Extensive negotiations focused on finalizing the details of a “rulebook” for an international carbon market under Article 6 of the Paris Agreement.
By Jean-Philippe Brisson, Paul A. Davies, Betty M. Huber, Michael Dreibelbis, and Qingyi Pan
The 27th annual Conference of Parties (COP27) of the United Nations Framework Convention on Climate Change (UNFCCC) is well underway in Sharm el-Sheikh, Egypt. Over the past week, governments, corporations, non-governmental organizations, academics, and other members of civil society have been invited to discuss and collaborate on strategies for reducing carbon emissions and achieving net-zero targets.
Last year, COP26 in Glasgow led to notable progress in relation to global carbon credit markets and climate change mitigation. Significantly, a large number of countries that are party to the UNFCCC and the Paris Agreement signed the “Glasgow Climate Pact,” in which they agreed, among other things, to focus on limiting the global average temperature rise to 1.5°C above pre-industrial levels. It is critical that COP27 continues to build on the Glasgow Climate Pact to keep this momentum going.
This year as in prior years, Latham & Watkins is participating in the summit by speaking on panels and working with clients. This blog post summarizes the highlights from the first week of COP27. Latham will continue to monitor developments at the summit and will report on any final text adopted by the parties to the UNFCCC.
Article 6 Negotiations
As expected, during the first week of COP27 extensive negotiations focused on finalizing the details of a “rulebook” for an international carbon market under Article 6 of the Paris Agreement. Reaching agreement on the Article 6 rules will be instrumental in enabling governments to achieve their Nationally Determined Contributions (NDCs — parties’ self-determined obligations under the Paris Agreement) by encouraging private sector cooperation and the deployment of widespread capital. While COP26 marked a huge step forward for carbon markets by establishing some broad governing principles, a goal of COP27 is to further progress the practical and technical mechanisms that the implementing rules require.
The week suffered from a slow start as the parties were unable to reach consensus on a number of key issues. By the end of the week, three draft decision texts were sent to the COP27 Presidency with the hopes of resolving the outstanding issues at the ministerial level.
Crucially at issue were the details of and interrelationship between Articles 6.2 and 6.4:
- Article 6.2 sets out guidelines for the trading of “internationally transferred mitigation outcomes” between two countries. The negotiating countries are still working on the text for the infrastructure, authorization, and design of the review process.[i]
- Article 6.4 establishes a framework for a multilateral carbon credit market that would be overseen by a supervisory board, functioning according to agreed guidelines. The negotiating countries have yet to agree on the operation of the registry and how projects from the Kyoto Protocol’s Clean Development Mechanism would transition to the new mechanism.[ii]
Although these issues remain outstanding, previous COPs have shown that limited progress in week one is not determinative of overall success.
John Kerry’s Energy Transition Accelerator
The US made several announcement during the first week of COP27 that will have significant implications for the private sector.
Recognizing that no single government has sufficient capital to support developing countries in phasing out fossil fuels and accelerating the expansion of renewable energy, US climate envoy John Kerry announced plans to use voluntary carbon markets to drive the energy transition. The proposed “energy transition accelerator” would enable corporations to purchase carbon credits from governments (or other jurisdictions) and use those credits to meet their voluntary climate targets. The capital raised from the sales would then be deployed in developing countries to fund clean energy projects.
A number of corporations across different industries, including retail, technology, and finance, expressed support for the initiative. While the US has not yet developed a framework for the accelerator, Kerry expects that the initiative will be ready for COP28 in Dubai.
President Biden’s Methane Strategy
Later in the week, in what has been seen as an attempt to reestablish the United States as a global climate leader, President Biden announced that the federal government will soon require domestic oil and gas producers to detect and fix methane leaks. If the supplemental proposed standards to the Clean Air Act are finalized, the Environmental Protection Agency projects that the standards will eliminate 36 million tons of methane from oil and gas operations by 2035 (the equivalent of 810 million MTCO2e).[iii] This would be accomplished by introducing regulations targeted at oil and gas entities, as well as a “super-emitter response program” that would require oil and gas operators to respond to credible third-party reports of major methane leaks at their sites.
Biden also announced a number of more incremental changes that will build on the Inflation Reduction Act’s tax incentives and government spending programs, including more than $20 billion in new investments to reduce methane emissions.
This blog post was prepared with the assistance of Georgia Bellett and Tal Carmeli.