ARTICLE 6 APPROACH PAPER SERIES PAPER TWO Country processes and institutional arrangements for Article 6 transactions © 2020 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of the World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution Please cite the work as follows: The World Bank. “Country processes and institutional arrangements for Article 6 transactions,” World Bank Working Paper, Washington, DC. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Design and copyediting by Clarity Global Strategic Communications (www.clarityglobal.net) Table of Contents Abstract i 1. Introduction 1 2. Background: New institutional requirements for Article 6 1 3. Options and approaches 3 3.1 Building of existing domestic and international experience 3 3.2 Potential Article 6 “activity cycle” 4 3.3 Institutional and governance functions for Article 6 6 3.4 Options for institutional roles, composition and mandates 8 4. Progress in the negotiations 10 5. Relationship with other design elements 11 6. Considerations for market participants 11 7. Coordination between different ministries/agencies 11 8. Infrastructure for operationalization 12 9. Sustainability of the institutional framework 12 10. Practical examples and considerations for pilots 12 11. References 15 Acknowledgements This technical approach paper has been written for the Climate Warehouse Program at the World Bank, drawing on ongoing work to design crediting programs under the Partnership for Market Readiness (PMR). The paper has been prepared jointly by a team of experts that includes Randall Spalding-Fecher (Carbon Limits) and Jürg Füssler (INFRAS). Harikumar Gadde (World Bank) and Seoyi Kim (World Bank) provided substantive inputs and managed the project. Chandra Shekhar Sinha (World Bank) and Sandhya Srinivasan (World Bank) provided valuable comments and suggestions to the authors. Jeff Swartz (South Pole), Sandeep Roy Choudhury (VNV Advisory Services), Ousmane Fall Sarr (Agence Sénégalaise d’Électrification Rurale), and Klaus Oppermann (World Bank) also contributed to the review. This work also benefited greatly from consultation with the World Bank Article 6 Advisory Group and has been discussed in the Climate Market Club. The Article 6 Advisory Group comprises 20 private sector companies convened by the International Emissions Trading Association (IETA), four governments, and three project-implementing entities in World Bank client countries. The Climate Market Club, as of February 2021, has representatives from 13 countries and three non-sovereign entities as its members with the MDB Working Group on Article 6 acting as the secretariat. Acronyms BTR Biennial Transparency Report CDM Clean Development Mechanism Ci-Dev Carbon Initiative for Development CPIs Carbon pricing instruments GHG Greenhouse gas ITMOs Internationally transferred mitigation outcomes JI Joint Implementation JISC Joint Implementation Supervisory Committee LOA Letter of approval LT-LEDS Long-term low emission development strategy MOs Mitigation outcomes MRV Measurement, reporting, and verification NAMAs Nationally Appropriate Mitigation Actions NDC Nationally Determined Contribution REMA Rwandan Environmental Management Agency SCF Standardized crediting framework ARTICLE 6 APPROACH PAPER 2 i Article 6 Approach Paper: Country processes and institutional arrangements for Article 6 transactions Abstract Unlike the Kyoto Protocol’s Clean Development This means that, in addition to any international Mechanism (CDM), Article 6.2 of the Paris Agreement institutions that may oversee Article 6 is designed to allow for international cooperation in cooperation, countries intending to engage carbon markets through decentralized governance. in cooperative activities will need their own Under this article, bilateral or plurilateral cooperation robust institutional and governance framework between participating parties can be established at domestic level in order to systematically make through a mutually agreed policy and governance informed decisions. Putting such a framework framework, and reflected in the agreement between in place also provides policy clarity to market the parties involved. This decentralized architecture players (both domestic and international) who requires considerably higher levels of engagement are interested in engaging with the country. and oversight from participating parties. Specifically, the decisions on how to quantify, monitor, While the functions in the institutional and governance verify, authorize, and report emission reductions framework would be broadly similar between under Article 6.2 are largely up to the participating participating parties, the focus of this paper is parties, with broad guidance from the CMA. Even on the necessary institutional arrangements for under Article 6.4, which will be governed by the countries hosting the mitigation activities. Supervisory Body with strong centralized governance, it is expected that host countries would play a much The context for setting institutions and approval bigger role compared to the CDM. More importantly, procedures at the domestic level is fundamentally any transfers of internationally transferred mitigation rooted in the country’s national climate strategy outcomes (ITMOs) under Article 6 that trigger and their NDC. A host country will need to establish corresponding adjustments of the host country’s a detailed Article 6 strategy that guides, but is not Nationally Determined Contribution (NDC) need to be limited to, how its participation in Article 6 will help the closely monitored by the host country to ensure that country achieve its target. These considerations will the trading does not compromise the environmental include the activities, sectors, and technologies the integrity and achievement of their NDC goals. country intends to use to generate ITMOs for transfer; the price at which the country wishes to sell the ITMOs; measures to enable private entities to participate in crediting operations (marginal cost pricing versus opportunity cost pricing); and how to choose different crediting approaches (such as project-by-project, ii COUNTRY PROCESSES AND INSTITUTIONAL ARRANGEMENTS FOR ARTICLE 6 TRANSACTIONS sectoral, or policy crediting). An Article 6 strategy and also choose to use international crediting programs a policy framework to address these issues will help to register projects and issue units. However, the the country identify the mix of mitigation interventions, host country would still be responsible for the Article policies, and measures that could meet its NDC 6.2 process of authorizing and transferring ITMOs, pledge, forming an integral component of the country’s as well as applying corresponding adjustments. overall climate strategy. A clear strategy is essential for countries to understand the broader requirements that The type of arrangement that a country chooses to support their participation in Article 6.2 mechanisms. adopt affects the type of institutional arrangement and functions of the different bodies involved. As This paper forms the starting point, focusing on the summarized in Table 1, the governance arrangements institutional requirements to establish the policy could