ANALYSIS: Article 6.2 is moving into an operational phase, but does it face a demand problem?

Quantum Commodity Intelligence - The Article 6 decisions in Baku last month have raised expectations for global carbon trading, but will there be enough demand to meet potential supply, with Indonesia, for instance, telling a conference in December that it had the potential to export hundreds of millions of carbon credits?

Norway added impetus on the buy side, when in Baku it unveiled a $740 million initiative called Norwegian Global Emission Reduction (NOGER) to purchase Article 6.2 credits, although mainly focussed on renewable energy and the phasing out of fossil fuels subsidies.

The Nordic country joins Japan, Switzerland, Sweden, Singapore and South Korea as the current committed countries to buying Article 6 credits, and has Article 6 agreements with Benin, Jordan, Morocco, Senegal and Zambia, as well as Indonesia.

Norway

It is currently uncertain what the demand from Norway will be under NOGER. Its current climate target for 2030, adopted in 2022, is for a reduction in greenhouse gas emissions (GHG) of at least 55% below 1990 levels.

Norway's government expects to agree on a 2035 climate target by the second quarter of 2025, including the use of international offsets, with a consultation on its climate policies open for comment until the end of this year. It has a long term goal of a 90-95% GHG emissions reduction cut below a 1990 baseline by 2050.

Analysis by non-profit Climate Action Tracker in 2022 concluded that Norway would only cut emissions by 21% below 1990 levels by 2030 to 41 million tonnes of carbon dioxide equivalent (tCO2e) based on existing policies. "Norway will need to adopt further policies in order to meet its updated 2030 target," it said at the time.

Switzerland through its appointed 'buyer', the KliK Foundation, is understood to be looking for about 30-40 million credits by the end of 2030. Although KliK said, as of the end of 2023, that the "contractually defined impact" on the climate from the projects it is involved in is to be over 28 million tCO2e by 2030.

South Korea is looking to secure 37.5 million tCO2e through overseas GHG reduction projects by 2030 and has inked several country agreements, as well as project specific deals. However, currently it seems to be well short of the volume it has said is needed to meet its 2030 Paris goals.

The small island state of Singapore has also been prolific in signing Article 6 agreements, with a percentage of certain international carbon credits eligible towards obligations under the country's carbon tax. However, the demand signal is only expected to be about 2 million tCO2e in the short term, according to domestic market players.

Sweden signed Article 6 cooperation deals with Nepal and Zambia in Baku last month, adding to existing agreements with Gabon, Peru, Laos, Mongolia, Morocco, UAE, Uzbekistan and Vietnam, and letters of intention with Bangladesh, Georgia, Ghana, Kyrgyzstan and Sri Lanka. The country has not set a formal target for buying under Article 6.

Supplementary measures

However, a report published in 2020 by the Swedish Energy Agency, which is overseeing the country's participation in Article 6, looking at how Sweden may meet its climate goals gives some insight into what Sweden's buying intentions might be.

The report suggests that 20 million tCO2e by 2030 should come from three "supplementary measures", of which ITMOs is one - with bio carbon capture and storage and Land Use, Land-Use Change and Forestry the others.

The report does not specify how the 20 million tCO2e should be split between the three, but does say that for Sweden's single year 2030 target 3.7 million tCO2e should be from the three areas, with 700,000 tCO2e from ITMOs. "These are not formally adopted targets but it provides an idea of the volumes under discussion," an SEA official told Quantum.

Japan, on the other hand, has for some time said it is looking to procure 100 million tCO2e by 2030 through its Joint Crediting Mechanism (JCM) - an initiative that has been around since 2013 and involves partnerships with developing countries whereby Japan finances emission reduction projects in exchange for carbon credits.

The Asian country has started work to align the JCM with Article 6 - it opened a month-long consultation last week on revised requirements for developers of projects in the scheme, so that functions, such as verification and registration, are greater aligned with rules for the Article 6 carbon markets.

Japan has 29 JCM bilateral agreements in place and over 250 projects in development. However, currently only 770,309 carbon credits have been issued under the JCM, according to the government's JCM website.

The country does have a JCM agreement with Indonesia with 23 projects registered under the scheme currently, mainly energy efficiency or small renewable energy schemes. However, most of these projects are expected to deliver low levels of carbon credits, with only five having average emissions reductions in the thousands, and one over 100,000.

Yet, Indonesia's potential is much more, given its performance in relation to its Paris goals, a government official told a conference last week. Southeast Asia's largest economy is reducing and absorbing greenhouse gas emissions quicker than it pledged under the UN climate pact, meaning that it has had a "surplus" of emissions in 2021 and 2022, Joko Prihatno, a carbon trading expert with Indonesia's Ministry of Environment and Forestry said.

The surplus in 2022 amounted to 168.478 million tCO2 in the forestry sector and 141.35 million tCO2e in the energy sector, he said at the 'Global Carbon Markets Conference by S&P Global Commodity Insights' held in Barcelona. "We have a new government, it needs to decide (on the fate of the surplus)," he told Quantum, referring to President Prabowo Subianto who came into office in October replacing Joko Widodo.

Prihatno said that most of the surplus will likely be made available for projects or programmes to generate carbon credits which then might as well be transferred to other countries under Article 6 of the Paris Agreement.

He said that Indonesia saw a surplus of emissions in 2021 as well, the first year of the Paris era, but he did not specify the volume. "Not all years until 2030 will be like the one in 2021 and 2022, we may see years when we do not overperform our trajectory," he pointed out, suggesting that the government would not give all of the surplus for carbon projects every year.

Indonesia has an unconditional emissions reduction target of 29% by 2030 compared with business-as-usual, drawing up a declining emissions trajectory for the economy including sectoral caps for the forestry and energy sectors.

Forestry

Prihatno said that for the forestry sector, the government's priority is to use the surplus for REDD+ initiatives under the World Bank's Forest Carbon Partnership Facility, which targets habitat conservation in the Indonesian province of East Kalimantan on the island of Borneo. "For the surplus in the energy sector the priority is carbon trade either domestically or internationally," he said.

Domestically offsets from emission reduction projects can be used for compliance by the 99 coal-fired power plants that have been covered by a new emissions trading system since the start of the year, he said. The scheme initially covers coal-fired power plants that have capacity of 100MW or more and are directly connected to grids owned by state utility Perusahaan Listrik Negara. But this will rise to 146 in 2024 when facilities of 25MW or more join the scheme.

On the sidelines of Baku climate talks, Indonesia and Japan signed a "mutual recognition arrangement" on carbon credit trading, with a particular focus on Article 6.2. Prihatno said that the Indonesian government is in talks with the government of South Korea to replicate the agreement with Japan, having signed a memorandum of understanding with Korea to explore cooperation in June.

"Through this MRA, we want to formulate and develop concrete projects for emission reduction in Indonesia, and based on that experience, both countries can also contribute to global emission reduction," said Yutaka Matsuzawa, Japan's Vice Minister for Global Environment Affairs at the Ministry of Environment said in a statement released during COP29.

"This MRA ensures that Indonesia's carbon credit system is recognised by partner country authorities, in order to support the achievement of greenhouse gas (GHG) emission reduction targets mandated by the Paris Agreement," the statement said. Carbon credits generated under Indonesia's GHG emissions reduction certification system, known as SPEI, are recognised as equivalent to those in the partner country, it added.

The agreement means that all projects developed between the two countries under Japan's Joint Crediting Mechanism (JCM) will have to be registered in Indonesia's national carbon registry and use the SPEI system. Previously, JCM projects between the two countries were not fully recorded in the host country's registry.