How to operationalize accounting under Article 6 market mechanisms of the Paris Agreement

The role of market mechanisms was far from certain in the lead up to the 2015 Paris Climate Conference. The use of 'constructive ambiguity' led to Article 6 of the Paris Agreement, with Article 6.2 specifying a mechanism with limited international oversight, and Article 6.4 establishing a 'Sustainable Development Mechanism' (SDM) subject to detailed rules. Clear operationalization of these mechanisms remains a challenge, especially regarding the critical accounting issue that could not be resolved at the 2018 Katowice Climate Conference (COP24) - how to apply corresponding adjustments, especially regarding sectors not covered by targets under nationally-determined contributions (NDCs). By using fictitious examples, we explain two possible approaches to using Internationally Transferred Mitigation Outcomes (ITMOs) under Article 6.2 for achieving NDCs: a 'target-based' one where the acquiring Party adds the ITMO amount to the target level of its NDC; and a 'tally-based' one where the acquiring Party removes the ITMO amount from the final tally of its NDC. We discuss how these approaches influence the way to make corresponding adjustments and to avoid 'double counting'. The first one leads to 'target/budget-based accounting', the second one to 'emission-based accounting'. For mitigation outside the scope of the host Party's NDC, we propose using a tally-based interpretation of ITMO use, as opposed to the target-based variety used in the 1997 Kyoto Protocol, and stress the need for additionality testing. This interpretation allows for mandatory corresponding adjustments for all ITMO usage, while the host Party NDC level remains unchanged. A buffer registry is created for corresponding non-NDC adjustments of the selling party. Key policy insights Under the Paris Agreement, transfers of emissions units between two countries through the Article 6 mechanisms need a corresponding adjustment on both sides to prevent double counting. Corresponding adjustments can be applied either to emissions targets under NDCs or measured emissions levels. The transfer of emissions reduction credits generated outside an NDC should lead to a corresponding adjustment of a buffer registry of the selling country, but not its emissions level/NDC target. Such credits should only be generated if additionality of the reductions is shown.