include a high-level decision body with overall and regulatory process that defines and supports authority to design and oversee the program and the implementation of the potential activity cycle international cooperation; an executive body that for Article 6.2 activities and transactions; identifies would develop and approve rules based on the functions required at the national level from the overall regulatory environment and mandate; an host country’s perspective; and discusses different administrator to execute the rules and guidance options to allocate these functions to existing or new on a day-to-day basis; and a technical committee institutions. The Article 6.2 activity cycle could build to provide technical advice and inputs to all of the on project cycles under the Kyoto Protocol, with an other bodies. Each cell is colored in green, yellow, added requirement for the authorization and transfer or red, which respectively represents that the of mitigation outcomes (MOs). While the entire process function should be undertaken by that particular can be developed domestically, host countries can institution, could be handled by the institution, or should not be performed by the institution. Table 1. Governance functions for Article 6 in host countries and options for mapping functions to key institutions Decision Executive Admini- Technical Functions body body strator Committee Policy coordination and oversight • Agree on overall scope of Article 6 engagement: sectors,     technologies, project types, methodologies, etc. • Agree on the use of elements of international crediting programs or recognition of any existing crediting programs/independent standards • Agree on allocation of all other functions to relevant institutions ARTICLE 6 APPROACH PAPER 2 iii Decision Executive Admini- Technical Functions body body strator Committee Rulemaking • Approve methodologies, technical     standards, and guidelines • Approve accreditation rules for third-party auditors • Approve NDC-related parameters to be used in emission reduction calculations • Guide and oversee Article 6 program implementation • Review implementation decisions, if appropriate • Address grievances and appeals (e.g., by project proponents, civil society, etc.) Technical advisory • Review international methodologies, technical     guidelines, default factors, etc. for use within country • Oversee development of new methodologies, technical guidelines, default factors, etc., where this work was undertaken by third parties • Develop new (top-down) methodologies, technical guidelines, default factors, etc. • Provide analysis of impact of potential projects/transfers on NDC compliance Implementation • Accredit auditors to carry out validation and verification     • Approve projects and project entities to generate MOs for Article 6 • Review and register eligible projects and their crediting period • Certify and issue emission reduction units • Authorize units to transfer for Article 6 • Execute transfer of Article 6 units • Approve and implement converting Article 6 units to domestic units and vice versa • Maintain a registry of projects and emission reductions, including links with international registries where required • Implement corresponding adjustments • Report on projects, MOs and transfers in the Biennial Transparency Report (BTR) for Article 6 Technical Expert Review Note: Functions in italics could be covered by either domestic institutions or the authorities under an international crediting program, or a combination of the two, depending on the transferring country’s approach to Article 6.2 1 COUNTRY PROCESSES AND INSTITUTIONAL ARRANGEMENTS FOR ARTICLE 6 TRANSACTIONS 1. Introduction 2. Background: This note introduces the country processes and New institutional institutional arrangements that will be needed for Article 6 transactions, and that countries could begin to pilot now. This includes what new legal, institutional, requirements and regulatory arrangements may be required, particularly by countries that host mitigation activities. for Article 6 While the note covers both Article 6.2 and Article 6.4 cooperation, the focus is on Article 6.2 because of Under the Kyoto Protocol’s Clean Development the stronger role that participating countries will likely Mechanism (CDM), the host country’s formal role in play. By outlining the key functions or decisions and a mitigation activity was largely limited to providing the various options for meeting these requirements, a “letter of approval” (LoA) before the request for this note is intended to serve as a basis for further registration.2 This LoA provided the host country’s country-level consideration—as an aid to piloting confirmation that the activity would contribute to rather than a comprehensive treatment of the subject. their sustainable development. In addition, the LoA authorized the project participants to engage in the Section 2 provides background on the evolving role activity and sell Certified Emission Reductions in of transferring countries in the transition from the the future without any additional approval from the Kyoto Protocol to the Paris Agreement. Section 3 government. Under the Paris Agreement’s Article presents an overview of what the activity cycle for 6, on the other hand, the role of governments in Article 6 cooperation could be, and the institutional trading transactions is potentially much greater. options for host country1 institutions and their role This is because Article 6.2 leaves the decisions on in the cycle. This is followed by a summary of the how to quantify, monitor, verify, and report emission negotiations involving these topics in Section 4. reductions largely up to the participating countries, Links to the other approach papers in this series are provided they follow the CMA’s general guidance explained in Section 5, while Section 6 highlights (expected to be approved in 2021). For Article 6.4, the considerations for both private and public sector Supervisory Board created by the Paris Agreement participants when considering the options presented. will have more centralized functions, but even here the Section 7 elaborates on the importance of coordination host country will have new authority and decisions to between different ministries/agencies. Finally, Section make. Under Article 6.2, any transfers of ITMOs will 8 highlights the infrastructure that may be required trigger corresponding adjustments, affecting the host to operationalize the approaches presented, Section country’s ability to achieve their NDC pledges. This 9 emphasizes the need to explore options to ensure means that, in addition to any international institutions the sustainability of the framework, and Section 10 that may oversee Article 6 cooperation, countries provides examples of ongoing piloting activities. intending to host cooperative activities will need their own robust institutional arrangements and procedures. Because of the stronger bottom-up architecture of the Paris Agreement, Article 6 will require considerably higher levels of engagement and oversight from the host country institutions in developing countries than under the CDM. This means stronger institutional and governance