Zhou Zhengyun: Article 6.2 of the Paris Agreement, Power Sector Debt, and Gradual Coal Phase-Out—Designing an Innovative Bilateral Financing Mechanism

Introduction

Article 6.2 of the Paris Agreement provides an institutional framework for voluntary cooperation among Parties through the transfer of internationally recognized mitigation outcomes, supporting the achievement of Nationally Determined Contributions (NDCs).

In April 2026, Pakistan and Norway signed a bilateral climate cooperation agreement under Article 6.2, marking Pakistan’s transition from carbon market preparedness to participation in international carbon transactions. While the agreement focuses on mitigation outcome transfers and carbon credit purchases, its significance extends beyond generating additional carbon revenue.

Pakistan’s power sector is currently under substantial financial stress. Structural mismatches among capacity payments, long-term power purchase agreements (PPAs), underutilized generation assets, and the expansion of renewable energy mean that coal phase-out is no longer solely a climate issue—it is also closely tied to power system costs and legacy asset restructuring.

Against this backdrop, this paper examines how coal phase-out could serve as an entry point for both debt relief and energy transition. It further explores whether Article 6.2 can convert emissions reductions from coal retirement into results-based international finance, thereby creating a new financing channel for coal phase-out compensation, clean energy substitution, and asset transition.

I. Pakistan’s Debt Pressure and Power Sector Challenges

Pakistan’s debt challenge is systemic, characterized by high public debt levels, persistent external financing needs, reliance on domestic borrowing, and structural constraints such as circular debt in the energy sector.

According to the World Bank’s Pakistan Development Update, total public and publicly guaranteed debt reached PKR 80.6 trillion by the end of 2024, up from PKR 76.8 trillion in mid-2024. With net external outflows continuing, the government remains heavily reliant on domestic financing, while external debt still accounts for 35% of total public debt—indicating ongoing exchange rate risk.

Circular debt in the power sector has been identified as a key structural constraint on economic reform. In June 2025, Pakistan secured PKR 1.275 trillion (approximately USD 4.5 billion) in Islamic financing from 18 commercial banks to ease power sector debt pressures, underscoring that the issue has moved beyond sectoral finance to become a macroeconomic concern.

The Pakistan Electricity Review 2025 highlights the structural drivers of this debt burden. In FY2024, installed capacity reached 46.2 GW and total generation 137 TWh, yet electricity sales declined by 2.8% year-on-year. Meanwhile, capacity payments increased by 46% to PKR 1.9 trillion, and circular debt rose to PKR 2.4 trillion.

New coal-fired and LNG-based plants commissioned in recent years typically involve high fixed capacity payments. When utilization rates are low, these fixed payments continue to accumulate, increasing system costs and ultimately raising electricity tariffs.

At the same time, distributed and renewable energy—particularly rooftop solar—has expanded rapidly. Net metering capacity grew from 1.3 GW in FY2023 to 2.5 GW in FY2024, reaching 4.9 GW by March 2025. However, renewables still account for only 5% of total generation, and transmission constraints limit the delivery of low-cost electricity.

This indicates that while Pakistan’s energy transition is reshaping supply-demand dynamics, grid infrastructure, dispatch systems, and contractual arrangements have not yet adapted accordingly.

As a result, coal phase-out is not only a climate mitigation issue but also directly linked to power sector debt management and system cost optimization.

II. Why Coal Phase-Out Can Serve as an Entry Point

Pakistan’s coal power assets emerged under specific historical conditions. In the mid-2010s, persistent electricity shortages constrained economic activity, prompting the rapid development of coal-fired power plants such as Sahiwal, Port Qasim, and Hub.

While these projects initially alleviated supply shortages, their economic viability has since shifted. Studies indicate that imported coal capacity helped reduce outages but created costly “take-or-pay” obligations under long-term PPAs. Weak industrial demand and the rapid growth of rooftop solar have reduced plant utilization rates—some falling below 20%—while capacity payments continue to drive up system costs.

In this context, coal phase-out offers three distinct forms of value:

  1. Quantifiable emissions reduction value
    Coal plants are high-emission, large-scale, and data-rich assets, making avoided emissions from early retirement easier to measure and verify compared to dispersed mitigation activities.
  2. Power system cost restructuring value
    Coal retirement can reduce fixed payment burdens, but only if combined with PPA restructuring, clean energy substitution, grid investment, and demand-side management.
  3. Legacy asset transition value
    Early retirement requires coordination among investors, off-takers, financiers, and government entities, involving compensation mechanisms and reinvestment pathways.

However, these values do not automatically translate into immediate financial resources. Emissions reductions require verification and recognition, cost savings materialize over time, and asset restructuring demands upfront compensation and investment.

This creates a financing gap—highlighting the need for mechanisms that can convert future value into present liquidity.

III. How Article 6.2 Can Enable Coal Phase-Out Financing

Article 6.2 offers a potential solution by enabling emissions reductions—once authorized and internationally accounted for—to be monetized through results-based payments from buyer countries.

If early coal retirement projects can demonstrate real, additional, and verifiable emissions reductions, these outcomes may be authorized as Internationally Transferred Mitigation Outcomes (ITMOs) and sold through bilateral agreements.

The mechanism relies on national authorization, tracking, reporting, and corresponding adjustments to avoid double counting. This is particularly critical for coal phase-out, given its large-scale emissions impact and long project timelines.

Global experience shows that Article 6.2 is still in an early implementation phase. As of April 2026, only a limited number of countries have completed the full cycle of authorization, reporting, and review. Early transactions—such as Switzerland’s cooperation with Thailand and Ghana—demonstrate feasibility, but most agreements remain at the framework stage.

