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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 Paris Agreement’ 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.

On 24 November 2022, a successful training was held in Kigali, Rwanda on the Article 6 of the Paris Agreement. In attendance were participants from GGGI, REMA, BRD, African Parks, FONERWA, IUCN, EPD, RAPED, MININFRA, and a freelancer. The discussion aimed 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

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 him, Rwanda is targeting 38% of GHG emissions reduction by 2030, which is huge target to meet. He added that in mitigation outcomes, bilateral agreement on ITMOs and Article 6 on the carbon market would play an important role. He further 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 the purpose of this workshop saying, “Carbon market in the Paris Agreement 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.” Mr. Mudakikwa concluded his remarks by calling upon participants to use this opportunity to discuss how the carbon market mechanism can be understood therefore called every participant to use this opportunity to discuss how we can understand carbon market mechanisms.

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 added that the Carbon Pricing Unit is one core function of GGGI, and their expertise can be used to understand carbon markets and Article 6. Ms. DeFreese also mentioned that we could anticipate some updated information about Article that were discussed during 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, and Price. Mr. Hopkins 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. Mr. Hopkins reiterated that the new phase of international carbon markets was currently being implemented under Article 6 of the Paris Agreement, and further showed the units in the context of market mechanisms as follows:

  • 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 of the Paris Agreement can help countries to implement NDCs through “cooperative approaches.” She then gave some grounds under Article 6 to undertake cooperative pproaches 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, in practice, Article 6 approaches enable direct transfers of emission reductions between countries. She further indicated that the selling country is obliged not to account for that mitigation outcome towards their own NDC, to avoid double counting.

(Example: If Rwanda reduces GHG emissions by some activities created through either their own methodology, or centralized methodologyy and have a bilateral agreement between the, and the Government of Sweden, Rwanda could sell the mitigation amount and not account for iin itheir NDC. Only Sweden would account for it in their mitigation goals.)

Following the Q&A session, Ms. Aouane explained the reasons for the trading, and what the benefit would be for both parties. 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.

Mr. Hopkins, mentioned earlier, again 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 lacked the necessary frameworks. Rwanda, for example, has ambitious targets according to the updated NDC as follows:

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

He indicated that Rwanda is planning to use Article 6 cooperative approaches to meet the investment gap and needs more mitigation action. Mr. Hopkins further emphasized the potential risks of Rwanda is that if Rwanda sell too many ITMOs, they cannot achieve their own NDC targets. Following on from this, Mr Hopkins presented 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?

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

In her final presentation, Ms. Aouane explained the 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.

Furtherance to this, she delivered the Article 6 activity cycle on how an ITMO is authorized and reported. Among multiple stages, she highlighted that the Government should set eligible criteria for the activities, and after the transfer, it needs to execute the ITMO transfer and have it recorded.

Lastly, Ms. Aouane emphasized GGGI’s role in Article 6 transaction activities. She said, “Currently GGGI is the largest deliver of technical assistance on international carbon trading under Article 6” and went ahead to some areas and sectors being supported by GGGI.

Rounding up her presentation, Ms. Aouane said that GGGI is aiming to open global carbon trading market under Article 6 and introduced the newly piloted GGGI Carbon Transaction Facility. She said that the outcome of this was improved readiness (through knowledge sharing and training), and catalyzed trading. It is currently under implementation in over ten (10) countries and hopefully will expand to other countries as well.