arrangements should be considered and put in place at domestic level. This paper uses the terms “host country” and “transferring country” interchangeably. Although the Article 6 rules only refer to “Participating 1 Parties” and transfers of mitigation outcomes, most readers are familiar with the term “host country”. Though in specific cases, host countries also set up frameworks and legal institutions to approve projects, set floor prices (such as China), 2 and funds to administer share of proceeds (again, such as China). ARTICLE 6 APPROACH PAPER 2 2 This paper discusses some arrangements for the This is why a detailed Article 6 strategy is a critical mandate, authority, and composition of national prerequisite to decide on whether and how to institutions, and what their role in the international and authorize the transfer of MOs internationally. This domestic processes could be. Given the impact of strategy development process should involve the Article 6 trading on NDC compliance, the institutions authorities in charge of NDC implementation as well. that are responsible for a country’s NDC achievement may also need to play a role in Article 6 cooperation. The context for setting institutions and approval In addition, although Article 6.4 will have a more procedures at domestic level is fundamentally rooted in centralized governance structure, COP26—the 26th the country’s national climate strategy and their NDC. United Nations Climate Change Conference—may Given a country’s pledges under the Paris Agreement, provide additional guidance on the specific authority the most important goal of implementing and promoting that transferring countries would exercise under this mitigation projects is to achieve—or even to surpass— mechanism (for example, when and how transfers its NDC goals. Mobilizing and facilitating access to are authorized). Setting up a robust institutional financing for mitigation activities is one of the key roles framework could also support effective domestic of government and the private sector, even before carbon pricing instruments (CPIs). Many countries considering Article 6 engagement. At the same time, already have or are considering domestic CPIs deciding whether to authorize the transfer of ITMOs (such as domestic crediting schemes to provide requires close attention by the authorities in charge offsets against a carbon tax or emissions trading of the transferring country’s mitigation pledges scheme obligation), which means that the national to ensure that the trading does not compromise institutions described in this note could potentially the achievement of their NDC goals. Given that serve both domestic and international arrangements. all countries are assumed to increase their ambition level over time (Article 4.3), transferring countries may The decisions on institutional arrangements should want to align their engagement with Article 6 with their form part of a broader Article 6 strategy, which will be ability to increase their NDC target ambitions in future. an important part of building capacity in transferring The transferring country will need to understand and countries. For example, to avoid double counting, quantify its NDC target, including potentially analyzing transferring countries cannot use any transferred MOs what the overall target means for (sub)sectoral targets to meet their own NDC goals. There is a risk, therefore, and action plans. This will help the country assess of transferring MOs from low abatement cost activities how using Article 6 to trade in MOs may be used as ( “low-hanging fruit”), which could compromise NDC a stepping stone for increasing their ambitions in achievement if the remaining mitigation opportunities future and to decide if a mitigation action proposed for turn out to be too expensive. Ideally, the transferring Article 6 trading goes beyond the actions necessary country needs to first identify which mix of mitigation to reach the NDC target (Broekhoff et al. 2017). interventions, policies, and measures would be used to meet its NDC pledges, based not only on Authorizing transfers without understanding this abatement costs but also on other criteria such as short- to medium-term plan for how to export ITMOs policy alignment, other socioeconomic benefits, or without compromising the NDC goals would be risky. technology development priorities. The transferring In the longer term, countries will also need a national country might also consider additional factors such as: mitigation planning process for example, a long-term low emission development strategy (LT-LEDS) that • Whether the sector is covered by NDC pledges (see highlights the role of Article 6 cooperation in long-term more discussion on these issues in the approach decarbonization and increases NDC ambitions over paper on crediting outside the scope of the NDC) time. This planning and analytical process could then support the development of baseline trajectories that • The need of the transferring country for reflect the country’s NDC targets over multiple cycles. technology transfer and international resources The strategy should also consider what institutional • The strategic importance of the sector to the and governance arrangements need to be put in place country in current and future NDC pledges. so that respective bodies are empowered to make informed decisions related to Article 6 transactions. 3 COUNTRY PROCESSES AND INSTITUTIONAL ARRANGEMENTS FOR ARTICLE 6 TRANSACTIONS 3.1 Building existing domestic 3. Options and and international experience A key driver of setting the national institutional approaches requirements for Article 6 will be to what extent the participating countries want to participate in Article 6 mechanisms and to what extent they want to use This section presents an overview of the different elements of international crediting programs. At one national institutional structures that could support end of the spectrum, the countries could simply a country’s participation in Article 6 mechanisms recognize carbon credits issued by an international (as well as potentially supporting domestic CPIs in crediting program or any independent standards future). Previous reviews of international, regional, and as the basis for an ITMO transfer.3 At the other end national crediting schemes—as well as guidance for of the spectrum, decisions on project registration; developing domestic CPIs—have characterized key measurement, reporting, and verification (MRV) institutions in terms of different levels of governmental approaches; accrediting of third-party verifiers; authority, including a) a high-level decision-making and issuance of units—everything up to the actual authority on the overall scope of the scheme, b) an authorization and transfer of MOs—might be done administrator to handle day-to-day requirements, c) entirely by the transferring country government at advisory bodies that provide technical support, and d) domestic level. The benefits of building on international third-party auditors that validate and verify emission crediting programs or using any independent standards reductions. Before considering the functions that include faster implementation, reduced costs (for