Emerging Fundamentals in Climate Mitigation Through ITMO Transactions Under Paris Agreement Article 6.2

Article 6.2 of the Paris Agreement that was approved by the 21st session of the Conference of the Parties to the United Nations Framework Convention on Climate Change ("UNFCCC") provides a framework for countries to transfer greenhouse gas ("GHG") mitigation outcomes to other countries, or to parties based in other countries. These transferred climate change mitigation outcomes are a specific type of carbon credit, referred to as Internationally Transferred Mitigation Outcomes ("ITMOs"). Rules for parties wishing to enter into ITMO transactions are starting to emerge. These rules, along with ITMO transactions that parties are entering into, provide guidance on how countries can work across national borders to achieve greater ambition in reducing their GHG emissions or removing GHGs from the atmosphere.

Article 6.2 of the Paris Agreement

Article 6.2 of the Paris Agreement provides a decentralized framework for countries that are parties to the Paris Agreement to enter into bilateral or multilateral arrangements, known as "cooperative approaches."¹ These arrangements are intended to facilitate the transfer of one country's GHG emissions reductions or removals to other countries seeking to use those reductions or removals. Countries can use these reductions or removals towards their own contribution to the global response to climate change under Article 4.2 of the Paris Agreement, referred to as Nationally Determined Contributions ("NDCs"), or for other purposes.² The GHG emission reductions or removals transferred under Article 6.2 are a specific type of carbon credit known as ITMOs.³

The country procuring ITMOs under Article 6.2 is the "host country" in which the project or activity giving rise to the GHG emission reductions or removals is based. For host countries procuring ITMOs, often based in the Global South, ITMOs transactions are an innovative way to channel investments into low-carbon projects that contribute to their sustainable development.⁴ For the receiving country, ITMOs transactions enable it to take on greater ambition in setting its NDC by allowing it to finance projects or activities in geographic locations where GHG emissions reductions or removals can be achieved in a more cost-effective manner.⁵ Alternatively, receiving countries may choose not to count the ITMOs towards their NDC, but may instead use them to complement their NDC.⁶

In line with the incremental approach of the international climate change regime, the Paris Agreement laid out a high-level framework for engagement in "cooperative approaches" under Article 6.2, leaving most of the details as to how this would work in practice to be agreed at each subsequent session of the Conference of the Parties ("COP") serving as a Meeting of the Parties to the Paris Agreement.⁷ Initial rules on the functioning of Article 6.2 were tabled at the 26th session of the COP ("COP26") in 2021,⁸ and further progress was made at the 27th session of the COP ("COP27") in 2022.⁹

Key requirements for ITMOs transactions

While Article 6.2 leaves it open for countries to tailor their cooperative approaches to the particular circumstances of each case, the guidelines agreed at COP26 and COP27 (collectively, the "Article 6 Rulebook") lay down certain rules which countries must comply with in structuring these arrangements.¹⁰

In particular, the Article 6 Rulebook establishes an accounting framework in respect of Article 6.2 which is designed to avoid double-counting GHG reductions or removals by requiring countries to apply what are known as "corresponding adjustments" when transferring ITMOs.¹¹ To prevent double-counting, the project host country is required to deduct the transferred GHG emission reductions or removals from its own inventory upon transferring ITMOs to another country.¹² Where the receiving country is authorized to count the ITMOs towards its NDC, it will also apply a corresponding adjustment.¹³

In their reporting, countries must also include information on how each cooperative approach meets certain social and environmental standards.¹⁴ These include demonstrating that the cooperative approaches do not lead to an increase in global GHG emissions, that conservative baselines are adopted,¹⁵ and that the risk of non-permanence¹⁶ of mitigation outcomes over the long term is minimized.¹⁷ Countries must also report on how cooperative approaches minimize, and where possible avoid, negative environmental, economic and social impacts, and how cooperative approaches are consistent with and contribute to sustainable development.¹⁸

