Article 6.2 Unveiled: Bilateral Trading, ITMOs, and the Path to Net-Zero

A decentralised approach for trading emission reductions and removals

Carbon Credits

Project Development

Jan 16, 2025

Carolina Amu Trujillo

This blog marks the final entry in our series exploring the development of the mechanisms of Article 6 under the Paris Agreement after COP29. In our previous blog on Article 6.4, we dive deep into a centralised framework for emissions trading and project development. Now, we turn to Article 6.2, which takes a decentralised, bilateral approach that enables countries to trade emissions reductions and removals. This mechanism has been operational since COP26 in Glasgow, and while progress has been made, challenges remain.

In this blog, we’ll delve into the operational elements, current status, and implications of Article 6.2 for stakeholders like project developers and global climate action.

The Mechanics of Article 6.2

At its core, Article 6.2 facilitates country-to-country trading of emissions reductions and removals, known as Internationally Transferred Mitigation Outcomes (ITMOs). By allowing nations to share mitigation outcomes, the mechanism aims to mobilise much-needed capital and encourage high-integrity climate programs.

Key Participation Conditions

For a country to participate in Article 6.2, it must meet several criteria:

Be a signatory to the Paris Agreement.
Have submitted a Nationally Determined Contribution (NDC).
Establish systems for authorising, tracking, and reporting ITMOs.
Provide up-to-date national inventory reports.

These elements ensure that participation is transparent and aligned with each nation's climate goals.

Understanding ITMOs

ITMOs are the building blocks of Article 6.2, measured in metric tonnes of CO₂ equivalent. They can represent:

Emission reductions and removals.
Co-benefits from adaptation or diversification strategies.
Mitigation outcomes authorised for use in NDCs or other international purposes.

To ensure credibility, ITMOs must adhere to methodologies outlined by the Paris Agreement and be generated from mitigation activities conducted after 2021.

Registries and Transparency

Each participating country maintains a registry to track the lifecycle of ITMOs, from authorisation to use. These registries operate under the oversight of a centralised UNFCCC platform, which ensures consistency and public accountability through:

Unique identifiers for ITMOs.
A database to record adjustments and emissions balances.
Routine expert reviews for accuracy.

Navigating Implementation Challenges

Since its inception, the Article 6.2 mechanism has seen slow but meaningful progress. Notable transactions include agreements between Switzerland and Thailand and Ghana’s authorisation of climate-smart rice projects. However, implementation at the national level remains a challenge.

Key Issues

Institutional Readiness: Many countries lack the systems needed to authorise, track, and report ITMOs effectively.
Balancing Trade-Offs: Host countries must carefully weigh how many ITMOs they export without jeopardising their own NDC targets.
Lack of Uniform Standards: Bilateral agreements are governed by diverse terms, leading to inconsistencies in global practices.
Transparency Gaps: Current guidelines do not mandate pre-trade disclosures, limiting visibility into deal specifics.

Implications for Project Developers

For project developers, Article 6.2 presents both opportunities and uncertainties:

Increased Demand and Funding

With several bilateral agreements already in place, demand for Article 6.2 credits is growing. Developers, particularly in developing nations, can access new funding sources, capacity-building initiatives, and advanced technologies.

Flexibility in Participation

Unlike the standardised system under Article 6.4, Article 6.2 allows developers to negotiate terms within bilateral agreements, creating more tailored opportunities.

Uncertainty for Legacy Projects

The UNFCCC’s requirement for post-2021 mitigations leaves the status of older projects unclear, posing potential barriers for those seeking to transition under Article 6.2.

The Road Ahead

As countries ramp up efforts to achieve their 2030 climate goals, and as reductions, removals and mitigations under Article 6.2 and 6.4 mechanisms need to be in line with updated NDCs, it can be expected that there would be a boost in demand and participation under the Article 6 mechanisms. With the conclusion of several bilateral agreements between countries following COP29, Article 6.2 is poised to play a pivotal role in international cooperation.

The mechanism offers new avenues for collaboration, funding, and innovation for project developers. Recent progress, including agreements reached post-COP29, suggests that operational challenges will diminish as nations gain experience with bilateral trading. Additionally, with agreement-specific criteria and methodologies, developers have more options for participation.

While the lack of precedents in actual trades and practical issues in national implementation pose challenges in fully operationalising the 6.2 mechanism, with the increasing number of agreements signed, operational challenges will be resolved as countries gain more experience in bilateral trading. With the potential to unlock significant mitigation outcomes, Article 6.2 represents a powerful tool in the global fight against climate change—one that will continue to evolve as countries and stakeholders refine its implementation.