different institutions could have, however, it is important example, for developing methodologies or setting to understand the overall role of the host country in the up accreditation schemes), and potentially greater Article 6.2 activity cycle, and how this relates to the use credibility. This could be particularly important for of international crediting programs in Article 6 transfers. countries with limited capacity (such as least developed The discussion of institutions and project cycles in this countries and small island developing states), note is not meant to prejudge exactly when and how because relying on existing international crediting the authorization for international transfers will occur, programs would reduce the administrative burden on since this is still under discussion in the negotiations. the government. On the other hand, this could offer less flexibility and restrict the institutional options (for example, the number of qualified auditors within the host country) to support Article 6 programs. Similarly, building on existing domestic experience with carbon markets and other mitigation activities will have major advantages. Many countries have experienced CDM designated national authorities and other related agencies that have worked with carbon markets, United Nations Framework Convention on Climate Change (UNFCCC) processes, Nationally Appropriate Mitigation Actions (NAMAs), and results-based climate finance. In addition, many countries have already set up institutional structures for NDC development and implementation. Building on these experiences, arrangements, and institutions—bearing in mind the lessons learned from earlier carbon markets—will strengthen Article 6 governance at the national level. While countries can utilize international crediting programs or independent standards to generate and issue carbon credits, it may still 3 require additional due diligence process to ensure no double issuance that includes the country authorization process. ARTICLE 6 APPROACH PAPER 2 4 3.2 Potential Article 6 “activity cycle” 3.3 Institutional and governance functions for Article 6 This section discusses a possible generic activity cycle for Article 6.2 from the host country’s perspective. To support the development of the host country’s The Article 6.2 rules do not require this project strategy and the processes and procedures that cycle, because they only address the process and should be put in place at domestic level, developing requirements for transfer and accounting of MOs. an institutional framework for Article 6.2 cooperation In practice, however, Article 6 pilot activities are should consider what functions are required for the likely to follow a project cycle that, in many ways, transferring country, and how these functions could is similar to earlier carbon markets, but with added be allocated to new or existing bodies. Building on steps related to the authorization and transfer existing institutions and reporting structures has of MOs. As discussed above, the host country’s important benefits in terms of leveraging capacity, responsibility could vary depending on the extent to minimizing costs, and drawing on existing relationships. which the cooperating Parties rely on elements of In this context, the need for fostering collaboration international crediting programs for the activity cycle. and coordination between related ministries/agencies Figure 1 illustrates this process for an activity where cannot be underestimated. Countries will need an international crediting program would handle to consider how to develop suitable overarching project registration and issuance of units,4 while the coordinating and decision-making bodies on domestic host country would still be responsible for the Article climate policy (including NDC updates, reporting 6.2 process of authorizing and transferring ITMOs, under the enhanced transparency framework, as well as applying corresponding adjustments. and so on) and participation in Article 6 activities. The figure shows that the project proponent Article 6 governance should consider building could request and receive formal authorization on existing national infrastructure established to at three different stages of the activity cycle: regulate the country’s engagement with CDM or Joint Implementation (JI). For existing institutions to execute • At the project concept stage (the host country these functions, however, their mandate, authority, “pre-authorizes” the project based on certain composition, and skills may need to be revised. eligibility criteria and basic project documentation provided in a project concept note) This section outlines the main functional areas for transferring country institutions: policy coordination • Following validation of the project design and oversight, rulemaking, technical advisory, (when more information about the project is implementation, and auditing (see Table 2). Those known, including how the project contributes functions shown in italics could be covered by either to different national policy objectives) domestic institutions or the authorities under an international crediting program, or a combination • Following verification of emission reductions (when of the two, depending on the transferring country’s the transfer and use of MOs has been requested).5 approach to Article 6.2 (as discussed in section 3.1). This is important because, under the different potential reporting requirements of Article 6.2 of the Paris Agreement, countries may require reporting authorizations and transfers separately, so authorization might need to occur prior to the time of transfer. Article 6.2 does not require that mitigation outcomes be authorized as “units” or that they be in metrics of tCO2. For purposes of this paper, 4 however, the term “units” is used interchangeably with MOs to include greenhouse gas and non-greenhouse gas metrics. In practice, Article 6 piloting activities are using tCO2 as units in their MRV. Other metrics could be possible, but the current Article 6 piloting activities almost all focus on emission reductions. Emission reductions in 5 this paper refers to both removals and reductions in emissions. 