ITMOs must also satisfy requirements that claimed GHG emission reductions or removals are "real, verified and additional".¹⁹ The principle of "additionality" requires that ITMOs should only be transferred in respect of GHG emission reductions or removals that would not have occurred in the absence of the incentives created by the carbon credit revenues.²⁰

Structuring of ITMOs transactions

Article 6.2 aims to facilitate cooperative approaches between countries, which typically sign bilateral agreements for the transfer of ITMOs.²¹ Governments can also agree for companies to trade ITMOs within the overarching frameworks established by these agreements, thus creating opportunities for private sector participation in ITMOs transactions.²² In this scenario, ITMOs transactions would have a two-tier structure:

• Bilateral governmental agreement. Bilateral governmental agreements, usually referred to as a "Cooperation Agreements" or "Implementing Agreements", are signed between the project host country in which the activity giving rise to the GHG emission reduction or removals is based, and the country which will receive the ITMOs.²³ This sets out the framework for cooperation between the two countries, within which transactions for the transfer of ITMOs (including private sector transactions) can be agreed.²⁴ The governmental agreement sets out minimum quality criteria which ITMOs transferred under the framework must satisfy in relation to the environment, human rights and contributing to sustainable development.²⁵ In addition, the agreement sets out the agreed government procedure for authorizing, verifying and recognizing the transfer of ITMOs, for applying corresponding adjustments, and for reporting on their cooperative approaches.²⁶
• Commercial agreements. Within the framework established by the bilateral governmental agreement, third parties may sign commercial agreements for transferring ITMOs in respect of particular projects.²⁷ These agreements set out the relevant commercial terms for each ITMOs transaction, including the number of credits to be transferred, the payment structure and pricing.²⁸ The transfer of ITMOs under the commercial agreement is conditional on authorization of the proposed activity or project by the countries that are party to the overarching bilateral agreement.²⁹ The governments that are party to the bilateral agreement will not generally be parties to the commercial agreement. The exception to this is if the mitigation project is owned or the mitigation outcomes are sold by the project host country government, in which case that government may be a party to the agreement – and may directly sell ITMOs to the relevant private entity.³⁰

For example, the framework established by the bilateral agreement between Switzerland and Peru expressly recognizes that ITMOs can be used by private entities domiciled in Switzerland or Peru. Pursuant to this framework, the Swiss Foundation for Climate Protection and Carbon Offset ("KliK Foundation") entered into a commercial agreement with Microsol S.A.S. (a French company with subsidiaries in Peru) to support the use of energy efficient cook-stoves in Peru.³¹ Through this arrangement, the KliK Foundation acquires ITMOs on behalf of certain corporations that are required to offset GHG emissions generated by the use of motor fuels under the Swiss CO2 Act.³² The KliK Foundation is involved in similar projects in Georgia, Malawi, Peru and Senegal, among other countries.³³

The procedure for ITMOs transactions

In terms of procedure, ITMOs transactions typically involve the following steps:

