Project and Country Risk — New Bedfellows of the Article 6 Market

Around half of global demand for carbon credits could come from the Paris Agreement’s Article 6 transactions between 2025 and 2035, according to the latest MSCI projections. These would come from government-to-government transfers, airlines under the international aviation scheme CORSIA and corporate-level trading schemes requiring credits compliant with Article 6.

Article 6 of the Paris Agreement defines how countries can cooperate through international carbon markets to achieve their climate targets, which are communicated through nationally determined contributions (NDCs). Article 6 allows one country (the purchaser) to fund the emissions reductions or removals in another country (the host) and count these outcomes toward its own NDC. These outcomes are called internationally transferred mitigation outcomes (ITMOs) and must be measured, reported and tracked. 

For buyers seeking assurance that credits contribute to national climate goals, Article 6 offers a mechanism to align voluntary efforts with climate policy. While this framework enables cooperation, it does not guarantee integrity by itself. 

Article 6 has two sets of rules for carbon trading: 

• Article 6.2 provides accounting and reporting guidance on international trading of "mitigation outcomes." Governments can sign bilateral agreements agreeing to authorize transfers between their countries or to corporates. Authorization means that a country has committed to making what’s known as a corresponding adjustment (CA).  
• Article 6.4 sets a UN carbon-credit standard at the project level, similar to the clean-development mechanism (CDM). It is designed to create a centralized means to channel resources to climate projects around the world. Carbon credits issued under 6.4. can be bought by countries or companies and, if retired for voluntary purposes, do not require a corresponding adjustment. While a lot of progress has been made, 6.4 is not yet fully operational.

A corresponding adjustment is an accounting mechanism that ensures emission reductions or removals traded through Article 6 are counted only toward a single target — such as a country’s NDC under the Paris Agreement or CORSIA. A CA requires the host country to add the reductions or removals that have been transferred back to its emissions balance, in order for the buyer to deduct them. The host country can allocate CAs to a project by issuing a letter of authorization (LoA). 

When first proposed, this mechanism was intended to ensure the integrity of the overall Paris system when an international carbon transaction is made. That is, the collective “bubble” across all countries’ NDCs would be maintained when a transfer takes place between two countries.  

NDCs vary considerably in ambition and coverage, however. Some cover only part of a country’s emissions, others are based on intensity rather than absolute emissions and many of the more meaningful targets are conditional on access to international finance. This means that this is not yet a system with a single global cap — although the ambition is to move toward this standard over time.

With such wide variability in NDCs under the Paris Agreement, as well as the rigor with which they may be enforced, the CA process is not yet able to guarantee full integrity of the global emissions system. We have therefore developed the MSCI Article 6 Integrity Framework, which is designed to assess the quality and risks associated with Article 6 transactions. This framework complements MSCI Carbon Project Ratings and captures both project-specific and country-level risks.  

The framework considers three main factors and seven sub-factors, covering 40 metrics across 70 countries:  

Country-level 

1. NDC delivery and ambition: The ambition of a host country’s NDC relative to its level of economic development and whether the country is likely to meet its targets. 

2. Country revocation risk: The state of preparedness to apply CAs transparently and consistently, coupled with political- and financial-governance factors. Shifts in political leadership, policy priorities or national legislation can affect how a country engages with Article 6. 

Project-level  

3. Project revocation risk: This risk considers the likelihood of a host country’s issuing an LoA with unclear terms, or later withdrawing it. Revocation could occur if there is a change in political leadership, legal frameworks or national priorities that prompts a reassessment of the country’s participation in Article 6 mechanisms or specific project approvals. Both the transparency and comprehensiveness of each LoA are evaluated in detail to assess this risk. 

Article 6 could unlock a significant source of finance for international carbon mitigation, but credibility hinges on more than a corresponding adjustment. The new MSCI Article 6 Integrity Framework, supported by MSCI Carbon Project Ratings, is specifically designed to help investors and buyers assess risks and opportunities specific to Article 6, an important part of the global credit market.