5 COUNTRY PROCESSES AND INSTITUTIONAL ARRANGEMENTS FOR ARTICLE 6 TRANSACTIONS Figure 1. Potential Article 6.2 activity cycle from transferring country perspective, using international crediting programs for MRV Request pre-authorization National process for concept Paris Agreement using international Article 6 process Grant crediting standard pre-authorization for MRV Full project design Validation Request Request registration authorization Register Authorize project ITMOs Implement/ Legend monitor Activity proponent Verify Auditor Issue units National authorities International crediting program Request Transfer transfer ITMOs Note: the criteria for approving authorization would be the same regardless of when Apply corresponding it happened in the activity cycle adjustments Source: authors The host country may also choose to develop verification and unit issuance would be made by the the domestic process for the project registration, host country government, not by the authorities of verification, and unit issuance functions, as shown an international crediting program or independent in Figure 2. This approach could still draw on standard programs. As with the previous example, internationally approved MRV methodologies and the request for authorization could still come auditors, but the decisions on project registration, at different stages of the activity cycle. ARTICLE 6 APPROACH PAPER 2 6 Figure 2. Potential Article 6.2 activity cycle from transferring country perspective, using domestically developed/adopted MRV approaches Request pre-authorization National process for concept Paris Agreement Article 6 process Grant pre-authorization Full project design Validation Request Request registration authorization Register Authorize project ITMOs Implement/ monitor Legend Verify Activity proponent Issue units Auditor National authorities Request Transfer transfer ITMOs Note: the criteria for approving authorization would be the same regardless of when Apply corresponding it happened in the activity cycle adjustments Source: authors Depending on which of the two approaches a host example, some existing crediting schemes combine country chooses, the institutional and governance the validation and verification steps, so that both arrangements that should be put in place and project eligibility and performance are assessed capacity-building needs at domestic level will vary. after implementation.6 Typically, this is for project Accordingly, how the host country functions would be types that lend themselves to highly standardized allocated to different institutions is discussed in the approaches for baseline and additionality assessment. following sections. In addition, countries may choose to modify or bring innovation to the activity cycle to fit the particular scope of their mitigation activities. For Including Ci-Dev’s Standardized Crediting Framework. 6 7 COUNTRY PROCESSES AND INSTITUTIONAL ARRANGEMENTS FOR ARTICLE 6 TRANSACTIONS Table 2. Governance functions for Article 6 in transferring countries Policy coordination Rulemaking Implementation and oversight functions functions functions • Agree on overall scope • Approve methodologies, • Accredit auditors to carry out of Article 6 engagement: technical standards, validation and verification sectors, technologies, project and guidelines • Approve projects and types, methodologies, etc. • Approve accreditation rules project entities to generate • Agree on the use of elements for third-party auditors7 MOs for Article 6 of international crediting • Approve NDC-related • Review and register programs or recognition of any parameters to be used eligible projects and existing crediting programs/ in emission-reduction their crediting period independent standards calculations • Certify and issue emission • Agree on allocation of • Guide and oversee Article 6 reduction units all other functions to program implementation • Authorize units to relevant institutions • Review implementation transfer for Article 6 decisions, if appropriate • Execute transfer of • Address grievances Article 6 units Technical and appeals (by project • Approve and implement advisory proponents, civil society, etc.) converting Article 6 units to functions domestic units and vice versa • Maintain a registry8 of projects and emission reductions, • Review international Auditing including links with international methodologies, technical functions registries where required9 guidelines, default factors, etc. for use within country • Implement corresponding adjustments10 • Oversee development of new methodologies, technical • Validate project applications • Report on projects, MOs guidelines, default factors, and transfers in the BTR for • Verify emission reductions etc., where this work was Article 6 Technical undertaken by third parties Expert Review • Develop new (top-down) methodologies, technical guidelines, default factors, etc. • Provide analysis of impact of potential projects/transfers on NDC compliance 7 For 6.4, the Supervisory Board will have authority for accreditation, but for 6.2, national authorities would likely have jurisdiction. 8 A separate approach paper will discuss in more detail the domestic infrastructure needs for Article 6 (i.e. a project database management system and a registry for unit tracking and transactions). 9 In the case in which a country decides to use international crediting programs’ registries for registration and issuance of MOs, it is still the country’s responsibility to fulfil potential reporting requirements of Article 6.2 of the Paris Agreement. Therefore, a separate database or a registry at the national level is needed for the purpose; countries that do not have such domestic infrastructure are expected to use the international registry that the secretariat of the UNFCCC shall implement. 10 This assumes that transferring country authorities will need to undertake tasks on corresponding adjustments as per the agreed international rules. This note does not address the unresolved issues of how and when corresponding adjustments are made. ARTICLE 6 APPROACH PAPER 2 8 3.4 Options for institutional roles, • Third-party auditors to carry out auditing composition and mandates functions, although some programs allow the administrator to audit small projects. International and domestic crediting schemes can provide important lessons for Article 6 governance • This section outlines some options and choices at the national level, including what types of in setting up the governance structures for institutions are needed and how the functions above Article 6 engagement. These options are are allocated to these different institutions. The not all mutually exclusive, because they governance arrangements for these functions will address different interrelated approaches vary across countries, but would often include: to allocating roles and responsibilities. • A high-level decision body with overall authority to • Allocate some rulemaking functions to an design and oversee the program and international administrator: In some international crediting cooperation (the “policy coordination and oversight” programs, the decision body and executive body functions). This would generally require ministerial are essentially the same (for example, the boards authority and would only occur at the start of of the Gold Standards and Verra, which runs the Article 6 engagement and periodically (every few Verified Carbon Standard) and only cover policy years) as the country’s overall performance was coordination and oversight. In these programs, reviewed. This might be implemented by a single the administrator covers most of the rulemaking ministry or a high-level inter ministerial body. functions as well as the implementation functions (for example, the administrator accredits auditors • An executive body that would develop and approve and approves methodologies). Under the CDM rules based on the overall regulatory environment and JI, on the other hand, the parties to the and mandate (most of the rulemaking functions Kyoto Protocol served as the decision body, the above). This body would include middle- to senior- CDM Executive Board and Joint Implementation level members, often with relevant