6.2,procedurestogovernauthorization,includingthecompetentdecision-makingbody,mustbeestablished.Figure8summarizestheselegalandinstitutionalrequirementsandtheirrespectivesub-elements.Figure8:LegalandInstitutionalRequirementstoAuthorizeMitigationOutcomesunderArticles6.2and6.4forInternationalTransferARTICLEARTICLEInstitutionalcapacitytofulﬁllArticleInstitutionalcapacity(DesignatedNationalparticipationrequirementsAuthority)andprocedurestosupporttheapprovalofArticleactivitiesMechanismstotrackandrecordmitigationoutcomesachievedProcessesforauthorizingtheuseofAERsAuthorizationprocedurespertheArticleProcessesforapplyingcorrespondingrulebookadjustmentstoAERsProcessestodetermineeligibilityforauthorizationProcessessforassessinggrantingordenyingandcommunicatingauthorizationArrangementsfortrackingITMOsandapplyingcorrespondingadjustmentsA6.4ER=Article6.4EmissionReductionUnit,ITMO=internationallytransferredmitigationoutcome.Source:FiguredevelopedforthisreportbytheAsianDevelopmentBankandPollination.AccountingandReportingInfrastructuretoSupportArticle6OperationalizationAlongsidethelegalandinstitutionalrequirementstotrackandauthorizemitigationoutcomesunderArticle6.2andArticle6.4forinternationaltransfer,theArticle6guidanceandrulesenvisageseveralcomponentsofaccountingandreportinginfrastructuretosupporttheoperationalizationofArticle6.2andtheArticle6.4mechanism.PartiesareresponsibleforreportingregistryinformationtotheArticle6database,regardlessofhavinganationalregistryoraccountsintheinternationalregistry.Informationexchangebetweenpartyregistries(whetherinthenationalorinternationalregistry)andtheArticle6.4mechanismregistryshouldbemadepossible.Figure9visualizesArticle6accountingandreportinginfrastructure.LegalandPolicyFrameworkstoOperationalizeInternationalCarbonMarketsthroughArticle627Figure9:Article6AccountingandReportingInfrastructureCentralizedAccountingandReportingPlatformArticleDatabaseInternationalnationalregistryArticleMechanismRegistrySource:FiguredevelopedforthisreportbytheAsianDevelopmentBankandPollination.NationalOperationalizationofArticle6:LessonsfromGhanaIn2022,GhanaadopteditsFrameworkonInternationalCarbonMarketsandNon-MarketApproaches,whichisoneofthefirstnationalArticle6frameworksdevelopedglobally.38Thisdetailedframeworkguidesdomesticandinternationalactorsinterestedininvestinginthegenerationand/orinternationaltransferofmitigationoutcomesinGhana.Inadditiontothetechnicalandoperationalrequirements,theframeworkprovidesthesampleletters,templates,andformsnecessarytooperationalizethepolicy.Box5capturessomeofthestrategicdecisionstakenbyGhanaforoperationalizingArticle6andthekeyinsightsorlessonsfromthisexperienceforcountries.Box5:NationalOperationalizationofArticle6—LessonsfromGhanaPROCESSESTODETERMINEELIGIBILITYFORAUTHORIZATION(INFORMEDBYLONG-TERMSTRATEGYTOACHIEVETHENATIONALLYDETERMINEDCONTRIBUTION[NDC])GhanaExperienceInitsnationalArticle6framework,GhanaclarifiesthatitwillauthorizemitigationoutcomesassociatedwithitsconditionalNDCactivitiesandactivitiesoutsidetheNDC.ToclarifywhichactivitiesfallundertheconditionalportionofitsNDCandareeligibleforinternationaltransfer,Ghanaestablisheda“whitelist”of25activitytypesthatformtheconditionalNDC,includingforestconservationactivities.Voluntarycarbonmarket(VCM)projectsaimingtogeneratecarboncreditsmustobtainformalrecognitiontoensureenhancedaccountinginreporting.Asexplicitlyaddressedintheframework,VCMprojectsarenotrequiredtobecorrespondinglyadjusted,thoughtheymayrequestoneifdesired.continuedonnextpage38GovernmentofGhana,GhanaCarbonMarketOffice.2022.Ghana’sFrameworkonInternationalCarbonMarketsandNon-MarketApproaches.Accra.28NationalStrategiesforCarbonMarketsundertheParisAgreementBox5continuedKeyInsightsAstheexperienceofGhanademonstrates,engagementinArticle6ismostlikelytomeetacountry’sstrategicneedsifitisinformedbyalong-termstrategyforNDCachievement.ThismodelmaynotnecessarilyworkforallcountriesduetothedifferencesinhowtheNDCsaredesigned,particularlyconcerningthedelineationofsectorsasconditionalandunconditional,andtherepercussionsofdefiningeligiblemitigationactivities.PROCESSESANDINSTITUTIONALARRANGEMENTSFORASSESSING,GRANTING,ORDENYINGAUTHORIZATIONGhanaExperienceTheimplementationofGhana’sArticle6frameworkisledbytheMinistryofEnvironment,Science,Technology,andInnovation.TheministryandtheEnvironmentalProtectionAgencyhostthenewCarbonMarketOffice.Ghanaalsoestablishedseveralnewentities:•CarbonMarketInter-MinisterialCommittee•CarbonMarketCommittee•CarbonMarketTechnicalAdvisoryCommitteeGhanashallissuealetterofauthorizationtoeligiblemitigationactivities.ActivitiesontheGhana“whitelist”mayreceivepre-authorizationbyrequestinga“LetterofAssurance”fromtheCarbonMarketOffice.KeyInsightsGhana’sArticle6institutionalarrangementsledtothecreationofseveralnewoffices.AspartoftheirArticle6frameworks,countrieswillneedtodefinethe“letters”ofintent,pre-authorization,authorization,etc.Multiplenationalagenciesandministriesmayneedtobeinvolvedinthereviewandapprovalofauthorizationrequests,andcoordinationbetweentheseentitiesstructuredwiththeintenttominimizeadministrativeburdenandduplication.MEASURESTOMITIGATETHERISKOFOVERSELLINGMITIGATIONOUTCOMESGhanaExperienceToreducetheriskofoversellingmitigationoutcomes,Ghanaestablishedsafeguardsandanationalbuffersystem,reserving1%ofissuedmitigationoutcomesina“NationalBufferAccount”tobeusedtowardtheNDCintheeventofoversellingorcontributingtotheoverallmitigationofglobalemissions.TheGovernmentofIndonesiatookasimilarapproach,withnationalregulationsoncarbonpricingthatincludehigh-levelprovisionsfortheinternationaltransferofcarbonoffsets.Tominimizetheriskofoverselling,Indonesiaestablisheda“bufferreserve,”withdifferentiatedbufferobligationsbyusecase:•DomesticOffset:0%−5%oftheunits•InternationalOffset:10%−20%oftheunits;IfoutsideNDC:Atleast20%oftheunitsKeyInsightsTheprimaryapproachtominimizingtheriskofoversellingistoestablishandadheretoalong-termstrategyforNDCachievement.However,tofurtherreducetheriskofoversellingmitigationoutcomesandunderminingNDCachievement,countriesmaywishtoestablishanationalbufferaccountorcarboncreditreserve.Source:AsianDevelopmentBankandPollination.ConclusionInresponsetotheParisAgreementandtheneedtolimitwarmingto1.5degreesCelsius,deepemissioncutsarerequiredacrossallsectorsandregions,withresidualemissionsneutralizedbycarbondioxideremovals.Carbonmarketsprovidemechanismsforcountriestoincentivizethereductionoftheirdomesticemissionsaswellasapathwaytocooperatewithothercountriesornon-stateactorsthroughtheinternationaltransferofmitigationoutcomesunderArticle6oftheParisAgreement.AscountriescommittoincreasinglymoreambitiousNDCs,manyareconsideringhowtoleveragebothdomesticandinternationalcarbonmarketsandwhatimpacttheirparticipationincarbonmarketscouldhaveontheirdecarbonizationpathway.Countriescaneithercreatetheirdomesticcreditingschemestogeneratecarboncreditsoradopt(andpotentiallyadjust)internationalcarboncreditstandards.Creditsgeneratedwithinthebordersofacountrycanbeusedforavarietyofpurposesdependingonthecountry,includingfordomesticcomplianceuse(e.g.,acarbontaxorcap-and-tradesystem),internationalcomplianceuse,orinternationalordomesticvoluntaryuse.VCMsarealsogrowingrapidlyascorporatesseektopurchasecarboncreditsaspartoftheircommitmentstotransitiontonetzero.Toassesstheappropriatemixofcarbonmarketpolicies,policymakersmustdefinetheirobjectivesaswellasunderstandthetradeoffsbetweenvariouscarbonmarketmechanisms.Forexample,policymakerswillneedtoevaluatethebenefitsofsellingmitigationoutcomestodaytoattractmuch-neededcarbonfinance,againsttheneedtomeettheirownincreasinglyambitiousNDCtargets.Evaluatingthistradeoffrequiresalong-termstrategytoachievetheNDCthatinformsengagementwithArticle6,includingguidingprinciplesandcriteriaformitigationoutcomestobeeligibleforinternationaltransfer.Beyondstrategicconsiderations,governmentsthatwishtoparticipateincarbonmarketswillbeconfrontedwithoperationalrequirementsandtheneedfornewlegalandpolicyframeworksaswellasnewreportingandaccountingframeworksthatunderpintheintegrityofthemitigationoutcomestraded.CountriesacrossAsiaandthePacificandgloballyareworkingthroughthesestrategicchoiceswithaviewtohowinternationalcarbonmarketsfitwithintheirlong-termdecarbonizationplan.Theaimistoassistcountriesthathaveindicatedawillingnesstoparticipateincarbonmarketstooperationalizetheircarbonmarketstrategiesandbeginbuildingthepolicy,regulatory,andinstitutionalinfrastructure.APPENDIX1PrerequisitesforInternationalCooperationunderArticles6.2and6.4ParticipationininternationalcooperationunderArticles6.2and6.4oftheParisAgreementrequiresthatparticipatingpartiesfulfillseveralprerequisites.Manyoftheseprerequisitesareaddressedaspartofacountry’sArticle6readinessactivities.PartyEligibilityunderArticle6ThepartywillneedtoensureitiseligibletoparticipateinArticle6,aspertherequirementsofDecision2/CMA.3andDecision3/CMA.3(BoxA1.1).BoxA1.1:PartyEligibilityunderArticle6ForArticle6.2,eachparticipatingpartyshallensurethat:(i)Itsparticipationinthecooperativeapproachandtheauthorization,transfer,anduseofinternationallytransferredmitigationoutcomes(ITMOs)isconsistentwithDecision2/CMA.3andotherdecisionsoftheConferenceofthePartiesservingasthemeetingofthePartiestotheParisAgreement(CMA);(ii)ItisapartytotheParisAgreement;(iii)Ithasprepared,communicated,andismaintaininganationallydeterminedcontribution(NDC);(iv)IthasarrangementsinplaceforauthorizingtheuseofITMOstowardtheachievementofNDCs;(v)IthasarrangementsinplacethatareconsistentwithDecision2/CMA.3andotherCMAdecisionsfortrackingITMOs;(vi)Ithasprovidedthemostrecentnationalinventoryreportrequiredfollowingdecision18/CMA.1;and(vii)ItsparticipationcontributestotheimplementationofitsNDCandlong-termlow-emissiondevelopmentstrategy,ifithassubmittedone,andthelong-termgoalsoftheParisAgreement.Source:UnitedNationsFrameworkConventiononClimateChange(UNFCCC),ConferenceofthePartiesservingasthemeetingofthePartiestotheParisAgreement(CMA).2021.Decision2/CMA.3,PartII,paras.3−5.ForArticle6.4participation,eachhostpartyshallensurethat:(i)ItisapartytotheParisAgreement;(ii)Ithasprepared,communicated,andismaintaininganNDC;(iii)IthasindicatedpubliclytotheSupervisoryBodyhowitsparticipationinthemechanismcontributestosustainabledevelopmentwhileacknowledgingthattheconsiderationofsustainabledevelopmentisanationalprerogative;and(iv)IthasindicatedpubliclytotheSupervisoryBodythetypesofArticle6.4activitythatitwouldconsiderapprovingandhowsuchtypesofactivityandanyassociatedemissionreductionswouldcontributetotheachievementofitsNDC,ifapplicable,itslong-termlowgreenhousegasemissiondevelopmentstrategy,ifithassubmittedone,andthelong-termgoalsoftheParisAgreement.Source:UNFCCC,CMA.2021.Decision3/CMA.3.PartIV,para.26.Appendixes31ActivityEligibilityunderArticle6AfterconfirmingwhetherthepartyiseligibletoparticipateininternationalcooperationunderArticle6,thepartiesinvolvedwillthenneedtodeterminewhetherthemitigationactivityiseligibleforeitherArticle6.2or6.4(BoxA1.2).BoxA1.2:ActivityEligibilityunderArticle6ForArticle6.2purposes,internationallytransferredmitigationoutcomes(ITMOs)are:(i)real,verified,andadditional;(ii)emissionreductionsandremovals,includingmitigationco-benefitsresultingfromadaptationactionsand/oreconomicdiversificationplansorthemeanstoachievethem,wheninternationallytransferred;(iii)measuredinmetrictonsofcarbondioxideequivalentfollowingthemethodologiesandmetricsassessedbytheIntergovernmentalPanelonClimateChangeandadoptedbythemeetingofthePartiestotheParisAgreement(CMA)orinothernon-greenhousegas(GHG)metricsdeterminedbytheparticipatingpartiesthatareconsistentwiththenationallydeterminedcontributions(NDCs)oftheparticipatingparties;(iv)fromacooperativeapproachreferredtoinArticle6.2,thatinvolvestheinternationaltransferofmitigationoutcomesauthorizedforusetowardanNDCunderArticle6.3;(v)generatedinrespectoforrepresentingmitigationfrom2021onwards;(vi)mitigationoutcomesauthorizedbyaparticipatingpartyforuseforinternationalmitigationpurposesotherthantheachievementofanNDCorauthorizedforotherpurposesasdeterminedbythefirsttransferringparticipatingparty;and(vii)Article6.4emissionreductionsissuedunderthemechanismestablishedbyArticle6.4,whentheyareauthorizedforusetowardtheachievementofNDCsand/orauthorizedforuseforotherinternationalmitigationpurposes.Source:UnitedNationsFrameworkConventiononClimateChange(UNFCCC),ConferenceofthePartiesservingasthemeetingofthePartiestotheParisAgreement(CMA).2021.Decision2/CMA.3.PartI,para.1.TobeeligibleunderArticle6.4,theactivity(i)shallbedesignedtoachievemitigationofGHGemissionsthatareadditional,includingreducingemissions,increasingremovalsandmitigationco-benefitsofadaptationactionsand/oreconomicdiversificationplans(“emissionreductions”),andnotleadtoanincreaseinglobalemissions;(ii)maybeaproject,programofactivities,orothertypeofactivityapprovedbytheSupervisoryBody;(iii)shallbedesignedtoachieveemissionreductionsinthehostparty;(iv)shalldeliverreal,measurable,andlong-termbenefitsrelatedtoclimatechange;(v)shallminimizetheriskofnon-permanenceofemissionreductionsovermultipleNDCimplementationperiodsand,wherereversalsoccur,ensurethattheseareaddressedinfull;(vi)shallminimizetheriskofleakageandadjustforanyremainingleakageinthecalculationofemissionreductionsorremovals;(vii)shallminimizeand,wherepossible,avoidnegativeenvironmentalandsocialimpacts;(viii)shallundergolocaland,whereappropriate,subnationalstakeholderconsultationconsistentwithapplicabledomesticarrangementsconcerningpublicparticipationandlocalcommunitiesandindigenouspeoples,asapplicable;(ix)shallapplyacreditingperiodfortheissuanceofA6.4ERsthatisamaximumof5yearsrenewableamaximumoftwice,oramaximumof10yearswithnooptionofrenewal,thatisappropriatetotheactivity,or,inrespectofactivitiesinvolvingremovals,acreditingperiodofamaximumof15yearsrenewableamaximumoftwicethatisappropriatetotheactivity,andthatissubjecttoapprovalbytheSupervisoryBody,oranyshortercreditingperiodspecifiedbythehostparty;thecreditingperiodshallnotstartbefore2021;and(x)shallapplyamechanismmethodologythathasbeendevelopedfollowingDecision3/CMA.3andapprovedbytheSupervisoryBody.Source:UNFCCC,CMA.2021.Decision3/CMA.3.PartV.A.,paras.31−32.APPENDIX2LegalandInstitutionalRequirementstoAuthorizeMitigationOutcomesunderArticles6.2and6.4forInternationalTransferArticle6.2WhileArticle6.2guidanceestablishestherequirementthatmitigationoutcomesbeauthorizedforinternationaluseandtransferbythehostcountry,theguidanceprovideslittleinformationonhowsuchauthorizationshouldbeexpressedordocumented.Thedraftannualinformationreportingtemplatedoeshoweverprovidethefollowingminimumauthorizationrequirements:1(i)dateofauthorizationbythefirsttransferringparty;(ii)authorizationIDasassignedbythefirsttransferringparty,andmayincludealinktothepublicevidenceofauthorizationbythefirsttransferringparty;(iii)purposesforauthorizationthatinclude“nationallydeterminedcontribution”(NDC),“otherinternationalmitigationpurposes,”or“NDCandotherinternationalmitigationpurposes;”(iv)whenapplicable,theotherinternationalmitigationpurposesauthorizedbytheparty;and(v)ifotherinternationalmitigationpurposesareauthorized,thefirsttransferringparticipatingparty’sdefinitionof“firsttransfer”(asperdecision2/CMA.3,annex,para.2[b]).Atthe27thConferenceoftheParties(COP27),manyauthorizationdecisionsweredeferredforconsiderationandadoptionatthenextCOP,followingfurtherworkfromtheSubsidiaryBodyforScientificandTechnologicalAdvice,includingtheprocessforauthorizationand,notably,thescopeofchangestoauthorizationforuseofinternationallytransferredmitigationoutcomes(ITMOs).2Ultimately,theapproachtoauthorizationofeachcountrymaybedifferenttoaccommodatetheirindividualizedneedsandcontext.ProcessesfortheauthorizationofITMOswillrequirethreecoreelements:(i)Processestodetermineeligibilityforauthorization.CountrieswillrequireclearcriteriafortheeligibilityofmitigationoutcomesforinternationaltransferunderArticle6.2.Countriesmaydecidetopre-authorizeorexcludecertaincategoriesofmitigationoutcomesforinternationaltransfer.Pre-authorizationwouldinvolveindicationsfromahostcountrythatmitigationoutcomesfromaparticularmitigationactivity(orcategoryofmitigationactivity,orsector)arealignedwithnationallydeterminedeligibilitycriteria,andthatthemitigationoutcomesfromtheeligibleactivitycouldbeauthorizeduponmeetingsubsequentrequirements.3Pre-authorizationmayencourage1UnitedNationsFrameworkConventiononClimateChange(UNFCCC),ConferenceofthePartiesservingasthemeetingofthePartiestotheParisAgreement(CMA).2022.Decision6/CMA.4,MattersRelatingtoCooperativeApproachesreferredtoinArticle6,paragraph2,oftheParisAgreement.AnnexVII.2UNFCCC,CMA.2022.Decision6/CMA.4,MattersRelatingtoCooperativeApproachesreferredtoinArticle6,paragraph2,oftheParisAgreement.para.17.3OrganisationforEconomicCo-operationandDevelopment(OECD)andInternationalEnergyAgency(IEA).2022.TheBirthofanITMO:AuthorisationunderArticle6oftheParisAgreement.p.34.Appendixes33theprivatesectortoinvestinpre-authorizedmitigationactivities.Pre-authorizationcouldtakeseveralforms,includingaletterofassuranceorintent(footnote3).