Blog: How ‘Article 6’ could help our LNG exports

Our blog, 29 November 2023

Article 6 of the international Paris Climate Agreement of 2015 spoke of “voluntary cooperation . . .  to promote sustainable development and environmental integrity.”

And at least in theory, Article 6 could be used to establish an international co-operative system of credits from emissions-reduction projects, and allow for international trade in such credits.

Such credits are called “international transferred mitigation outcomes,” or ITMOs for short, also short-handed as “carbon credits.”

The ITMO system would allow Canada to earn such credits for exports of liquefied natural gas that enable another country (or countries) to lower their emissions by using our cleaner LNG instead of coal to generate electricity.

And it’s long been argued that if Canada receives such credits it should be able to apply them against its own count of greenhouse-gas emissions.

The Canadian Association of Petroleum Producers (CAPP) hailed ITMOs in 2019 as beneficial for Canada in two ways:

  • “They would help Canada achieve its commitments under the Paris Agreement in addition to domestic measures underway.
  • “Canada can grow its natural gas and LNG industries to meet global market demand, helping to reduce global emissions while creating economic growth and jobs across the country.”

CAPP added: “Carbon offsets shared through Article 6 could help incentivize Canadian companies to build liquefied natural gas (LNG) facilities using electrification, producing low-emissions natural gas that could be shipped to markets in Asia and South America.

“This would, for example, help displace coal power production in China, resulting in as much as a 65 percent reduction in GHG emission.”

Right now, though, if Canada produces LNG, the emissions from the production count toward Canada’s national greenhouse-gas inventory. Our exported LNG may reduce an importing country’s GHG numbers, but the difference in emissions affects the importer’s official GHG count, not Canada’s.

When Article 6 came on the scene, some federal ministers suggested that its ITMO credits could and should be used to count against Canada’s own greenhouse-gas emissions. And Ottawa is still expressing interest in this.

But the system and proclaimed benefit hasn’t happened.

Following Article 6’s introduction in 2015,  the “rulebook” for Article 6 was somewhat  refined at the world climate conference of 2021 in Glasgow.

But since then Article 6 has remained bogged down in efforts by governments and working groups to further refine it, to clarify key rules and potential rules and to ensure they are transparent.

Roadblocks to date have included finding strict and internationally recognized ways to ensure that there is no double-counting of emission reductions, and to ensure that any claimed reductions are real and are not just book-keeping fiddles.

The United Nations body working on the Article 6 carbon-credit will submit recommendations to the COP 28 climate conference in Dubai Nov. 30- Dec. 12.

But today, under the current accounting rules of the United Nations Framework Convention on Climate Change (UNFCC), our ITMOs from a foreign sale of Canadian LNG could not be counted against our own emissions.

A new report from the First Nations Climate Initiative on LNG and energy exports says on Article 6: “Internationally transferred mitigation outcomes (ITMOs) will be a difficult path for Canadian LNG to earn carbon credits due to Article 6 constraints on double-counting and additionality.

“Nonetheless, as Article 6 rules are still being implemented and finalized, there is opportunity for Canada and its LNG trading partners to test innovative scenarios and pathways for international carbon credit trading around fuel-switching.”

Jerome Gessaroli, a senior fellow of the Macdonald-Laurier Institute of Canada, has taken a fresh look at Article 6 and what it could do for Canada. And that includes using ITMOs to count against Canada’s own emissions.

Gessaroli writes:

“Canada should announce its intent to use Article 6 (specifically Article 6.2) as a tool to help meet its emissions reduction targets.

“The federal government should then work with industry to identify candidates for bilateral agreements.

“Government-to-government negotiations could then proceed to create a framework under which the resulting cooperative projects would operate. Common methodologies for measuring, tracking, and verifying carbon mitigation outcomes would all need to be developed.

“A registry for tracking and transferring ITMOs would also be needed. These are complex issues, but we can learn from countries like Switzerland, Japan, and Sweden that have already established processes for managing ITMO generating projects.”

Gessaroli sees a key flaw in the current version of article 6. He gives this hypothetical example of two countries, Canada and Malaysia:

“Canada can undertake one of two potential carbon mitigation projects. The first project, in Canada, can reduce GHGs by 8 million tonnes (Mt) per year. The second project is in Malaysia. It costs the same as the Canadian-based project but will mitigate 12Mt of GHGs per year.

“All else equal, almost everyone would agree that Canada should pursue the latter project as it will have the greatest impact on reducing global carbon emissions.

“However, under our basic current climate accounting rules, which Canada and all other UNFCCC parties have agreed to, Canada would receive zero credit towards meeting its own GHG reduction goals if it went ahead with the project in Malaysia, no matter the financial, technological, or other types of help it may have provided. The emissions reduction benefits would all accrue to Malaysia.

“Therefore, Canada would likely undertake the first project within its borders to help meet its own national carbon reduction goals. And that would be unfortunate for the planet’s emission reduction efforts. The focus on emission targets within national borders is a shortfall in the nationally based climate accounting system.”

So, how about a way for Canada to get credits that can be applied to its own emissions?

On our LNG as a way of reducing emissions, Gessaroli notes:

“Coal-fired power plants are expected to produce large amounts of the world’s energy (and GHGs) over the next several decades, even though coal emits much more carbon than other primary fuel sources.

“Even more troublesome is that new coal plants are still being built in significant numbers. Those new plants alone are expected to emit over 1,415 Mt CO2e (mega tonnes of CO2 equivalent) per year, which dwarfs Canada’s national targeted reductions of approximately 310 Mt CO2e per year by 2030. . . .

“The number of coal plants, especially in Asia, is rapidly increasing. Moreover, their young average age of eight to 14 years will make shutting them down in the short to medium term very difficult, both economically and politically.

“Canada can do little more than use diplomatic channels to persuade countries in Asia and elsewhere to decommission existing coal-fired plants and halt the construction of new ones

“But we can help to significantly reduce the carbon emissions generated by selling LNG as a substitute fuel for coal to power these plants.

“Liquified natural gas (LNG) is a lower source of carbon emissions than coal or petroleum. Moreover, new LNG projects within British Columbia are amongst the world’s least carbon-intensive.”

And so, he argues, Canada should be able to use Article 6 and its ITMOs to help meet its own emissions reduction targets.

Ottawa and Alberta have held back-room talks on Article 6, with the office of Jonathan Wilkinson, minister of energy and natural resources, saying: “There is interest among Canadian industry to see if Article 6 can be operationalized in order to displace coal abroad with Canadian LNG.”

And Environment Minister Steven Guilbeault, while promising restrictions on federal subsidies for oil and gas, did say the Liberals will permit subsidies that align with Article 6.

In June, Western premiers sent a message to Ottawa: “Premiers renew their call on the federal government to support emission credit trading across international borders and work with provinces and territories to finalize the rules under Article 6 to ensure they receive credit for reductions resulting from actions in their jurisdictions, as a means to support emissions targets.”

Alberta Premier Danielle Smith then pushed the case in a meeting with Prime Minister Trudeau. And Smith noted: “B.C. Premier David Eby is very keen to work with us to see if there’s a way that we can get global credit for reducing emissions in Japan, South Korea or India or China.”

But for now, Article 6 and its potential for Canada earning LNG credits to apply against the country’s greenhouse-gas emissions, remain theoretical.

(Posted here 29 November 2023)

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