specialist Supervisory Committee (JISC) served as the knowledge, and would meet more regularly to executive body, and the UNFCCC Secretariat address some rulemaking functions. It might also was the administrator, with the latter covering include members from outside of government. only implementation functions. Domestic crediting programs also vary in their approaches. • An administrator to execute the rules and Table 3 illustrates different options in such an guidance on a day-to-day basis. This could be approach. Each cell is colored in green, yellow, a department, government agency, or even an or red, which respectively represents that the outsourced third-party with appropriate oversight. function should be undertaken by that particular institution, could be handled by the institution, • A technical committee to provide technical or should not be performed by the institution. advice and inputs to all of the other bodies. Table 3. Different approaches to mapping functions to key institutions Decision Executive Technical Functions Administrator body body Committee Policy coordination and oversight     Rulemaking     Technical advisory     Implementation     Source: authors 9 COUNTRY PROCESSES AND INSTITUTIONAL ARRANGEMENTS FOR ARTICLE 6 TRANSACTIONS • Include nongovernment stakeholders in A robust institutional framework can support effective rulemaking functions: While nongovernmental domestic CPIs and be built on existing institutions stakeholders and experts are often part of the and international crediting programs. Specifically: technical advisory functions in crediting programs, their role in rulemaking varies greatly. In some of • Combining governance with existing climate the emerging domestic crediting programs (such policies and instruments: Where a country has as in Colombia and South Africa) the rulemaking multiple domestic CPIs that could have international functions are all covered by government, although linkages via Article 6, there could be synergies they could be in agencies instead of departments. from combining Article 6 governance with the For Rwanda’s domestic governance for future authorities that supervise other CPIs. On the other Article 6 engagement, however, a civil society hand, the authorities governing the existing CPI representative was included in the executive body (such as a carbon tax system) might not have the that covers rulemaking functions (and potentially capacity and skills to cover many of the more some policy oversight functions as well) (see technical functions for Article 6 engagement. In section 8). Including civil society at this level could addition, having separate institutions could allow potentially increase credibility, although there more flexibility in the way domestic crediting would need to be provision for managing potential would interact with Article 6 cooperation. conflicts of interest—for example, if the civil society organization was involved in the crediting • Building on existing institutions versus creating program as a project proponent or auditor. new institutions: Many of the functions could be covered by existing institutions, assuming their • Include private sector stakeholders in technical mandate could provide the authority to do so. For advisory and rulemaking functions: Similarly, example, the rulemaking and/or implementation bringing the private sector into the technology functions might be assigned to existing advisory and rulemaking functions—for example, environmental regulators, or the policy coordination via industry associations rather than individual and oversight functions might be addressed under companies—might help develop robust greenhouse existing ministerial (or statutory body) constitutional gas (GHG) methodologies and streamline the powers. This could be particularly useful to ensure program to make it more accessible to activity coordination among NDC revisions, preparation of proponents, including pushing for lower transaction reporting under the Paris Agreement and UNFCCC, cost options. Here the potential for conflict of and even tracking of climate finance. Technical interest could be greater, however, which could advice could also be sourced from committees set negatively affect the credibility of the system. up to serve other climate policy functions (such as national communications or biennial update • Outsource implementation functions versus reports) or sectoral functions (such as energy policy keeping them in-house: Government could choose development). This might include building on or to contract an independent entity to implement modifying in-country institutions that evaluated Article 6 functions rather than assigning them and approved CDM or JI projects on behalf of the to a government authority. Outsourcing could host country. On the other hand, there may be a reduce the burden on government and potentially need to establish new institutions if the mandates improve efficiency with lower transaction costs. of the existing bodies, or their competencies, does Depending on the strength of the government’s not fit with the functional requirements. Building policy oversight, however, this choice could raise on existing institutions would reduce the burden concerns about credibility and environmental on government and might also reduce transaction integrity if the outsourced organization did not costs (because other actors in the sector already have sufficient capacity or perverse incentives to know the relevant government authorities). These prioritize project flow over environmental integrity. existing authorities might not be as flexible, however, in terms of exercising their functions and evolving as the needs of the crediting program change. ARTICLE 6 APPROACH PAPER 2 10 • Building on elements of existing international crediting programs: Whether domestic institutions are needed for all functions depends on the 4. Progress in approach to incorporating elements of international crediting programs. Countries might choose to use internationally accredited auditors in their the negotiations Article 6 engagement, or use methodologies approved under other international crediting As with many other issues, consensus on key issues standards. If a domestic crediting program uses at COP26 will most likely provide more detailed only internationally accredited auditors, then there guidance on the roles of national institutions in the is no need to develop a national accreditation Article 6 activity cycle. The most recent text for Article standard or supervise auditors. In terms of technical 6.2 discussed at COP25 focused on participation advisory functions, if methodologies are all from requirements, accounting, and tracking issues, international standards, then less technical input because under Article 6.2 the Parties will largely be is needed, although there may still be a need to able to decide how to approve, monitor, and verify assess international standards for their applicability. ITMOs. The international rules, in turn, are likely If these methodologies and parameters are to mainly cover how transfers are tracked, how developed locally, the technical committee must corresponding adjustments are implemented, and how have