• Authorization. Authorization of ITMOs is required under Article 6.2.³⁴ The entity wishing to issue ITMOs in respect of a particular activity in the host country submits a request for authorization to both countries that are party to the bilateral agreement.³⁵ Both countries must then agree to an authorization statement referencing the activity in respect of which the mitigation outcomes originate, the standards and baseline methodologies applied, the crediting period, the maximum amount of mitigation outcomes in respect of which transfer and use is authorized, and, where applicable, the NDC period(s) during which the ITMOs are authorized for use.³⁶ Once both countries have agreed the authorization statement, the transfer of mitigation outcomes is authorized.³⁷
• Monitoring, verification and examination. The entity developing the mitigation activity in the project host country is responsible for preparing monitoring reports demonstrating that the activity meets various requirements, including in relation to social and sustainable development impacts, which it submits to an independent third-party entity approved by each country to the bilateral agreement for the purposes of verifying the reports.³⁸ Once verified, each country must examine the verified monitoring reports to confirm that all relevant requirements are met, including that there are no discrepancies between the monitoring reports and the provisions of the authorization statement.³⁹
• Recognition of transfer. In order for the transfer of ITMOs to be carried out, both countries which are party to the bilateral agreement issue domestic units in respect of the mitigation outcomes in their respective registries.⁴⁰ Following this, the project host country cancels the units in its domestic registry system, while simultaneously, the receiving country will re-issue the cancelled units as "international attestations" in its registry.⁴¹ If any third party entities are involved in the purchase of the ITMOs (for example, in the case study mentioned above, the KliK Foundation), they are issued to such third party upon "recognition" by both countries that the mitigation outcomes have been added to the receiving country's registry.⁴²
• Corresponding adjustment. Once both countries have issued domestic units for tradable or transferred mitigation outcomes, the final step is for both countries to apply the respective corresponding adjustment, which is to be reported by the countries.⁴³ This effectively involves the project host country deducting the transferred GHG emission reductions or removals from its own inventory, so that the receiving country can count them in their own GHG inventory.⁴⁴

In addition, countries participating in cooperative approaches are required to prepare various reports on their activities under Article 6.2. These include: (i) an initial report, to be submitted no later than authorization of ITMOs or in conjunction with the next biennial transparency report,⁴⁵ (ii) annual information for recording in the Article 6 database,⁴⁶ and (iii) other regular information to be included as an annex to biennial transparency reports.⁴⁷ The information on cooperative approaches set out in these reports is subject to a centralized technical expert review overseen by the UNFCCC to ensure that the information provided by participants meets the requirements set out in the COP guidelines.48

ITMOs transactions to date

Although still in its infancy, various countries have agreed frameworks to enter into "cooperative approaches" under Article 6.2. In particular, Switzerland has committed to purchasing ITMOs from countries including Ghana, Peru, Senegal, Georgia and Vanuatu, among others.⁴⁹ In addition, Singapore has concluded Article 6.2 agreements with countries including Ghana,⁵⁰ Peru,⁵¹ Papua New Guinea⁵² and Japan.⁵³ Likewise, Sweden, acting through the Swedish Energy Agency, has agreed to acquire ITMOs from countries including Ghana,⁵⁴ and is collaborating with the Global Green Growth Institute to transact ITMOs with Nepal⁵⁵ and Cambodia.⁵⁶ Other countries, including South Korea and Vietnam, have also entered into bilateral agreements to transfer ITMOs,⁵⁷ while further countries, such as Gabon and the Kingdom of Bhutan, have set out an intention to do so.⁵⁸ Japan has launched the "Article 6 Implementation Partnership", which aims to support the implementation of Article 6.2 by sharing best practices and know-how.⁵⁹

Ghana is at the forefront of host countries seeking to enter into cooperative approaches under Article 6.2,⁶⁰ having recently announced an Article 6.2 project, which aims to support training rice farmers in sustainable agricultural practices and reduce methane emissions.⁶¹

ITMOs transactions going forward

Despite these recent forays into ITMOs transactions, challenges for expanded implementation exist.

Uncertainties and risks remain for private sector entities involved in ITMOs transactions. In particular, private sector entities which have acquired ITMOs face the risk that the governmental parties to the agreement will not carry out the corresponding adjustments which they are required to under the Article 6.2 rules.⁶² In such a scenario, it is unclear how the status and value of the credits would be affected by the corresponding adjustments not having been carried out.⁶³

Another area of uncertainty relates to the fact that, according to the Article 6 guidance, ITMOs cannot be banked between NDC implementation periods.⁶⁴ This creates a risk that the supply of ITMOs could dry up near the end of the NDC period, causing liquidity issues and presenting challenges for countries or entities wishing to sell ITMOs.⁶⁵

There are also uncertainties regarding how, or if, ITMOs can be operationalized within existing mandatory emissions trading schemes, such as the EU's Emissions Trading System. The EU and Switzerland have announced that they intend to enable the transfer of emission allowances between their respective emissions trading systems using the Article 6.2 mechanism,⁶⁶ but questions remain as to how this will be achieved.⁶⁷

