Capacity building workshop on carbon markets under Article 6 of the Paris Agreement

In 2016, Rwanda ratified the Paris Agreement (PA) to combat climate change by limiting the global temperature rise to below 1.5º, as articulated in the 2015 Paris Agreement (PA). Submitted to the UNFCCC (United Nations Framework Convention on Climate Change), the National Greenhouse Gas Inventory reported that the per capita Green House Gases (GHG) emissions intensity rapidly increased from 2.82 Gg CO2 eq. in 2006 to 3.34 Gg CO2 eq. 2018 due to the unceasing Rwanda’s socio-economy activities. Therefore, the Government of Rwanda has put great attention to green growth within its strategy documents and national vision. It is thus committed to promote holistic, balanced, and integrated strategies under Article 6 of the Paris Agreement, which will assist in its NDCs implementation (National Determined Contributions).
The Article 6 of the Paris Agreement’s allows signatories to use voluntarily cooperation to meet GHG emission reduction targets outlined in their NDCs. These cooperative approaches involve the international transfer of Mitigation Outcomes via both bilateral agreements and/or a supervised marketplace, yet to be formalized. It is widely acknowledged that creating and establishing these market-based mechanisms can be cost-effective in achieving emission reduction targets. Despite its low level of emissions, Rwanda has the potential for a range of carbon mitigation activities above and beyond the planned activities of the NDC that may allow it to access carbon finance through trading to assist its ambitious goal to become a developed, carbon-neutral, and climate-resilient economy by 2050. Thus, as the marketplace for carbon trading is emerging, it will be of great importance to explore the opportunities and identify implications and risks associated with carbon market under PA’ s article 6 in Rwanda. Recognizing that this would substantially supporting climate action over the next decade and shifting the country’s course towards sustainable development.

In this regard, REMA and GGGI are organizing the capacity-building workshop on market-based mechanisms under Article 6 of the Paris Agreement on (Date) at (Venue). The discussion aims to explore the advantages and opportunities under article 6 of the Paris agreement now available to the Government of Rwanda and the rest of the world following the finalization of the Paris Rulebook

24 November, Kigali, Rwanda with diverse participants from GGGI, REMA, BRD, African Parks, FONERWA, IUCN, EPD, RAPEP, MININFRA, and a freelancer a successful training was held in Rwanda on the Article 6 of the Paris Agreement.

REMA Division Manager ,Mr Eric Mudakikwa gave his opening remarks highlighting that the carbon market under Paris Agreement (PA) is really important thing to discuss. According to Eric, Rwanda is targeting 38% of GHG emission reduction by 2030, which is very big target. He said that in mitigation outcomes, bilateral agreement on ITMOs and Article 6 in carbon market would play an important role. He highlighted the ambition of REMA and Rwanda on global carbon market engagement saying, “We have ongoing projects that will support the carbon market and emission reduction in the country.” In this context, he mentioned about the purpose of this workshop saying, “Carbon market in the PA era is really important as this is new concept, so we are trying to build our own capacity in different institutions, so as to figure out what opportunities we have and what we can do to meet NDC.” Eric therefore called every participant to use this opportunity to discuss how we can understand carbon market mechanism and thanked GGGI and other partners.

GGGI Senior Green Growth Officer Michelle DeFreese started her opening remarks saying, “This is really timely workshop, as there are a lot of interest on Article 6. She said, “Carbon Pricing Unit (CPU) is one of the core functions of GGGI, so we can use their expertise to understand carbon markets and Article 6.”Michelle also mentioned that we can anticipate some updated information about Article 6 what were discussed during the COP27.

GGGI Global Article 6 Capacity Building and Knowledge Sharing Carbon Pricing Unit Associate , Mr Mark Hopkins started his presentation by giving an example of Clean Air Act, to show how market mechanisms can be used to address environmental problems. The Environmental Protection Agency (EPA) considered two options to address the acid rain problem: tax (price-based approach) vs limit (quantity-based approach). However, both options had limitations; a new solution was created to minimize cost to power plants and to maintain low regulatory burden. The new policy approach was to combine three elements: CAP+Allowance+Price. Mark said that under this system, the price of allowances was determined by market forces, not by regulations. This system gave incentives for factories to reduce emissions so that they could have additional allowances that can sell to other factories who are polluting above their limits. In terms of international scheme, there was Kyoto Protocol during 2005-2020. Marks said, “We are now in a new phase of international carbon markets under Article 6 of Paris Agreement.” Mark showed the units in the context of market mechanisms:

  • Allowance (traded for compliance purposes in an ETS / Cap & Trade): AAUs under the Kyoto Protocol (If country beyond AAU, they have to buy AAU from another)

Credits (traded for different purposes – compliance, voluntary): under Article 6, there is Internationally Transferred Mitigation Outcomes (ITMO)

Ms Fenella Aouane ,Deputy Director – Head, Carbon Pricing Global Practice Carbon Pricing Unit  started her presentation comparing the Kyoto Protocol and Paris Agreement. She said “The mechanism under the Kyoto Protocol was Clean Development Mechanism (CDM), which targeted industrialized countries only. However, now, under the Paris Agreement beginning from 2021, every country has their own emission target, which is Nationally Determined Contributions (NDCs).” She highlighted that Article 6 under PA can help countries to implement NDCs through “cooperative approaches” Then she gave some grounds under Article 6 to undertake cooperative approaches between countries.

