The road to COP27 Series: Voluntary international cooperation to reduce emissions (‘Article 6’ of the Paris Agreement)

By Orlanda Grech & Sarah Bulteel

In the first article within this four-part series of COP-related articles, ‘A focus on climate change adaptation’, we acknowledged the fact that the implementation of adaptation measures is crucial against the effects of climate change, especially for a small island state like Malta. Coupled with mitigation measures, this has led to the creation of carbon markets and carbon credits, as per Article 6 of the Paris Agreement (framework for voluntary international cooperation for countries to reduce emissions and meet their pledges towards Nationally Determined Contributions), which was widely discussed and revisited at COP26.

Carbon credits can be defined as a certified and transferable instrument representing one tonne of CO2 or equivalent greenhouses gases that has been avoided or removed, essential in achieving ‘Net Zero’. Such credits provide flexibility in achieving emission reductions by allowing for a cost-effective transition, enabling business to offset hard-to-abate emissions.

Article 6 is arguably one of the most important, covering international cooperation for carbon markets and Emissions Trading Systems (ETSs). One of its major concerns has been the double-counting of emission cuts - whereby two countries make the claim for the same emission reduction or carbon removal. Therefore, as a counter measure, Article 6 has led to the development of an accounting mechanism, known as the ‘Corresponding Adjustment’, whereby one country (Country A) transfers mitigation outcome to another country (Country B). Hence, once the transfer has been authorized, Country A will have to subtract this emission reduction from its own GHG Inventory, while Country B adds up this emission reduction from their own GHG accounting.

Following COP26, it was agreed that ‘cooperative approaches’, trading of emissions between developed and developing countries for internationally traded mitigation outcomes (ITMOs), can take place via bilateral cooperation. Such ITMOs are measured in metric tonnes of carbon dioxide equivalent (tCO2e-eq) and could lead to ETSs and/or countries to buy offsets towards their national climate goals.

A new mechanism will see to the creation of a carbon market (replacing the current Clean Development Mechanism), that could be created by the public or private sector. This will create a global platform in which the crediting of emission reductions will be recognized.

This could also have implications for Malta. The new mechanism, led by the United Nations Framework Convention on Climate Change (UNFCCC), will incentivise the private sector to implement mitigation activities across all sectors, encouraging innovation and the use of sustainable technologies.

Malta’s private sector may be able to invest in green projects and obtain credits that potentially could be traded with other countries, thereby also setting off their own emissions and reaching internal climate-related goals.

For these credits to be issued, a request for issuance with relevant requirements will need to be submitted. If approved by this body, the credits will be issued into the mechanism registry which distinguishes credits that are authorized for use towards the achievement of NDCs and for other international mitigation purposes. Engaging in such projects could increase brand reputation and demand from green investors. These same carbon credits may then contribute towards carbon emission reduction at a national level, for countries to meet their NDCs.

In Malta, green finance and investment is still at inception. The Malta Stock Exchange (MSE) has launched a ‘Green Market’ in the form of a Green Bond List (the ‘MSE GBL’), where potential issuers can obtain finance for green projects, and benefit from reductions in listing fees. The Ministry for Energy, Enterprise and Sustainable Development (MESD) also launched the Malta ESG Platform, which collates ESG data for most listed companies listed on the MSE.

With all these new developments, business leaders who engage early will be best placed to reap the benefits. The pooling of small actions can produce a larger ripple for a brighter and more sustainable future.

Sustainability and climate change will be discussed during EY-Parthenon’s Malta Future Realised Conference on October 18 at the Mediterranean Conference Centre. For more information and to register visit: ey.com/en_mt/events/ malta-future-realised-2022.