In addition, general macroeconomic trends may also hamper the expansion of ITMOs transactions. Borrowing costs have risen, but debt financing remains the dominant form of financing in sustainable finance markets. Climate change mitigation projects must compete for financing with resurgent demand for fossil fuel projects in emerging market and developing economies.⁶⁸

Despite these uncertainties and risks, cooperative approaches under Article 6.2 are likely to become increasingly common over the coming years. At COP27, some details were agreed regarding infrastructure needed to support Article 6.2, including registries, an Article 6 database, and a centralized accounting and reporting platform, but some of the necessary infrastructure is still to be created.⁶⁹ Additional procedural issues, including those related to granting authorization of ITMOs and what process a country should follow to manage changes to how an ITMO is used, will likely be considered at the 58th sessions of the UNFCCC Subsidiary Body for Implementation and Subsidiary Body for Scientific and Technological Advice in June 2023, and at the 28th session of the Conference of the Parties to the UNFCCC in November and December 2023.

Further reading

• Negotiations on Carbon Credits Expected to Continue at COP27 (21 September 2022)
• Article 6 of the Paris Agreement: Opportunities for Africa (12 December 2022)
• Energy Transition & Industry Impact – Carbon Trading (10 November 2021)
• Scaling voluntary carbon markets: Opportunities and challenges (21 October 2021)
• Scaling Voluntary Carbon Markets: Phase II Report (30 July 2021)
• Scaling Voluntary Carbon Markets: Phase II Public Consultation (16 June 2021)
• Scaling Voluntary Carbon Markets: The Final Report (18 February 2021)

