Introduction

The Paris Agreement, a landmark international accord on climate change, features Article 6 as a key element for global collaboration via carbon markets. This mechanism enables countries to trade carbon credits, aiding them in achieving their climate action objectives. On 14 December 2023, Cambodia enacted comprehensive regulations to implement Article 6 within its borders. This client alert provides an overview of these regulations and their impact on project developers and credit buyers.

Cambodia's Article 6 Operation Manual

The Ministry of Environment, with the endorsement of the Cambodian Royal Government, has approved the Operations Manual for the Implementation of Article 6 of the Paris Agreement on Climate Change in Cambodia ("Article 6 Operations Manual"). The Article 6 Operations Manual provides a detailed framework for issuing and transferring of Internationally Transferred Mitigation Outcomes (“ITMOs”), which are referred to as authorized Greenhouse Gas Emission Reductions (“GHG ERs”) in the Article 6 Operations Manual.

Key Criteria for GHG ER Projects

To participate in the GHG ER market, project developers must ensure their projects align with the following criteria:

1. Positive List Inclusion: Projects must be aligned with the updated Nationally Determined Contribution (“NDC”) that Cambodia has established and communicated to the United Nations Framework Convention on Climate Change (“UNFCCC”) every five years. The NDC outlines Cambodia’s national climate action plans, including targets, policies, and implementation measures, in response to climate change and as a contribution to global climate action. The "Positive List" inclusion requirement means that for a project to be considered under Cambodia's Article 6 Operations Manual, it must be recognized as contributing to the achievement of the country's self-determined climate goals, specifically those requiring international support.

2. Domestic Use Reservation: A specified portion of GHG ERs must be reserved for domestic use, as detailed in the authorization request. This means that a portion of the GHG ERs generated from projects implemented in Cambodia cannot be authorized for international transfer but will instead be counted towards Cambodia’s NDC targets.

3. Authorization Period: Projects may be authorized for varying durations:

• Five years, renewable twice (up to 15 years),
• A single 10-year period without renewal, or
• 15 years, renewable twice (up to 45 years) for projects involving removals.

4. Eligible Carbon Mechanisms: GHG ERs must be issued by recognized mechanisms, including bilateral ones like the Joint Crediting Mechanism (“JCM”), independent standards like the Gold Standard and VCS, or the Paris Agreement Article 6.4 mechanism.

5. Verification and Additionality: GHG ERs must be real, verified, and additional, originating from 2021 onwards.

6. Environmental Integrity: Projects must set conservative baselines and minimize the risk of non-permanence of mitigation.
 

7. Alignment with Cambodia's Sustainable Development: Projects should support Cambodia's sustainable development priorities which are divided into three main categories: "social enhancement of income and quality of life," "technology transfer," and "economic benefits." 

Authorization Process

The authorization process for GHG ERs in Cambodia is structured into three stages:

1. Pre-implementation: The process begins with an optional Letter of No Objection, where project developers can receive recommendations on maximizing sustainable development co-benefits and ensuring alignment with national development priorities. The issuance of the Letter of No Objection and subsequent registration in the National GHG ER Registry is overseen by the National Authority (i.e. the Ministry of Environment (“MOE”)).

2. Implementation: During the implementation stage, project developers must register the GHG ER project with the relevant carbon mechanism. Then, the project is implemented by the project developers. Next, the project undergoes verification, where the project developer submits a request for independent verification according to the mechanism's procedures. Following verification, the developer must request a mandatory Letter of Positive Examination from the MOE seeking the issuance of authorized GHG ERs generated from their projects. If approved, MOE issues the Letter of Positive Examination to the project developer and updates the National GHG ER Registry with the volume of authorized GHG ERs. Finally, MOE updates project information in the National GHG ER Registry, indicating the project's eligibility to issue and transfer authorized GHG ERs.

3. Issuance and Transfer/Cancellation: After obtaining the Letter of Positive Examination, the project developer must request GHG ER issuance from the relevant carbon mechanism and inform the MOE of any issuance, transfer, or cancellation within twenty working days.

Considerations for Project Developers

To adhere to Article 6 Operation Manual, projects must contribute to Cambodia's NDC, prove additionality, and generate post-2021 emissions reductions. Project developers should be aware of the reserve requirements for domestic use or adaptation initiatives and follow the structured authorization process for project approval.

Considerations for Credit Buyers

The Article 6 Operation Manual does not directly impose obligations on buyers, but the MOE may negotiate terms related to the Share of Proceeds (“SOP”) or contributions to Overall Mitigation in Global Emissions (“OMGE”). Buyers should account for these potential stipulations during negotiations as a portion of the transaction cost might be allocated to support adaptation measures in Cambodia (SOP) or to ensure that a share of the emissions reductions contributes to a net decrease in global emissions (OMGE). Buyers need to consider these potential costs in their financial planning and negotiations to ensure the viability and sustainability of their investments.

Conclusion

Cambodia's recent formalization of the Article 6 carbon market under the Paris Agreement marks a transformative step towards a sustainable future, offering a plethora of opportunities for both project developers and credit buyers. This initiative not only aligns with global efforts to mitigate climate change but also propels Cambodia towards achieving its sustainable development goals. By participating in this market, stakeholders contribute significantly to the reduction of global emissions, fostering a healthier planet for future generations.

Our firm is at the forefront of environmental regulation, climate project development, and international climate agreements. With our deep expertise, we are uniquely positioned to guide project developers through the intricate regulatory landscape of Cambodia's carbon market, ensuring that projects not only comply with the necessary criteria but also maximize their environmental and financial benefits. For credit buyers, we offer comprehensive services including due diligence, contract negotiation, and ensuring regulatory compliance, thereby facilitating secure and beneficial transactions in the carbon market.

Whether you are a project developer looking to contribute to Cambodia's sustainable development and global emissions reduction efforts, or a credit buyer aiming to meet your climate targets through credible and impactful investments, our team is ready to support your journey in this promising market. Together, we can turn the challenges of climate change into opportunities for growth, sustainability, and global cooperation.

The information provided here is for information purposes only and is not intended to constitute legal advice. Legal advice should be obtained from qualified legal counsel for all specific situations.