the depth of sectoral knowledge and mitigation the impacts of Article 6.2 activities are reported. This analysis expertise to evaluate a new methodology means that countries will need to set up institutional proposal or develop a “top-down” approach. arrangements to authorize ITMO transfers, track ITMOs, and implement corresponding adjustments. For Article 6.4, on the other hand, the role and responsibilities of the participating countries— and particularly the country hosting the mitigation activity and transferring those MOs—could be quite different and may differ significantly by country. This is because, based on the current text, the country can choose whether to develop their own baseline and methodology approaches (including standardized baselines), which institutional functions they will exercise (such as auditor accreditation), and how they will evaluate the sustainable development contribution of project activities. They will be required to approve each project and authorize its activity proponents, as well as transferring the verified and issued emission reductions. Of course, they will also implement and report on corresponding adjustments. Finally, they should communicate to the Article 6.4 Supervisory Board what types of activities they will allow, in line with the earlier discussion in this report about the specific strategies for Article 6 cooperation (for example, the country could communicate that they would not permit certain activities). 11 COUNTRY PROCESSES AND INSTITUTIONAL ARRANGEMENTS FOR ARTICLE 6 TRANSACTIONS approval—after which no further issuance would be 5. Relationship allowed—but, short of this, they still did not have any say in the quantity of issued units or to whom they were transferred. For Article 6.2, on the other hand, the host with other design country must authorize the activity and execute the transfer of MOs. This raises the question of what legal, elements institutional, or technical arrangements can help to reduce these risks. As discussed in section 3.2, could the host country authorize the activity after validation, In terms of the relationship between this note and so that transfers would happen automatically after other Article 6 approach papers in the series, one verification as long as certain conditions were met? key link is that transferring country institutions, Or could there be domestic legal arrangements that legal frameworks, and infrastructure will influence would grant “pre-authorization” for projects even at the environmental integrity. Reflecting NDC goals in concept stage and guarantee the approval of transfers baselines for Article 6.2 activities, for example, would under certain conditions and up to a certain volume? rely on rulemaking decisions supported by the technical One possible approach is for host countries to establish committee. Similarly, where transferring countries a policy framework that clearly outlines the roles and have their own national accreditation process for responsibilities of different entities and processes, and auditors, the robustness of that process (including the requirements that the private sector needs to follow. spot checks on auditor performance) could influence The range of functions that will now be under national the credibility of the resulting emission reduction authority also means that many countries will need units. Where national governments are able to choose to significantly build their capacity. The level of the methodologies and approaches they will use capacity needed will depend on, among other things, for single-year versus multi year accounting, the the degree of national oversight of methodologies, institutions outlined in this note would likely be centrally accreditation of auditors, and other components of the involved in that process. These institutions could activity cycle, as opposed to using only international even play a role in ITMO metrics and approving institutions and tools. In addition, capacity building conversion factors for ITMOs in non-GHG metrics. will be needed for the Article 6 strategy and national mitigation analysis (see section 3.1) in terms of NDC quantification and setting crediting baselines. Continuously developing national expertise (for 6. Considerations the technical committee, for example) and closely coordinating analysis and decision-making across ministries/agencies will also be important. for market participants 7. Coordination One of the most fundamental changes for international trading under the Paris Agreement is that private sector developers in transferring countries now face new between different risks. These risks are created by the requirement that all transfers of MOs—and not just projects—must be ministries/agencies authorized by the government. Under the original CDM rules, once a project was approved, the government Because all ITMO transactions affect a country’s had no further role in the issuance and transfer ability to meet its NDC target and manage sectoral process, in part because the transfer did not have any targets (if the country’s NDC has sectoral targets), consequences for the transferring country. In 2013, coordination between various ministries, government the CDM Executive Board adopted a procedure that institutions, and agencies that manage the NDC would allow host countries to withdraw their letter of ARTICLE 6 APPROACH PAPER 2 12 process and Article 6-related functions is important. As such, government at its highest level needs to make coordination a requirement by law, decree, or 9. Sustainability regulation. The coordination structure should reflect the way the NDC is set up to ensure that sectors and ministries/agencies responsible for meeting targets of the institutional are directly involved. The coordination meetings should be chaired by the coordinating ministry/agency framework with experience in climate-related processes. In setting up an institutional and governance framework, one important aspect for consideration is the cost of implementing the framework and 8. Infrastructure for options to adequately finance it. While outsourcing methodology development and the independent assessment process12 could minimize the government’s operationalization burden, the resources needed for key institutions’ policy coordination, oversight, and administrative support should be identified at the beginning to Workflow management systems are key pieces of ensure their sustainability. These resources could technical infrastructure needed to support these new include budgetary support from the government or country institutions and processes. The systems could levying a fee on Article 6 transactions. Also, in the track the decision-making process and documentation case of setting up essential yet costly infrastructure for project authorization and approval, unit issuance, such as national registries for UNFCCC reporting, and transfer execution. Most crediting schemes have countries could explore the possibility of aggregating some form of workflow management, particularly when and sharing services at the regional level or multiple organizations need to provide documentation using services from third-party providers or the and contribute to