_{1 This is to be contrasted with the more centralized framework for the creation of a global carbon credit market under Article 6.4 of the Paris Agreement, overseen by a "Supervisory Body" that is to be appointed by the Conference of Parties serving at the meeting of the Parties to the Paris Agreement (the "CMA").
2 Paris Agreement, Articles 4.2 and 6.2, available here; "Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Decision 2/CMA.3, available here.
3 "Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Decision 2/CMA.3, available here.
4 "Frequently Asked Questions on Article 6 of the Paris Agreement and Internationally Transferred Mitigation Options (ITMOs)", United Nations Development Programme, available here. Climate mitigation projects could indirectly or indirectly yield development benefits including job creation, access to energy, support to livelihoods, food security and gender empowerment.
5 "Frequently Asked Questions on Article 6 of the Paris Agreement and Internationally Transferred Mitigation Options (ITMOs)", United Nations Development Programme, available here.
6 For example, Switzerland is entering into cooperative approaches with Ghana and Vanuatu to reduce its federal administration's GHG emissions, but these ITMOs will be complementary to its NDC, rather than counted towards it. See "Ghana, Vanuatu, and Switzerland launch world's first projects under new carbon market mechanism set out in Article 6.2 of the Paris Agreement", United Nations Development Programme, 12 November 2022, available here.
7 Paris Agreement, Articles 4.2 and 6.2, available here.
8 With regard to Article 6.2, progress was made at COP26 on the definition of ITMOs, participation requirements for countries, the application of corresponding adjustments, reporting rules and the establishment of registries. See "Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Decision 2/CMA.3, available here.
9 With regard to Article 6.4, guidance was agreed at COP27 in relation to the implementation of registries (including national registries to be set up by countries, and an international registry to be set up by the secretariat), the creation of a centralized accounting and reporting platform and an Article 6 database, as well as guidelines in respect of the Article 6 technical expert review. See "Matters relating to cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Draft decision -/CMA.4, available here.
10 "Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Decision 2/CMA.3, available here.
11 "Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Decision 2/CMA.3, Annex, paragraph 6, available here.
12 "Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Decision 2/CMA.3, Annex, paragraphs 7 - 15, available here.
13 By contrast, where the ITMOs have been authorized other than for NDC use, such as for "other international mitigation purposes" (including CORSIA-use) or for "other purposes" (such as use in the voluntary carbon markets), the receiving country is not required to apply a corresponding adjustment. The selling country, on the other hand, must apply a corresponding adjustment in all circumstances. See "Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Decision 2/CMA.3, Annex, paragraph 1 and Section III.B, available here.
14 "Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Decision 2/CMA.3, Annex, paragraph 22, available here.
15 The "baseline" calculation represents what the GHG emissions would have been if the activity giving rise to the mitigation outcome had not been implemented. For example, if carbon credits are issued in respect of a carbon capture, utilization and storage project, the baseline analysis calculates the GHG emissions which would have been released but for the implementation of the project.
16 Non-permanence refers to the risk of GHG emission reductions or removals achieved by an activity being reversed, for example if there is a forest fire or other unforeseen circumstance. In addition, it refers more broadly to situations where GHG emissions in respect of a particular activity rise above the level that was projected in the baseline scenario analysis, meaning that the estimated GHG emission reductions or removals are overstated.
17 "Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Decision 2/CMA.3, Annex, paragraph 22(b), available here.
18 "Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Decision 2/CMA.3, Annex, paragraph 22(f) and (h), available here.
19 "Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Decision 2/CMA.3, Annex, paragraph 1(a), available here.
20 Although the term "additional" is not defined in the Article 6.2 guidance, the definition of additionality in the guidance on Article 6.4 is likely to be authoritative. See "Guidance on cooperative approaches referred to in Article 6, paragraph 4, of the Paris Agreement", Decision 3/CMA.3, Annex, paragraph 1, available here.
21 To participate in cooperative approaches, the country must be a party to the Paris Agreement, have prepared and communicated its NDC, have arrangements in place for authorizing the use of ITMOs towards the achievement of NDCs, and have provided its most recent national GHG inventory report. See Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Decision 2/CMA.3, Annex, paragraph 4, available here.
