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nationalisation risk - Will host countries hedge their bets between article 6 and the voluntary carbon markets?

COP27 has affirmed the view that country authorisation frameworks are a critical issue in making Article 6 markets operational.

Countries will have to enact legislation to establish or put in place a national control or authorisation framework (National Framework) to facilitate or enable them to (i) comply with their Paris Agreement reporting obligations under Articles 4, 6 and 13 of the Paris Agreement, and (ii) determine how they will manage and organise their greenhouse gas (GHG) abatement opportunities within an NDC and across future NDCs. If they wish to participate in Article 6, countries will also have to develop an authorisation framework for approvals of mitigation outcome activities (an Art 6 Authorisation Framework). Voluntary carbon market (VCM) mitigation or removal projects are likely to be impacted by this legislation.

HFW, together with leading sector-focused firms SSEK (Indonesia), TT&A (India) and Adnan Sundra & Low (ASL) (Malaysia), has published a report on the legislative developments for National Frameworks in Indonesia, India and Malaysia, respectively. These three countries have been chosen in light of announcements by their national or subnational governments on the introduction of a National Framework or a sub-national framework in those jurisdictions.

The report highlights how different countries will take different approaches towards establishing their National Frameworks and Art 6 Authorisation Frameworks, and notes any potential consequential impact on voluntary markets. The impact on VCM projects may require market participants to adopt country-specific investment structures to accommodate the differences that will exist across countries as they roll out their respective legislative programmes.

Peter Zaman, Partner, HFW: "COP27 has highlighted the importance of country authorisation frameworks in making Article 6 markets operational. Our report is intended to highlight how different countries are likely to take different approaches to how they deal with NDC obligations and market opportunities, and how participants in the VCM will need to acknowledge and adjust to these different approaches."

Denny Rahmansyah, Partner, SSEK: “Indonesia has established both a National Framework and an Article 6 Authorisation Framework, but both are relatively new and there is still uncertainty around the setting-up of domestic carbon trading schemes. SSEK is pleased to participate in this report and help shed some light on the approaches being taken by Indonesia and the market opportunities here.”

Gautam Saha, Partner, TT&A: "In light with the five-pronged climate action plan presented by India COP26, the Government of India has been undertaking extensive steps to streamline the Indian legislative framework for a carbon market which would enable India to achieve its action plan. As part of the report, we have elaborated on how the proposed steps may impact the voluntary carbon markets”."

Putri Norlisa Najib, Partner, ASL: “Scaling up carbon markets is timely for Malaysia, which is still at an early stage of its sustainable journey to achieve net-zero carbon emissions by as early as 2050. Malaysia is in the process of introducing new climate legislations and regulators have been committed in initiating markets towards sustainable financing, and such initiatives include the soon to be launched voluntary carbon market by Bursa Malaysia under the purview of the Ministry of Finance and the Ministry of Environment and Water.”

Read the full report here.

About HFW

HFW is a leading global law firm in the aerospace, commodities, construction, energy and resources, insurance, and shipping sectors. The firm has more than 600 lawyers, including 185 partners, based in offices across the Americas, Europe, the Middle East and Asia-Pacific. HFW prides itself on its deep industry expertise and its entrepreneurial, creative and collaborative culture.

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