(ii)Processesandinstitutionalarrangementsforassessing,granting,denying,andcommunicatingauthorization.Countriesmustdeterminewhichentityorentitieswillbeinvolvedinthereviewand,ifapplicable,approvalofauthorizationrequestsaswellasthestepsandtimelinesforthisprocess.Ideally,authorizationprocessesestablishedbycountrieswillbeonthepublicrecordandprovidetransparencyontheauthorizationprocesstoboththesellersandpurchasersofmitigationoutcomes.(iii)EstablisharrangementsfortrackingITMOsandapplyingcorrespondingadjustments.CountriesmusthavearrangementsinplacefortrackingITMOs.Article6.4InstitutionalCapacitytoFulfilArticle6.4ParticipationRequirementsCountrieswillneedtoensuretheyhavetheinstitutionalcapacitytofulfilltheparticipationrequirementsfortheArticle6.4mechanism.InstitutionalCapacityandProcedurestoSupporttheApprovalandRegistrationofArticle6.4ActivitiesandAuthorizationFormitigationactivitiestobeconsideredArticle6.4activities,theymustmeetcertainrequirements,includingconcerningstakeholderengagement.4Article6.4activitiesmustfollowmechanismmethodologies,whichcanbedevelopedbyactivityparticipants,hostcountries,stakeholders,ortheSupervisoryBody,andmustbeapprovedbytheSupervisoryBody.5CountriesmustprovidetheSupervisoryBodywithapprovaloftheactivity,beforearegistrationrequest.6Countrieswillalsoneedtoapprovetherenewalofcreditingperiodsifthecountryintendstoallowtheactivitytocontinuebeyondthefirstcreditingperiod(footnote7).HostcountiesmustprovidetheSupervisoryBodywithauthorizationofpublicorprivateentitiestoparticipateintheactivityasactivityparticipantsunderthemechanism(footnote7).HostcountriesmustalsoprovideastatementtotheSupervisoryBodyspecifyingwhetheritauthorizesA6.4ERsissuedfortheactivityforusetowardtheachievementofNDCsand/orforotherinternationalmitigationpurposes.7AtCOP27,itwasagreedthattheSubsidiaryBodyforScientificandTechnologicalAdvicecontinueitsconsiderationoftheformandtimingoftheauthorizationstatement.84UNFCCC,CMA.2021.Decision3/CMA.3,Rules,ModalitiesandProceduresfortheMechanismEstablishedbyArticle6,paragraph4,oftheParisAgreement,ChapterV;UNFCCC,CMA.2022.Decision7/CMA.4,GuidanceontheMechanismEstablishedbyArticle6,paragraph4,oftheParisAgreement.para.9(c).5UNFCCC,CMA.2021.Decision3/CMA.3,Rules,ModalitiesandProceduresfortheMechanismEstablishedbyArticle6,paragraph4,oftheParisAgreement.ChapterV,B.6UNFCCC,CMA.2021,Decision3/CMA.3,Rules,ModalitiesandProceduresfortheMechanismEstablishedbyArticle6,paragraph4,oftheParisAgreement.ChapterV,C.7UNFCCC,CMA.2021.Decision3/CMA.3,Rules,ModalitiesandProceduresfortheMechanismEstablishedbyArticle6,paragraph4,oftheParisAgreement.ChapterV,C;UNFCCC,CMA.2022.Decision7/CMA.4,GuidanceontheMechanismEstablishedbyArticle6,paragraph4,oftheParisAgreement.AnnexI,para.26.8UNFCCC,CMA.2022.Decision7/CMA.4,GuidanceontheMechanismEstablishedbyArticle6,paragraph4,oftheParisAgreement.para.9(c).34AppendixesProcessesforApplyingCorrespondingAdjustmentstoAuthorizedA6.4ERsAtCOP27,partiesagreedthattheArticle6.4mechanismregistryshalltrackA6.4ERsthatare:Authorizedtowardtheachievementofanacquiringcountry’sNDCorforotherinternationalmitigationpurposes,knownasAuthorizedA6.4ERs;9orNotauthorizedforusetowardtheachievementofanNDCorotherinternationalmitigationpurposes,knownasMitigationContributionA6.4ERs.10HostcountrieswhoauthorizeA6.4ERsforusetowardtheachievementofNDCsand/orforotherinternationalmitigationpurposesmustapplythecorrespondingadjustments.AccountingandReportingInfrastructuretoSupportArticle6BoxesA2.1,A2.2,A2.3,andA2.4foranoverviewoftheaccountingandreportinginfrastructureavailableunderArticle6andtherelatedobligationsofpartiesasoutlinedintheguidanceandrulesadoptedbyCMA3andCMA4(footnote10).BoxA2.1CentralizedAccountingandReportingPlatformThesecretariatshallestablishandmaintainaCARPasadigitalweb-basedplatformforpublishingnonconfidentialinformationsubmittedbyparticipatingpartiesundertheirreportingrequirements.AspartofadministeringtheCARP,thesecretariatwillprovideanannualreporttotheCMAonpartyactivitiesunderArticle6.2,includingrecordedITMOs,correspondingadjustments,andemissionsbalances.ReportsgeneratedbytheArticle6technicalexpertreviewteamwillalsobemadepubliclyavailableontheCARP.AtCOP27,partiesrequestedthatthesecretariatmakeatestversionoftheCARPavailablebyJune2024,withaviewtothefirstversionbeingfinalizedbyJune2025.PartiesalsorequestedthatthesecretariatprovideaninterimsolutionbyJanuary2023forthesubmissionofreportinginformationbypartiesuntiltheCARPandArticle6databasearereleased.PartyobligationsComplywithreportingrequirements.CARP=centralizedaccountingandreportingplatform,COP27=27thConferenceoftheParties,CMA=ConferenceofthePartiesservingasthemeetingofthePartiestotheParisAgreement,ITMO=internationallytransferredmitigationoutcomes.Source:UnitedNationsFrameworkConventiononClimateChange.9UNFCCC,CMA.2022.Decision7/CMA.4,GuidanceontheMechanismEstablishedbyArticle6,paragraph4,oftheParisAgreement.AnnexI,para.29.10UNFCCC,CMA.2021.Decision2/CMA.3,GuidanceonCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.Annex,ChapterVI;UNFCCC,CMA.2022.Decision6/CMA.4,MattersRelatingtoCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.AnnexI,ChapterII;ChapterIII.Appendixes35BoxA2.2:Article6DatabaseThesecretariatwillimplementanArticle6databaseasanintegratedbutdistinctdatabasewithinthecentralizedaccountingandrecordingplatformtoenabletherecordingofcorrespondingadjustmentsandemissionsbalancesandinformationoninternationallytransferredmitigationoutcomes(ITMOs)firsttransferred,transferred,acquired,held,canceled,canceledforoverallmitigationinglobalemissionsifany,and/orusedbyparticipatingparties.ThedatabasewillidentifyITMOsbyuniqueidentifiersthatdistinguish,ataminimum,theparticipatingparty,vintageofunderlyingmitigation,activitytype,andsector(s).TheArticle