Allowing the use of credits issued under Article 6 of the Paris climate agreement for compliance with the EU's carbon border adjustment mechanism (CBAM) could provide flexibility for developing countries that lack the capacity to set up their own carbon pricing systems in response to the measure, delegates at a conference in Lisbon, Portugal, heard today.
The CBAM regulation provides for a carbon price already paid on a product in its country of origin to be deducted from CBAM costs, providing an incentive for countries importing products covered by the measure to the EU to introduce equivalent carbon pricing systems.
But developing countries often lack the capacity to enact such policies, the chief sustainability and innovation officer at ACT Group, Federico di Credico, told delegates, and allowing the use of Article 6 credits for compliance could provide an alternative.
This could in one form take place implicitly, di Credico said, if CBAM liabilities are adjusted down in relation to pricing systems that themselves allow some compliance using Article 6 credits. An example of this is Singapore, where 5pc of the country's carbon tax can be offset through the purchase of Article 6 internationally traded mitigation outcomes (Itmos).
A more direct inclusion of Article 6 credits for compliance could entail a calculation on a euro-for-euro basis, di Credico suggested, for example reducing a CBAM liability of €100 to €50 if the importer has purchased €50-worth of Article 6 credits. Using a tonne-for-tonne basis would not work because the CBAM is not volume based, he said.
But the uncertainty surrounding Article 6 credits means that their inclusion would bring an added layer of complexity to the CBAM, Cedric de Meeus of cement producer Holcim said. Article 6 credits are not usable in the EU emissions trading system (ETS), which forms the reference price for the CBAM, he pointed out, while not all activities producing Article 6 credits would be equivalent to the deep decarbonisation being carried out by European industry.
It remains unclear how the EU will take into account carbon prices in other jurisdictions for the purposes of the CBAM. The CBAM regulation includes the ability to credit a "carbon price… effectively paid in the country of origin" but does not define what falls within this term, and the implementing regulation that will provide further detail on the matter has not yet been tabled.
Article 6 of the Paris deal provides for two carbon pricing mechanisms allowing countries to collaborate voluntarily to reduce their emissions. Article 6.2, which is already fully operational, produces Itmos through bilateral agreements on emissions reduction or removal projects, while Article 6.4 establishes the soon-to-be-implemented Paris Agreement Crediting Mechanism (Pacm), a UN-regulated global carbon crediting system.