decisions. Digitalizing the workflow UNFCCC to minimize costs for seller countries. system (such as using online templates for all data input, analysis, and calculations) and using digital infrastructure (such as MRV and registry systems) 10. Practical could increase the efficiency and reliability of processes and systems in the project cycle.11 In addition, the ongoing work in many countries to develop national registries will be important for managing Article 6 transactions and tracking units for domestic CPIs. examples and considerations for pilots The Standardized Crediting Framework (SCF), currently piloted in Senegal and Rwanda (see references in section 9), is a good example of an emerging Article 6 activity. The SCF pilots a simplified crediting approach, initially focused on energy access, for the Paris Agreement that builds on the lessons learned from the CDM. The Senegal and Rwanda schemes See proposals by the Climate Ledger Initiative 11 are funded by the World Bank’s Carbon Initiative for https://climateledger.org/, as well as Classen et al. (2012). Development (Ci-Dev) and target rural electrification 12 By using independent international standards like Gold Standard, and improved cookstoves, respectively. Importantly, Verra, and CDM, for example. 13 COUNTRY PROCESSES AND INSTITUTIONAL ARRANGEMENTS FOR ARTICLE 6 TRANSACTIONS the SCF program cycle only verifies emission One difference in the SCF process, however, is that reductions and does not yet include a process for validation and verification are combined, so that issuing units or authorizing transfers. Both transferring the administrator covers the “listing” of the project countries have established a governing board (approval and registration based on simple, objective (covering both decision body and executive body criteria). In terms of composition, both countries in the terminology of this paper), administrator, and have decided that the administrator would be the technical committee. Both pilots use internationally same institution that serves as the CDM designated accredited auditors from the CDM, Gold Standard, national authority and the focal point for the Green and Verra, but are starting to train local auditors for Climate Fund. The technical committees are based a possible national accreditation scheme in future. largely on similar reference groups used for evaluating CDM proposals, but with the addition of specific In terms of functions, the governing board covers expertise related to the pilot program content (such almost all of the policy coordination, oversight, as electrification or cookstoves). For the governing and rulemaking functions. It also covers some board, both countries include key ministries, but implementation functions, such as certifying and Rwanda also chose to include a state-owned issuing emission reduction units (see Figure 3). corporation that oversees energy development and a nongovernmental organization (Figure 4). Figure 3. Standardized Crediting Framework generic governance structure • Approves recommendations from technical committee Executive body (e.g. list of other suitable technologies) (SCF governing • Certifies emission reductions board) • Decides on international transfers of mitigation outcomes • Decides on future development of SCF • Evaluates role of SCF for NDC implementation Technical • Recommends approval of SCF program documents and templates committee (methodologies, monitoring, verification, eligible auditors, etc.) • Recommends rules/guidelines for application of SCF • Lists (i.e. approved and registers) projects and undertakes completeness checks (i.e. during listing and certification) Administrator • Approves and lists eligible auditors • Maintains a registry of emission reduction certificates • Convenes meetings of the governing board Source: Spalding-Fecher et al. (2017) ARTICLE 6 APPROACH PAPER 2 14 Figure 4. Governance structure for Rwanda SCF pilot Executive body • Ministry of Environment (chair); Rwanda Environmental (SCF governing Management Agency (co-chair); Ministry of Infrastructure; board) Rwanda Green Fund; Rwanda Energy Group; IUCN • 15 members, including government, private sector, academia, and civil society Technical • Drawn from the CDM technical committee (Rwanda’s existing committee multi stakeholder committee to review CDM projects) plus additional members • Rwanda Environmental Management Agency Climate Change Administrator & International Operations Department, which serves as the CDM and Green Climate Fund national designated authority Source: Rwandan Environmental Management Agency (REMA) (2018) While in the SCF example the rulemaking be undertaken by an administrator (known as the functions are vested in the executive body, in secretariat in Bangladesh) based in the Department Bangladesh the administrator carries out both of Energy within the Ministry of Environment, Forests, rulemaking and implementation functions. and Climate Change. This administrator would carry out all day-to-day functions, such as approving and The Bangladeshi government is developing an Article registering project proposals, issuing units, and 6 engagement strategy that includes domestic eventually authorizing and recording ITMO transfers. governance arrangements. It is considering allocating The administrator would be responsible for all liaison more of the rulemaking functions to an administrator, with the project proponents and technical committee, in addition to implementation functions. In this model, as well as managing the overall process of generating the combined decision body and executive body and authorizing the use of MOs for identified purposes. (called the governing board in Bangladesh) would be Finally, the technical committee would be an ad-hoc chaired by the Secretary of the Ministry of Environment, body, which would be convened to provide guidance Forests, and Climate Change and would provide only on an as-needed basis (for new types of projects and policy coordination and oversight functions (such applicable methodologies, for example). In summary, as strategic direction and coordination with other the Bangladesh example is one where the administrator ministries). The Ministry would also sign agreements carries out both rulemaking and implementation with other countries on Article 6 cooperation, where functions, while in the SCF example the rulemaking required. The governing board would approve a general functions will be vested in the executive body. policy on Article 6 engagement, which may include a “positive list” of activities that are automatically eligible activities, in order to reduce the transaction costs for project proponents. Most of the rulemaking and implementation functions, however, would 15 COUNTRY PROCESSES AND INSTITUTIONAL ARRANGEMENTS FOR ARTICLE 6 TRANSACTIONS 11. References Broekhoff, Derik, Juerg Fuessler, Noemie Klein, Lambert Schneider, and Randall Spalding-Fecher. 2017. “Establishing Scaled-Up Crediting Baselines under the Paris Agreement: Issues and Options. PMR Technical Note 15.” Washington, DC: World Bank Partnership for Market Readiness. https://openknowledge.worldbank.org/ handle/10986/28785. 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