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Insurance bulletin, November 2024

Bulletin
26 November 2024
3 MIN READ

By reference to three criteria – (i) private sector participation, (ii) infrastructure development and (iii) environmental integrity – for reasons elaborated on below, it seems that presently, the Article 6.4 Mechanism offers greater promise than Cooperative Approaches under Article 6.2. Ultimately, to attract private sector capital into the Article 6 mechanisms, efficiencies of scale will be a key feature. On that basis too, the Article 6.4 Mechanism offers greater promise than Cooperative Approaches.

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Article 6 of the Paris Agreement was finally implemented at COP26 in Glasgow thereby starting the formal process to make the two market mechanisms for transacting in mitigation outcomes recognised under Article 6 operational. Cooperative approaches under Article 6.2 (Cooperative Approaches) had a head start with countries such as Switzerland taking the lead on establishing bilateral arrangements with a number of countries in anticipation of the Article 6 agreement at COP26.

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Article 6 of the Paris Agreement should have been implemented in 2016 together with the rest of the Paris Agreement rulebook. However, it wasn’t and failure at successive COP meetings created uncertainty as to whether the COP process would ever deliver an international market mechanism under Article 6. The void created by that uncertainty, coinciding with net-zero or carbon neutrality pledges from deeper corporate engagement in environmental, social and governance (ESG) issues, led to the growth in voluntary sector activity that has breathed new life to the voluntary carbon markets (VCM).

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The Art 6.2 Guidelines are not highly prescriptive about what form a Cooperative Approach should take between Cooperative Approach Parties but there are nonetheless certain common fundamental rules that apply to any Cooperative Approach. For example, any Paris Agreement Party wishing to participate in a Cooperative Approach must meet the minimum eligibility requirements. Such requirements include, among others, that it has in place a framework for authorisation of ITMOs for NDC use and that it has the ability to track those ITMOs. The COP27 decisions on Article 6.2 4 expanded on some of these requirements obliging a Cooperative Approach Party to have access to a registry for the purposes of tracking ITMOs. Where a Cooperative Approach Party does not have its own registry it can use the international registry to be established by the Secretariat (the International Registry) no later than 2024. Where a Cooperative Approach Party has its own registry, it is at the discretion of that Party as to whether it will connect to the International Registry. Therefore, one immediate impediment to the operationality of a Cooperative Approach is the status of the Cooperative Approach Party’s registry.

The accounting rules for Cooperative Approaches were fundamentally put in place at COP26. It recognises that a mitigation outcome arising from an Art 6.4 Activity (an Art 6.4 ER) will, when transferred internationally, be treated as an ITMO. There are three different use cases for an ITMO originating under either the Article 6.4 Mechanism or a Cooperative Approach:

Type of UseActivityCorresponding Adjustment to be applied by the:
Host Country?Acquiring Country?
NDC UseITMOs authorised for use so that an acquiring Paris Agreement Party can use it towards its NDC✔ (on ‘first transfer’)✔
International Mitigation UseInternational mitigation purposes other than NDC Use, broadly understood to be for CORSIA-use or any future mechanism that might be developed by the International Maritime Organisation✔ (on ‘first transfer’)✕
Other Purpose UseMitigation outcome has been authorised by the host Cooperative Approach Party for ‘other purposes’, for example use in the VCM✔ (on ‘first transfer’)✔