22 "Article 6 Transaction Structures", World Bank et al., 21 April 2022, section 3.1, available here; "Frequently Asked Questions on Article 6 of the Paris Agreement and Internationally Transferred Mitigation Options (ITMOs)", United Nations Development Programme, available here.
23 See, e.g., Cooperation Agreement between the Swiss Confederation and the Republic of Ghana Towards the Implementation of the Paris Agreement, 24 November 2020, available here.
24 The bilateral agreement does not oblige the host country to transact a certain number of ITMOs. Rather, it creates a framework for the two countries to authorise individual transactions under which ITMOs are to be transferred.
25 Cooperation Agreement between the Swiss Confederation and the Republic of Ghana Towards the Implementation of the Paris Agreement, 24 November 2020, Articles 3 – 4, available here.
26 Cooperation Agreement between the Swiss Confederation and the Republic of Ghana Towards the Implementation of the Paris Agreement, 24 November 2020, Articles 5 – 12, available here.
27 "Article 6 Transaction Structures", World Bank et al., 21 April 2022, section 3.1, available here.
28 For example, in a pilot ITMO engagement between Switzerland and Peru, Swiss foundations provided financing for Microsol S.A.S., a French company, to install energy-efficient cook-stoves in rural Peruvian communities under a commercial agreement, with the resulting ITMOs transferred under a separate Mitigation Outcome Purchase Agreement; both agreements are operationalized under the framework of the bilateral agreement between Switzerland and Peru. See "Article 6 Transaction Structures", World Bank et al., 21 April 2022, section 3.1, available here.
29 Cooperation Agreement between the Swiss Confederation and the Republic of Ghana Towards the Implementation of the Paris Agreement, 24 November 2020, Articles 6.2 and 8 available here.
30 "Article 6 Transaction Structures", World Bank et al., 21 April 2022, section 3.1.2, p.5, available here.
31 "Tuki Wasi Receives Prestigious Environmental Recognition", Microsol International, 16 May 2022, available here.
32 KliK Foundation Annual Report 2021, available here.
33 See KliK Foundation’s website, accessible here.
34 See "Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Decision 2/CMA.3, Annex, paragraph 1, available here.
35 See, e.g., Cooperation Agreement between the Swiss Confederation and the Republic of Ghana Towards the Implementation of the Paris Agreement, 24 November 2020, Article 5.2, available here.
36 See, e.g., Cooperation Agreement between the Swiss Confederation and the Republic of Ghana Towards the Implementation of the Paris Agreement, 24 November 2020, Article 6, available here.
37 See, e.g., Cooperation Agreement between the Swiss Confederation and the Republic of Ghana Towards the Implementation of the Paris Agreement, 24 November 2020, Article 5.4 and 5.6, available here.
38 See, e.g., Cooperation Agreement between the Swiss Confederation and the Republic of Ghana Towards the Implementation of the Paris Agreement, 24 November 2020, Article 7, available here.
39 See, e.g., Cooperation Agreement between the Swiss Confederation and the Republic of Ghana Towards the Implementation of the Paris Agreement, 24 November 2020, Article 7, available here.
40 See, e.g., Cooperation Agreement between the Swiss Confederation and the Republic of Ghana Towards the Implementation of the Paris Agreement, 24 November 2020, Article 8, available here; "Article 6 Transaction Structures", World Bank et al., 21 April 2022, section 3.1.2, p.5, available here. A country that does not have its own registry can use an international registry that is to be set up by the UNFCCC Secretariat.
41 "Article 6 Transaction Structures", World Bank et al., 21 April 2022, section 3.1.2, p.5, available here.
42 "Article 6 Transaction Structures", World Bank et al., 21 April 2022, section 3.1.2, p.6, available here.
43 See, e.g., Cooperation Agreement between the Swiss Confederation and the Republic of Ghana Towards the Implementation of the Paris Agreement, 24 November 2020, Article 10, available here; "Article 6 Transaction Structures", World Bank et al., 21 April 2022, section 3.1.2, pp.5 - 6, available here.
44 "Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Decision 2/CMA.3, Annex, paragraphs 7 - 15, available here.
45 "Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Decision 2/CMA.3, Annex, paragraph 18, available here.
46 "Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Decision 2/CMA.3, Annex, paragraph 20, available here.
47 "Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Decision 2/CMA.3, Annex, paragraph 21, available here.
48 "Guidance on cooperative approaches referred to in Article 6, paragraph 4, of the Paris Agreement", Decision 3/CMA.3, Annex II, available here.
49 Switzerland has agreed to enter into cooperative approaches with Ghana, Peru, Senegal, Georgia, Vanuatu, the Dominican Republic, Thailand, Ukraine, Malawi, Chile and Uruguay. See Swiss Federal Office for the Environment, Bilateral Climate Agreements, available here.
50 "Singapore and Ghana Substantively Conclude Negotiations on Implementation Agreement on Cooperative Approaches aligned with Article 6 of the Paris Agreement", Ministry of Sustainability and the Environment of Singapore, 15 November 2022, available here.
