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This advice is provided by third parties in response to Query 99/24

Query:

Based on CMA decisions, when does the host country of an Article 6.4 carbon project generating mitigation outcomes apply the corresponding adjustment, before or after the share of proceeds for adaptation is levied?

Summary

Our analysis of the general sequencing present in the Rules, Modalities and Procedures in Decision 3/CMA.3, the provisions on pending accounts in Decision 7/CMA.4, and the provisions on retrospective authorisation of mitigation contribution A6.4ERs in Decision 6/CMA.6 suggests that, corresponding adjustments are applied after the deduction for the share of proceeds for adaptation. In practice, the application of corresponding adjustments and deduction for the share of proceeds for adaptation may be concurrent (i.e. happen in parallel) where authorised A6.4ERs are first transferred.

While there remains some uncertainty in relation to the precise timing and sequencing of the share of proceeds and corresponding adjustment processes, we expect these will be clarified by the Secretariat’s work (with the approval of the Article 6.4 Supervisory Body) pursuant to paragraph 14 of Decision 6/CMA.6.

Advice

A. Introduction

In this advice, we refer to the following key terms:

• Authorised/authorisation: we refer here to the information provided by the host country to the Article 6.4 Supervisory Body (SBM) pursuant to paragraph 42 of the rules, modalities and procedures for the mechanism established by Article 6, paragraph 4, of the Paris Agreement contained in the Annex to Decision 3/CMA.3, hereafter referred to as RMPs.
• Article 6, paragraph 4, emission reductions: A6.4ERs
• Authorised A6.4ERs (or “AERs”):[1]
  • A6.4ERs authorised for use towards achievement of nationally determined contributions (NDCs) and/or
  • A6.4ERs authorised for other international mitigation purposes (OIMP).
• Mitigation contribution A6.4ERs (MCUs):[2] A6.4ERs not authorised for use towards achievement of NDCs and/or for OIMP, which may be used for initiatives to attract climate finance, such as domestic mitigation pricing measures, for the purpose of contributing to the reduction of emission levels in the host country.

There is a key distinction between AERs for use towards NDCs and AERs for use towards OIMP that is relevant to the present advice, which  relates to the definition of “first transfer”. This is an important distinction because it is the first transfer of AERs that triggers the application of a corresponding adjustment for those units. The two approaches to the ‘first transfer’ are:

• For AERs authorised for use towards NDCs, the “first transfer” is defined as the first international transfer of the AER;[3] and
• For AERs authorised for OIMP, the “first transfer” is defined by the host country as (i) the authorisation, (ii) the issuance or (iii) the use or cancellation of the AER.[4]

B. Transaction procedure

Unless otherwise stated, the steps below, in boxes, are quoted from Annex 1, Decision 7/CMA.4, and our explanation is set out underneath each text box.

The SBM instructs the mechanism registry administrator to issue AERs and MCUs into the pending account.

The mechanism registry administrator assigns the status of A6,4ERs as AERs and/or  MCUs at the time of issuance in accordance with the host country statement.[5]

With respect to the share of proceeds for adaptation (SOP), the mechanism registry administrator “immediately”:

1. Effects a first transfer of 5% of issued AERs from the pending account to the share of proceeds for adaptation account held by the Adaptation Fund. The host country shall apply a corresponding adjustment in respect of this first transfer.[6]
2. Forwards 5% of issued MCUs from the pending account to the share of proceeds for adaptation account held by the Adaptation Fund.

We note that paragraph 20 of Decision 6/CMA.6 grants an exemption from the share of proceeds for adaptation for activities in LDCs and SIDS. LDCs and SIDS can choose to use this exemption or not.

With respect to cancelling A6.4ERs for overall mitigation in global emissions (OMGE), the mechanism registry administrator “immediately”:

1. Cancels (and identifies the cancellation as a first transfer of) a minimum of 2% of issued AERs from the pending account to the mandatory cancellation for OMGE account. The host country shall apply a corresponding adjustment in respect of this first transfer.[7]
2. Cancels a minimum of 2% of issued MCUs from the pending account to the mandatory cancellation for OMGE account.

With respect to the remaining A6.4ERs, the mechanism registry administrator forwards (or effects a first transfer of) remaining issued MCUs or AERs to the holding accounts of activity participants and participating countries involved, in accordance with the instructions of the activity participants.

Where a first transfer of AERs is effected, the host country shall apply a corresponding adjustment.[8]

C. Retrospective authorisation of MCUs

At COP 29 in Baku, Azerbaijan, Parties further clarified retrospective authorisation of MCUs. Unless otherwise stated, the information below is drawn from Decision 6/CMA.6.

A host country can retrospectively authorise MUCs for use towards NDC and/or for OIMP as long as the MCUs have not been transferred in or out of the mechanism registry. A (valid) retrospective authorisation results in such MCUs becoming AERs, and these AERs attract corresponding adjustments.