  • Article 6.2: Gives guidance to cooperative approaches. Countries can transfer the mitigation outcome. ITMO is a unit that is traded internationally.
  • You can use any standard or methodology as long as you stick on the term and regulations under Article 6.
  • Article 6.4: Establishes a centralized mechanism / registration system, replacing CDM.
  • Everything will be approved under the registry system when you are actually doing some mitigation activities.

She highlighted that even though the fundamentals of a trade under Article 6 are not different to CDM or voluntary markets.Fenella gave an example of Article 6 transaction. In practice, Article 6 approaches enable transfers of emission reductions between countries. Among this process, she highlighted the selling country agrees not to account for that MO towards their own NDC, to avoid double counting.

(Example: Rwanda reduces GHG emissions by some activities, they create through either their own methodology, or centralized methodology. If there is a bilateral agreement between the GoR and Government of Sweden, GoR can sell the mitigation amount.

If GoR sell this reduction to Sweden, what we have to do is to make sure not count to their own goals of Rwanda, to avoid double counting. As a buyer, Sweden can buy for a purpose of their own such as net-zero, not necessarily for NDC).

After the Q&A session, Fenella continued her presentation explaining the reason why we are trading, and what is the benefit for both sides. She gave an example of implementing electric mobility transformation in Rwanda. She said that by ITMO transfer, a host country can get more investment to implement mitigation activities, and a buyer country can accomplish their NDC and/or net-zero target.

∙ Mark delivered the opportunities and potential risks for Rwanda when engaging Article 6. He said that the Eastern African countries have signaled willingness and strong interest to use Article 6 mechanisms but lack frameworks. Rwanda has ambitious targets according to the updated NDC as follows:

  • 9MtCO2eq: unconditional target ($2.01B)
  • 7MtCO2eq: conditional target ($3.67B)

∙ Rwanda is planning to use Article 6 cooperative approaches to meet the investment gap and needs more mitigation action. Mark emphasized the potential risks of Rwanda is that if Rwanda sell too many ITMOs, they cannot achieve their own NDC targets. After answering the question, Mark continued his presentation of the requirements to avoid double counting and ensure environmental integrity.

  • Corresponding adjustments: transfer of ITMO to another country means that host/seller country cannot count that MO towards their own NDC
  • Additionality: would this activity take place in the absence of carbon finance?

Mark then delivered the corresponding adjustments in practice, by giving an example of ITMO trade between Rwanda and Switzerland. He showed some barriers that carbon finance needs to be overcome to implement mitigation activities. He said these barriers can be financial, technological, and regulatory. Mark closed his presentation saying “There are some risks and requirements under Article 6, so countries really need to think how to strategize and develop their frameworks, to make sure to engage under Article 6”

Fenella showed required key readiness decisions to operationalize Article 6

  • Establish eligibility criteria and trade parameters
  • Establish frameworks for processing requests and transfers
  • Establish (or access) a registry for ITMO transfers
  • Bilateral framework agreement – outlining purpose, general rules

Fenella delivered the Article 6 activity cycle, how ITMO is authorized and reported. Among the multiple stages, she highlighted that the Government should set the eligible criteria for the activities, and after the transfer, it needs to execute ITMO transfer and record into registry. Then she explained the steps for participation in Article 6. Lastly, Fenella emphasized the GGGI’s role in Article 6 transactions activities. She said “Currently GGGI is the largest deliverer of technical assistance on international carbon trading under Article 6.”, showing some areas that GGGI is supporting. According to her, GGGI is working with partner organizations such as other international organizations and private sectors, and trying to identify external parties if their activities are eligible.

She said “GGGI is aiming to open up global carbon trading market under Article 6. We feel this is a way to help countries increase ambition to meet global temperature goals.” She introduced newly started GGGI Carbon Transaction Platform (CTP)

  • Outcome: readiness improved (by knowledge sharing, training…) and trading catalyzed.

∙ Lastly, Fenella mentioned key takeaways from today’s presentation:

  • Rwanda has signaled intent to use Article 6 cooperative approaches to meet NDC financing shortfall of USD 3.67B
  • Operationalization of Article 6 requires establishment of robust governance frameworks
  • GGGI is implementing Article 6 readiness activities in 10+ countries