51 "Singapore and Peru to Collaborate on Carbon Markets to Advance Climate Ambition", Ministry of Sustainability and the Environment of Singapore, 18 November 2022, available here.
52 "Singapore and Papua New Guinea to Collaborate on Advancing Climate Actions and Ambition", Ministry of Sustainability and the Environment of Singapore, 14 November 2022, available here.
53 "Launch Event of the Article 6 Implementation Partnership at the COP27 Japan Pavilion", Ministry of Sustainability and the Environment of Singapore, 16 November 2022, available here.
54 "Ghana-Sweden Cooperative Approach under Article 6.2 of the Paris Agreement", Carbon Market Office of Ghana, available here.
55 "GGGI facilitates Memorandum of Understanding between Nepal and Sweden for bilateral cooperation under Article 6 of the Paris Agreement", Global Green Growth Institute, 9 June 2022, available here.
56 See "Article 6 Transaction Structures", World Bank et al., 21 April 2022, section 3.2, available here.
57 "Signing Ceremony for ROK-Vietnam Climate Change Agreement Takes Place", Ministry of Foreign Affairs of South Korea, 1 June 2021, available here.
58 See, e.g., "COP27: South Korea, Gabon flag potential Article 6 partnership", Carbon Pulse, 8 November 2022, available here.
59 See Paris Agreement Article 6 Implementation Partnership, website accessible here.
60 Ghana was one of the first countries to adopt the legal framework necessary for transferring ITMOs under Article 6.2, including through the creation of a Carbon Market Office and a National Article 6 Framework, in addition to the already existing Ghana Carbon Registry.
61 "Ghana, Vanuatu, and Switzerland launch world's first projects under new carbon market mechanism set out in Article 6.2 of the Paris Agreement", 12 November 2022, available here. The project is being developed in partnership with the United Nations Development Programme ("UNDP"), which channels payments to private sector project proponents investing in low-carbon solutions using a "payment-for-result" mechanism. This mechanism incentivizes private sector investments by creating additional revenue for ITMOs and reducing risk. UNDP estimates that for projects under this mechanism, private sector investments will be equivalent to up to four times the carbon payments generated by ITMOs. Thus the additional funding from UNDP serves to make these investments bankable.
62 As explained above, the transfer of ITMOs to private sector entities occurs upon 'recognition' by both countries that the ITMOs have been added to the receiving countries registry, rather than upon the countries carrying out corresponding adjustments. See "Article 6 Transaction Structures", World Bank et al., 21 April 2022, section 3.1.2, pp.6-7, available here.
63 "Article 6 Transaction Structures", World Bank et al., 21 April 2022, section 3.1.2, p.7, available here.
64 "Guidance on cooperative approaches referred to in Article 6, paragraph 2, of the Paris Agreement", Decision 2/CMA.3, Annex, paragraphs 8 – 9, available here.
65 The underlying rationale for this rule is to incentivize countries to work towards the achievement of their NDC through direct GHG emission reductions or removals in their own jurisdictions, rather than relying on the carbon markets. However, certain policy makers have called on the UNFCCC to consider changing the rules under Article 6 so as to allow the banking of ITMOs between NDC implementation periods, on the basis that this would greatly facilitate the use of the Article 6 trading mechanism. See "Prospects for Markets for Internationally Transferred Mitigation Outcomes under the Paris Agreement", Jon Strand (World Bank Group), May 2022, available here.
66 "Accounting for the linking of Emissions Trading Systems under Article 6.2 of the Paris Agreement", International Carbon Action Partnership, available here.
67 For example, defining ITMOs units as tonnes of carbon dioxide equivalent could facilitate the linkage of ITMOs with various emissions trading schemes; however, each ETS would need to alter its framework to ensure that acceptance of ITMOs would not effectively increase the overall cap on emissions credits. "Linking Emissions Trading Systems with Different Offset Provisions," European Union Institute, February 2022, available here.
68 A recent report by the International Monetary Fund highlighted the need for expanded private sector investment in host-country projects to foster a robust market for ITMOs, but noted that the general lack of robust climate data and disclosures in the Global South jurisdictions where ITMOs projects are likely to be based makes it difficult to analyse the risks and benefits of investments. See "Scaling up Private Climate Finance in Emerging Market and Developing Economies: Challenges and Opportunities," International Monetary Fund (Oct. 2022), available here.
69 "Guidance on cooperative approaches referred to in Article 6, paragraph 4, of the Paris Agreement", Decision 3/CMA.3, Annex, available here.}

Harjas Dhillon (White & Case, Trainee Solicitor, London) contributed to the development of this publication.

Sam McCombs (White & Case, Law Clerk, Houston) contributed to the development of this publication.

Maria Roxo Bacha (White & Case, International Advisor, São Paulo) contributed to the development of this publication.

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