Decision 6/CMA.6 means a host country may authorise MCUs ‘post issuance’ for use towards NDCs and/or for OIMP by:

• Providing a statement of authorisation to that effect, within the timeframe specified (prior to any transfer of the MCU in or out of the mechanism registry); and
• Applying a corresponding adjustment to the relevant MCUs already forwarded for SOP and cancelled to deliver OMGE

Corresponding adjustments are applied by the host country to these newly authorised A6.4ERs “as if they had been authorised no later than at issuance” (paragraph 14). Among other things, this means that:

• The issued MCUs already forwarded to the SOP account are now retrospectively authorised.
• This authorisation leads to the forwarding now being identified as a first transfer, and
• therefore, subject to a corresponding adjustment (pursuant to para 39, Annex I, Decision 7/CMA.4).

The same applies to the issued MCUs already cancelled for OMGE, pursuant to para 40, Annex I, Decision 7/CMA.4.

The language used in paragraph 12 of Decision 6/CMA.6 intentionally refers to the past tense (“already forwarded for SOP”). This supports the view that a corresponding adjustment arising from retrospective authorisation of a MCU for use towards an NDC and/or for OIMP is applied after MCUs have been forwarded for SOP.

Decision 7/CMA.4 addresses the circumstances in which contemporaneous authorisation of A6.4ERs for use towards an NDC and/or for OIMP occurs. In these circumstances:

• authorisation is assigned at issuance (not restrospectively) and the mechanism registry administrator forwards, by way of effecting a first transfer, of 5% of AERs for SOP; and
• this first transfer is subject to a corresponding adjustment.[9]

In practice, the trigger for applying a corresponding adjustment and first transfer for the SOP may be concurrent (i.e. happen in parallel) where AERs are involved (noting paragraphs 39 and 40 of Annex 1 of Decision 7/CMA.4, which distinguishes between forwarding and first transfer depending on the species of unit involved). This is because when a first transfer of AERs is effected it automatically triggers the application of the corresponding adjustment.

The methods for applying corresponding adjustments are addressed in guidance under Article 6.2 of the Paris Agreement (Decision 2/CMA.3). In practice, the method will be informed by single-year NDCs or multi-year NDCs and other relevant details.[10]

We expect the above processes will be further clarified by the Secretariat’s work (with the approval of the SBM) pursuant to paragraph 14 of the Decision 6/CMA.6:

We would expect this work to also clarify how the different functions of the mechanism registry administrator and the host country for the activity will operate in practice. Specifically on their functions related to the matter of this advice, a practical consideration is that, while it is the former who will effect a first transfer of 5% of AERs to the SOP account, it is the latter who will need to apply the corresponding adjustment for AERs that are first transferred.

[1] Pursuant to Decision 2/CMA.3, annex, paragraph 1(d) and (f); Decision 2/CMA.3, annex, para 42; Decision 7/CMA.4, annex 1, para 29 (a).

[2] Pursuant to Decision 7/CMA.4, annex 1, para 29 (b).

[3] Decision 2/CMA.3, annex, paragraph 2(a) which applies to A6.4ERs pursuant to Decision 3/CMA.3, annex, paragraph 71.

[4] Decision 2/CMA.3, annex, paragraph 2(b) which applies to A6.4ERs pursuant to Decision 3/CMA.3, annex, paragraph 72.

[5] Decision 3/CMA.3, annex, para 42: host country statement to the SBM specifying whether it authorizes A6.4ERs issued for the activity for use towards achievement of NDCs and/or for “other international mitigation purposes” as defined in decision 2/CMA.3, and if any such uses are authorized, the country may provide any applicable terms and provisions, and in the case of A6.4ERs authorized for use for other international mitigation purposes, specifying how it defines “first transfer”.

Decision 6/CMA.6, para 12: the host country can provide an authorisation statement in respect of MCUs already issued. In such case, the authorisation applies from the date of issuance of the MCU prior to any transfer of it in or out of the mechanism registry. The SMB is to consider and determine in 2025 whether there is a need to set a time limit, from the date of issuance to when the host Party shall provide a statement of authorization.

[6] Pursuant to paragraphs 43 and 44 of the RMPs, it is the host country that applies the corresponding adjustment.

[7] Pursuant to paragraphs 43 and 44 of the RMPs, it is the host country that applies the corresponding adjustment.

[8] Pursuant to paragraphs 71 and 72 of the RMPs

[9] paragraph 39, Annex I, Decision 7/CMA.4

[10] See Decision 2/CMA.3 annex paras 7(a) and 7(b), as well as para 18(c); see also Decision 4/CMA.6 annex I. See also Decision 3/CMA.3 annex para 72 “Where a host Party has authorized A6.4ERs for use for other international mitigation purposes pursuant to chapter V.C above (Approval and authorization) above, it shall apply a corresponding adjustment for the first transfer of all authorized A6.4ERs, consistently with Decision 2/CMA.3”.