6databasewillbedesignedtoenabletheidentificationofanyinconsistencies,allowingtherelevantpartiestobenotified.Partyobligations:Complywithreportingrequirements.Source:UnitedNationsFrameworkConventiononClimateChange.BoxA2.3:NationalRegistryorInternationalRegistryPartiesmusthave,orhaveaccessto,aregistryfortrackingandshallensurethatsuchregistryrecords,asapplicable,thefollowingitems:“authorization,firsttransfer,transfer,acquisition,usetowardsNDCs,authorizationforusetowardsotherinternationalmitigationpurposes,andvoluntarycancellation(includingforoverallmitigationinglobalemissions,ifapplicable),andshallhaveaccountsasnecessary.”aThesecretariatwillimplementaninternationalregistryforparticipatingpartiesthatdonothaveordonothaveaccesstoaregistry.Theinternationalregistryshall,totrackandrecordITMOs,compriseanelectronicdatabaseandothertechnicalandadministrativearrangements,supportingaccountsforeachparticipatingparty.AtCOP27,partiesrequestedthattheSubsidiaryBodyforScientificandTechnologicalAdviceandthesecretariatfurtherdevelopcertainaspectsoftheinternationalregistry,providinganinterimsolutionforparticipatingpartiesuntiltheinternationalregistrybecomesoperational.Thisinternationalregistrywillformpartofthecentralizedaccountingandreportingplatform.Aparticipatingpartymayconnectitsregistrytotheinternationalregistry.Partyobligations:Establishanationalregistrycapableofrecordingtheaboveitems;orRequestanaccountintheinternationalregistry.Notethattheinternationalregistryadministratorshallassisttheleast-developedcountriesandsmallislanddevelopingstatesthatusetheinternationalregistrywithfunctionsandprocesses,asnecessary,subjecttotheavailabilityoffinancialresources.COP27=27thConferenceoftheParties,ITMO=internationallytransferredmitigationoutcome,NDC=nationallydeterminedcontribution.aUnitedNationsFrameworkConventiononClimateChange,ConferenceofthePartiesservingasthemeetingofthePartiestotheParisAgreement.2022.Decision6/CMA.4,MattersRelatingtoCooperativeApproachesreferredtoinArticle6,paragraph2,oftheParisAgreement.AnnexVII.Source:UnitedNationsFrameworkConventiononClimateChange.36AppendixesBoxA2.4:Article6.4MechanismRegistryTheSupervisoryBodyfortheArticle6.4mechanismwillestablisharegistryforthemechanism.Thesecretariatwillserveasthemechanismregistryadministrator,maintainingandoperatingtheregistryunderthesupervisionoftheSupervisoryBody.ThemechanismregistrywilltaketheformofastandardizedelectronicdatabaseandshalltrackA6.4ERsandCERstransferredtothemechanismregistry.Themechanismregistryshallperformissuance,forwarding,firsttransfer,transfer,cancellation,voluntarycancellation,andretirementofA6.4ERsor,whereapplicable,ofCERstransferredtothemechanismregistry.Themechanismregistrywillcontainatleastapendingaccount,holdingaccount,retirementaccount,cancellationaccount,accountforcancellationtowardoverallmitigationinglobalemissions,andashareofproceedsforadaptationaccount,aswellasaholdingaccountforeachpartyandcertainpublicorprivateentities,asauthorizedbyaparty.Themechanismregistryshallbeconnectedtotheinternationalregistryreferredtoabove.ThemechanismregistryshalldistinguishA6.4ERsthatareauthorizedforusetowardtheachievementofNDCsand/orforuseforotherinternationalmitigationpurposes.ThemechanismregistryadministratorwillimplementtheleviestotheAdaptationFundandbuffertodeliveroverallmitigationofglobalemissions.Partyobligations:Applyforaholdingaccount.EnsurecompliancewiththeprocessesoutlinedinArticle6.4inChapter2,including,inparticular,providingastatementtotheSupervisoryBodyspecifyingwhetheritauthorizesA6.4ERsissuedfortheactivityforusetowardtheachievementofNDCsand/orforotherinternationalmitigationpurposes.A6.4ER=Article6.4EmissionReductionUnit,CER=certifiedemissionreduction,NDC=nationallydeterminedcontribution.Source:UnitedNationsFrameworkConventiononClimateChange.InternationalTransparencyandReportingInfrastructurePartieswhoengageincooperativeapproachesunderArticle6aresubjecttoseveralreportingrequirements.InformationsubmittedbyapartyunderthesereportingrequirementsthatisnotidentifiedbythatpartyasconfidentialshallbemadepublicontheCARP.1111UNFCCC,CMA.2021.Decision2/CMA.3,GuidanceonCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.Annex,para.24.Appendixes37Article6.2InitialReportEachparticipatingpartymustsubmitanArticle6.2initialreport.ThisreportistobesubmittednolaterthantheauthorizationofITMOsfromacooperativeapproachorwherepractical(intheviewoftheparticipatingparty)inconjunctionwiththenextbiennialtransparencyreportduefortheperiodofNDCimplementation.12PartiesagreedupontheoutlineoftheinitialreportatCOP27inAnnexV,Outlinefortheinitialreportandupdatedinitialreportreferredtoindecision2/CMA.3,annex,chapterIV.A(Initialreport)oftheCOP27decisionregardingArticle6.2.13Thisoutlinewillrequireparticipatingpartiestoreportagainstfourkeycategoriesofinformation:(i)ParticipationresponsibilitiesrequiredundertheguidanceofArticle6.2;(ii)Informationrelatingtotheparty’sNDCandtheintentiontousecooperativeapproachesthatinvolvetheuseofITMOsunderArticle6towardNDCs;(iii)InformationonITMOmetrics,methodforapplyingcorrespondingadjustments,andmethodforquantificationoftheNDC;(iv)Informationoneachcooperativeapproachincludingauthorizationandintegrityconsiderations.Notethatthisinformationmustbeprovidedintheinitialreportandupdatedinitialreportforeachcooperativeapproachseparately.AnnualInformation—Article6.2Participatingpartiesmustprovideinformationontheircarbonmarketactivitiesonanannualbasis,nolaterthan15Aprilofthefollowingyearinanagreedelectronicformat.ThisinformationwillberecordedintheArticle6database.14PartiesagreeduponadraftversionoftheagreedelectronicformatofthisannualinformationatCOP27inAnnexVII,Draftversionoftheagreedelectronicformatreferredtoindecision2/CMA.3,annex,chapterIV.B(Annualinformation)oftheCOP27decisionregardingArticle6.2.15Thisdraftformatsetsouttablescoveringparticipatingpartyactionsandholdings.Thesewillrequireparticipatingpartiestoprovideinformationregardingthefollowing:(i)therelevantcooperativeapproach;(ii)theITMOsuniqueidentifier;(iii)themetricandquantityofITMOs;(iv)ITMOdetailsincludingthefirsttransferringparty,vintage,sector,andactivitytype;(v)authorization,includingthepurposesforwhichauthorizationhasbeengiven;(vi)thefirsttransferringparty’sdefinitionor“firsttransfer;”and(vii)variousactiondetailsincludingthetransferringparticipatingparty,acquiringparticipatingparty,purposesforcancellation,usingaparticipatingpartyorauthorizedentityorentities,andfirsttransfer.12UNFCCC,CMA.2021.Decision2/CMA.3,GuidanceonCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.Annex,para.18.13UNFCCC,CMA.2022.Decision6/CMA.4,MattersRelatingtoCooperativeApproachesreferredtoinArticle6,paragraph2,oftheParisAgreement.14UNFCCC,CMA.2021.Decision2/CMA.3,GuidanceonCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.Annex,ChapterIV,B.15UNFCCC,CMA.2022.Decision6/CMA.4,MattersRelatingtoCooperativeApproachesreferredtoinArticle6,paragraph2,oftheParisAgreement.38AppendixesRegularInformation—Article6.2Every2years,partiesmustsubmitabiennialtransparencyreport(BTR).AsanannextotheBTR,partiesarerequiredtosubmitregularinformationontheirparticipationincooperativeapproachesnolaterthan31Decemberoftherelevantyear.16PartiesagreeduponanoutlineforthisregularinformationatCOP27inAnnexVI,Outlineforannex4(InformationinrelationtotheParty’sparticipationincooperativeapproaches,asapplicable)tothebiennialtransparencyreport,asreferredtoindecision2/CMA.3,annex,chapterIV.C(Regularinformation),paragraphs21–22oftheCOP27decisiononArticle6.2.17Thisoutlinewillrequireparticipatingpartiestoprovideregularinformationacrossthefollowingkeycategoriesofinformation:(i)participationresponsibilities;(ii)updatestotheinformationprovidedbythepartyinitsinitialreportandanypreviousBTRs;(iii)authorizationsincludinginformationonitsauthorization(s)ofuseofITMOstowardtheachievementofNDCsandauthorizationforuseforotherinternationalmitigationpurposes,includinganychangestoearlierauthorizations;(iv)correspondingadjustments,includingintegrityaspects(i.e.,howdoublecountingisavoided,howcorrespondingadjustmentsensurethatparticipationincooperativeapproachesdoesnotleadtoanetincreaseinemissionsacrossparticipatingpartieswithinandbetweenNDCimplementationperiods);(v)informationonhowthepartyhasensuredthatITMOsthathavebeenusedtowardachievementofitsNDCormitigationoutcome(s)authorizedforuseandthathavebeenusedforotherinternationalmitigationpurposeswillnotbefurthertransferred,furthercanceled,orotherwiseused;and(vi)informationoneachcooperativeapproach.Notethattheinformationrequiredmustbeprovidedforeachcooperativeapproach.ReportingtotheSupervisoryBody–Article6.4HostpartiesmustprovidetheSupervisoryBodywithinformationregardingtheirparticipationresponsibilitiesassetoutinparagraphs26–28oftherules,modalities,andproceduresagreedforArticle6.4atCOP26.18PartiesagreedatCOP27thattheSupervisoryBodyshallpromptlymakethereceivedinformationpubliclyavailableontheUNFCCCwebsite.19TechnicalExpertReviewTheinformationsubmittedbycountrieswillbesubjecttoanArticle6technicalexpertreviewfollowingguidelinesadoptedbytheCMA.20ThoseguidelineswereagreedatCOP27inAnnexII,GuidelinesfortheArticle6technicalexpertreviewpursuanttodecision2/CMA.3,annex,chapterV(Review).2116UNFCCC,CMA.2021.Decision2/CMA.3,GuidanceonCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.Annex,para.21.17UNFCCC,CMA.2022.Decision6/CMA.4,MattersRelatingtoCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.18UNFCCC,CMA.2021.Decision3/CMA.3,Rules,ModalitiesandProceduresfortheMechanismEstablishedbyArticle6,paragraph4,oftheParisAgreement.Annex,paras.26–28.19UNFCCC,CMA.2022.Decision7/CMA.4,GuidanceontheMechanismEstablishedbyArticle6,paragraph4,oftheParisAgreement.AnnexI,para.25.20UNFCCC,CMA.2021.Decision2/CMA.3,GuidanceonCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.Annex,paras.25–26.21UNFCCC,CMA.2022.Decision6/CMA.4,MattersRelatingtoCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.Appendixes39Thetechnicalexpertreviewisintendedto,amongotherthings,promotetransparency,accuracy,completeness,consistency,andcomparability,andfacilitatetheapplicationofrobustaccountingforengagementincooperativeapproachesunderArticle6.2.22Thetechnicalexpertreviewwillencompass:23(i)Theinitialreportandupdatedinitialreportsubmittedbyeachparticipatingparty;(ii)Regularinformation,asanannextoaBTR,submittedbyeachparticipatingparty;and(iii)TheresultsoftheconsistencycheckperformedbythesecretariatontheinformationsubmittedbytheparticipatingpartyforrecordingintheArticle6database.TheArticle6technicalexpertreviewteamshallprepareareportonitsreviewthatwill,ifapplicable,includerecommendationstotheparticipatingcountryonhowtoimproveconsistencywiththeguidanceonArticle6.2andrelevantdecisions.PartiesagreedonanoutlineofthatreportatCOP27inAnnexIII,OutlineoftheArticle6technicalexpertreviewreportofthedecisiononArticle6.2.24ReportsoftheArticle6technicalexpertreviewteamwillbemadepubliclyavailableontheCARP.25Article6.2:ProcessesfortheApplicationofCorrespondingAdjustmentsApplyingCorrespondingAdjustmentsSeveralfactorswillinfluencetheapplicationofcorrespondingadjustmentsbyparticipatingparties.TypeofNationallyDeterminedContributionTargetCountriescansetandexpresstargetsintheirNDCsinarangeofways,includingabsoluteemissionstargets,relativeemissionstargets,intensityemissionstargets,andnon-GHGtargets.Targetscanalsobeexpressedasmultiyeartargetsorsingle-yeartargets.Tounderpintheimplementationofcorrespondingadjustments,countriesmustensurethereisclarityinthemitigationoutcomescoveredbyeachtargetintheirNDCsandthenatureofthosetargets.TimingofCorrespondingAdjustmentsThetimingofcorrespondingadjustmentsiscomplexandwilldependuponwhetheracountryhasamultiyearorsingle-yearNDCtarget.22UNFCCC,CMA.2022.Decision6/CMA.4,MattersRelatingtoCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.AnnexII,para.1.23UNFCCC,CMA.2022.Decision6/CMA.4,MattersRelatingtoCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.para.11.24UNFCCC,CMA.2022.Decision6/CMA.4,MattersRelatingtoCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.AnnexIII.25UNFCCC,CMA.2022.Decision6/CMA.4,MattersRelatingtoCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.AnnexII,para.21.40AppendixesMultiyearNDCtarget.IntheeventacountrymaintainsamultiyearNDCtarget(e.g.,atargetcapturing2021through2030),itwouldapplyacorrespondingadjustmentonanannualbasisequivalenttotheITMOs“firsttransferred”inthecaseofasellercountry,and“used”inthecaseofthebuyercountryandreportsuchcorrespondingadjustmentsinitsannualreportsubmittedtotheArticle6database.ItwouldthenfurtherelaborateonsuchreportedtransfersandcorrespondingadjustmentsinitsBTR.(i)Single-yearNDCtarget.PartiesmaychoosebetweentwoapproacheswhenreportingtheirArticle6transfersunderanNDCthatreflectsitstargetasasingle-yeartarget(e.g.,a2030target):thetrajectoryapproachortheaveragingapproach.(ii)Trajectoryapproach.Ifapartyusesatrajectoryapproach,theapplicationofcorrespondingadjustmentsreplicatesthatofthemulti-yearNDCtargetdescribedabove.AcorrespondingadjustmentforITMOsfirsttransferredandusedwouldberequiredtobemadeonanannualbasisintheArticle6database.(iii)Averagingapproach.Ifapartyusesanaveragingapproach,itwillapplyanindicativecorrespondingadjustmentonanannualbasisintheArticle6databaseintheyearsbeforetheNDCtargetyear.IntheNDCtargetyear,thepartywouldapplyacorrespondingadjustmentintheamountoftheaverageannualITMOstransferredovertheentireperiod.AtCOP27,countriesdeferredadecisionontheelaborationoffurtherguidanceconcerningcorrespondingadjustmentsformultiyearorsingle-yearNDCs,includingthemethodsforestablishinganindicativetrajectoryandthemethodsfordemonstratingtherepresentativenessofaveraging.26ApplicationofCorrespondingAdjustmentFollowingtheselectionofanappropriateaccountingapproach,thehostcountrymustapplycorrespondingadjustmentsby:27(i)addingthequantityofITMOsauthorizedandfirsttransferred,forthecalendaryearinwhichthemitigationoutcomesoccurred;and(ii)subtractingthenumberofITMOsusedforthecalendaryearinwhichthemitigationoutcomesareusedtowardtheimplementationandachievementoftheNDC,ensuringthatthemitigationoutcomesareusedwithinthesameNDCimplementationperiodaswhentheyoccurred.CorrespondingadjustmentsarealsorequiredforITMOstradedinnon-greenhousegasmetrics.28ReportingCorrespondingAdjustmentsAsapartofArticle6.2reportingrequirements,participatingpartiesmustreportonthemethodforcorrespondingadjustmentsappliedthroughouttheNDCimplementationperiodintheirinitialreportsandregularinformationsubmittedasanannextotheBTR.2926UNFCCC,CMA.2022.Decision6/CMA.4,MattersRelatingtoCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.AnnexII,para.16.27UNFCCC,CMA.2021.Decision2/CMA.3,GuidanceonCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.Annex,para.8.28UNFCCC,CMA.2021.Decision2/CMA.3,GuidanceonCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.Annex,para.9.29UNFCCC,CMA.2021.Decision2/CMA.3,GuidanceonCooperativeApproachesReferredtoinArticle6,paragraph2,oftheParisAgreement.Annex,para.22.GlossaryArticle6Article6oftheParisAgreementprovidestheoverarchingglobalframeworkforvoluntarycooperationamongpartiesintheimplementationoftheirnationallydeterminedcontributions(NDCs)toallowArticle6guidanceforhigherclimatemitigationandadaptationambitionthroughmarket-basedandnonmarket-basedandrulesmeasures.AuthorizedDecisionsonArticle6atthe26thUnitedNationsClimateChangeConferenceofthePartiesA6.4ERs(COP26)adoptedguidanceoncooperativeapproachesreferredtoinArticle6.2;arules,modalities,andproceduresforthemechanismestablishedbyArticle6.4;andaworkprogramundertheCarboncreditframeworkfornonmarketapproachesunderArticle6.8.bAsthispaperprimarilyfocusesonArticles6.2and6.4,theauthorsusetheunofficialphrase“Article6guidanceandrules”toencompassCarboncreditingthedecisionsonbothArticle6.2andArticle6.4.schemeUnitsundertheArticle6.4mechanism,Article6.4EmissionReductions(A6.4ERs)areauthorizedforCarbonmarketsusetowardtheachievementofNDCsand/orforotherinternationalmitigationpurposes(followingCo-benefitstheguidanceforArticle6.2).ThistermwasintroducedaspartoftheCOP27decisionontherules,Correspondingmodalities,andproceduresforthemechanismestablishedbyArticle6.4.cadjustmentAdiscreteunitrepresentingaspecificamountofemissionreductionsorremovalsofgreenhousegas,usuallyexpressedintermsofmetrictonsofcarbondioxideequivalent(tCO2e).Carboncreditsareoftenissued,tracked,andcanceledonregistriesandmayhaveuniqueidentifierssuchasserialnumbers.Ascheme(voluntaryorcompliance-based)managedbyacentralorganizationthatregistersclimate-changemitigationactivitiesandissuescarboncreditsfortheemissionreductionsachievedbythoseactivities.Generally,carboncreditingschemescanbeinternationalandgovernedbyclimatetreaties(e.g.,CleanDevelopmentMechanism);independentlygoverned,orgovernedbythird-partyorganizations(e.g.,GoldStandardorVerra);ortheycanberegional,domestic,andsubnationalcreditingmechanismsthataregovernedbytheirrespectivejurisdictionalgoverningbodies.Theglobaltradingofbothcompliance-basedandvoluntaryunitsthatrepresentanallowancetoemit(suchasundertheEUemissionstradingsystem)orcarboncredits.Non-carbonsocialandenvironmentalbenefitsarisingfrommitigationactivities.Anaccountingmethodtobeappliedtoanationalemissionsbalanceduetotheuseandinternationaltransferofinternationallytransferredmitigationoutcomes(ITMOs)andA6.4ERswithinthecontextofArticle6oftheParisAgreementtoavoiddoublecounting.AcorrespondingadjustmentisappliedtoensurethatthehostcountrydoesnotusethevolumeofemissionreductionsorremovalsthataretransferredtoanotherpartyforitsownNDCachievement,whichwouldconstitutedoublecounting.Correspondingadjustmentsmayalsobemadebyhostcountrieswhenemissionreductionsorremovalsaretransferredtonon-partyentitiestoavoiddoubleclaiming.HostcountriesmaydecidewhethertoauthorizeemissionreductionsorremovalsasITMOs—includingtheexportofA6.4ERs—andapplyacorrespondingadjustment,includingforvoluntarymarkets.continuedonnextpage42GlossaryGlossarycontinuedWherethesameemissionreductionorremovalisclaimedbytwostakeholders(e.g.,acorporationandDoubleclaimingacountry)towardachievingmitigationtargetsorgoals.DoublecountingWherethesameemissionreductionorremovalisaccountedforbytwoormorecountriestowardachievingmitigationtargetsorgoalsunderthesameprogram(e.g.,twocountriesusingthesameEmissionsemissionreductionorremovalforcomplianceundertheParisAgreement).reductionEmissionsremovalGreenhousegas(GHG)abatementresultingfrommitigationactivities.InternationallyGHGabatementresultingfromactivitiesthatremoveGHGsfromtheatmospherebytechnicalortransferredbiologicalmeansandstoreitingeological,biological,oroceanreservoirs,orproducts.mitigationoutcomesEmissionreductionsorremovalsresultingfrommitigationactivitiesunderArticle6.2oftheParis(ITMOs)AgreementandauthorizedbypartiesforusetowardNDCsor“otherinternationalmitigationpurposes.”MitigationactivityFollowingtheguidanceoncooperativeapproaches,ITMOsarereal,verified,andadditionalemissionMitigationreductionsorremovalsgeneratedfrom2021onwardandtransferredbetweencountriesforusecontributiontowardtheirNDCcommitmentsandotherinternationalmitigationpurposes.dA6.4ERsAnactivitythatdeliversareductionofGHGemissionsfromsourcesorremovalbysinks,thatMitigationaccumulateandstorecarbonforanindefiniteperiodandtherebyremovescarbondioxidefromtheoutcomeatmosphere.OtherinternationalUnitsundertheArticle6.4mechanism(A6.4ERs)notspecifiedasauthorizedforusetowardthemitigationachievementofNDCsand/orforotherinternationalmitigationpurposes,whichmaybeused,amongpurposesotherthings,forresults-basedclimatefinance,domesticmitigationpricingschemes,ordomesticprice-basedmeasures,tocontributetothereductionofemissionlevelsinthehostparty.ThistermParisAgreementwasintroducedaspartoftheCOP27decisionontherules,modalities,andproceduresforthemechanismestablishedbyArticle6.4.ePartyUnitsdenominatedascarbondioxideequivalentthatrepresentGHGemissionreductionsorremovals.AswellasforusetowardNDCs,ITMOscanbeauthorizedandtransferredforusetoward“otherinternationalmitigationpurposes,”whichencompassboth“internationalmitigationpurposes”(e.g.,usetowardaninternationalcomplianceobligationsuchastheCarbonOffsettingandReductionSchemeforInternationalAviationorCORSIA)and“otherpurposesasdeterminedbythefirsttransferringparticipatingParty”(alsoknownas“otherpurposes”).TheParisAgreementisalegallybindinginternationaltreatyonclimatechangewiththeoverarchinggoaltoholdtheincreaseintheglobalaveragetemperaturetowellbelow2°Celsiusabovepre-industriallevelsandpursueeffortstolimitthetemperatureincreaseto1.5°Celsiusabovepre-industriallevels.AcountrythatisasignatorytoaninternationalagreementsuchastheUnitedNationsFrameworkConventiononClimateChange(UNFCCC)ortheParisAgreement.aUnitedNationsFrameworkConventiononClimateChange(UNFCCC),ConferenceofthePartiesservingasthemeetingofthePartiestotheParisAgreement(CMA).2021.Decision2/CMA.3,GuidanceoncooperativeapproachesreferredtoinArticle6,paragraph2,oftheParisAgreement;andUNFCCC,CMA.2022.Decision6/CMA.4,MattersrelatingtocooperativeapproachesreferredtoinArticle6,paragraph2,oftheParisAgreement.bUNFCCC,CMA.2021.Decision3/CMA.3,Rules,modalitiesandproceduresforthemechanismestablishedbyArticle6,paragraph4,oftheParisAgreement;andUNFCCC,CMA.2022.Decision7/CMA.4,GuidanceonthemechanismestablishedbyArticle6,paragraph4,oftheParisAgreement.cUNFCCC,CMA.2022.Decision7/CMA.4,GuidanceonthemechanismestablishedbyArticle6,paragraph4,oftheParisAgreement.AnnexI,para.29.dUNFCCC,CMA.2021.Decision2/CMA.3,GuidanceoncooperativeapproachesreferredtoinArticle6,paragraph2,oftheParisAgreement.eUNFCCC,CMA.2022.Decision7/CMA.4,GuidanceonthemechanismestablishedbyArticle6,paragraph4,oftheParisAgreement.AnnexI,para.29.NationalStrategiesforCarbonMarketsundertheParisAgreementMakingInformedPolicyChoicesThisreportanalyzeshowcarbonmarketscanbedesignedtohelpeconomiesreachambitiousemissionreductiongoalsandgeneratethefinancingneededtoscaleupclimateactionandbuildaresilientfuture.Designedasaframeworkforpolicymakers,itexaminesthecurrentstateofinternationalanddomesticcarbonmarkets,delvesintolegalandpolicyissues,andexplainshowinformedpolicychoicescanbemadewhendesigningnationalstrategiesforcarbonmarketsundertheParisAgreement.Itassessestheopportunitiesandchallengeswithcarbonmarkets,andsharesinsightsonhowhigh-integritycarbonmarketscanunderpinthetransitiontowardsalow-carboneconomyascountriestransitiontowardsnetzero.AbouttheAsianDevelopmentBankADBiscommittedtoachievingaprosperous,inclusive,resilient,andsustainableAsiaandthePacific,whilesustainingitseffortstoeradicateextremepoverty.Establishedin1966,itisownedby68members—49fromtheregion.Itsmaininstrumentsforhelpingitsdevelopingmembercountriesarepolicydialogue,loans,equityinvestments,guarantees,grants,andtechnicalassistance.ASIANDEVELOPMENTBANK6ADBAvenue,MandaluyongCity1550MetroManila,Philippineswww.adb.org

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