The Pakistan–Norway agreement should be understood in this context. It establishes a cooperation channel rather than a fully operational financing model. Whether this channel can extend from relatively straightforward sectors (e.g., renewable energy, agriculture) to complex transition scenarios like coal phase-out remains an open question.

A Potential Financing Pathway

A feasible Article 6.2-based coal phase-out financing model would involve three steps:

  1. Project selection and baseline setting
    Identify coal plants with low utilization, high capacity payments, and high emissions intensity, and establish conservative baselines for continued operation versus retirement.
  2. MRV and authorization
    Ensure emissions reductions are measurable, reportable, and verifiable (MRV), and authorize them as ITMOs without compromising Pakistan’s NDC targets.
  3. Results-based payment allocation
    Channel payments into dedicated funds to support compensation, clean energy replacement, grid upgrades, and community transition.

This approach enables future emissions reduction value to be converted into upfront financial resources, helping bridge the financing gap associated with early retirement.

IV. Conditions and Gaps for Implementation

Applying Article 6.2 to coal phase-out requires a comprehensive institutional framework. Key gaps include:

  • Project identification: Lack of a clear pipeline of eligible coal assets;
  • Methodology development: Absence of widely accepted baselines and MRV standards for coal retirement;
  • Fund allocation mechanisms: No established system for managing and distributing results-based payments;
  • Stakeholder coordination: Need for platforms linking government, utilities, investors, financiers, and international buyers.

Conclusion

The Pakistan–Norway agreement does not yet resolve the complexities of coal phase-out financing, but it establishes an important institutional entry point under Article 6.2.

Its broader significance lies in exploring how emissions reductions from high-carbon assets can be transformed into financial resources for transition.

For Pakistan, this pathway offers a supplementary financing tool to address power sector debt and facilitate coal exit. For other emerging economies, it provides a potential model for linking climate mitigation outcomes with asset transition finance.

Reference：

[1]UNDP Carbon Cooperation. (n.d.). Carbon Cooperation. United Nations Development Programme. https://carboncooperation.undp.org/ 

[2]科拉美特. (2026). 巴基斯坦与挪威签署《巴黎协定》第6.2条合作协议，开启南亚气候融资新篇章. https://mp.weixin.qq.com/s/2Om1XCZ3tnThmInMLnJS2A

[3]World Bank. (2025). Pakistan development update: Reimagining a digital Pakistan. https://thedocs.worldbank.org/en/doc/e414b36ae736660edf8f0f3cb597b1e9-0310012025/pakistan-development-update-reimagining-a-digital-pakistan-april-2025

[4]Shahid, A. (2025). Pakistan signs $4.5 billion loans with local banks to ease power sector debt. Reuters. https://www.reuters.com/sustainability/boards-policy-regulation/pakistan-signs-45-billion-loans-with-local-banks-ease-power-sector-debt-2025-06-20/

[5]Renewables First. (2025). Pakistan electricity review 2025. Renewables First. https://uploads.renewablesfirst.org/Pakistan_Electricity_Review_2025_89f0b613d6.pdf

[6]Honor Group. (n.d.). Sahiwal 2×660MW coal-fired power plant project. Honor Group. http://www.honorgroups.com/news_detail/128.html

[7]Bhandary, R. R., & Gallagher, K. S. (2022). What drives Pakistan’s coal-fired power plant construction boom? Understanding the China-Pakistan Economic Corridor’s energy portfolio. https://doi.org/10.1016/j.wdp.2022.100396

[8]Isaad, H., Sayed, M. H., Ahmad, A., & Farooq, U. (2025). Repurposing Pakistan’s coal-based assets. Institute for Energy Economics and Financial Analysis. https://ieefa.org/resources/repurposing-pakistans-coal-based-assets

[9]United Nations Framework Convention on Climate Change. (n.d.). Article 6.2. UNFCCC. https://unfccc.int/process-and-meetings/the-paris-agreement/article-6/article-62

[10]Norwegian Ministry of Climate and Environment. (n.d.). Norwegian Global Emission Reduction Initiative. Government.no. https://www.regjeringen.no/en/topics/climate-and-environment/climate/norwegian-global-emission-reduction-initiative/id3074249/

[11]Global Green Growth Institute. (2026). Pakistan and Norway formalize Article 6 climate cooperation facilitated via GGGI’s Carbon Transaction Facility. Global Green Growth Institute. https://gggi.org/press-release/pakistan-and-norway-formalize-article-6-climate-cooperation-facilitated-via-gggis-carbon-transaction-facility/

[12]Asia Research and Engagement, GenZero, & Standard Chartered. (2024). ACEN Renewables: Using transition credits to accelerate coal closure. Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science. https://researchonline.lse.ac.uk/id/eprint/129010/1/ACEN-Renewables_using-transition-credits-to-accelerate-coal-closure.pdf

[13]Article 6 Implementation Partnership. (2026). Implementation status of Article 6.2 guidance. Article 6 Implementation Partnership. https://a6partnership.org/a6-implementation-status/current-status-of-article-6-2-implementation 

[14]UNEP Copenhagen Climate Centre. (n.d.). Cooperation. Article 6 Pipeline. https://article6pipeline.unepccc.org/cooperation?view=a6p2 

[15]The Nature Conservancy. (2024). Article 6 implementation. The Nature Conservancy.https://www.nature.org/content/dam/tnc/nature/en/documents/Article-6-Implementation.pdf

Author
Zhou Zhengyun
Research Fellow, International Cooperation and Development Research Center
International Institute of Green Finance (IIGF), Central University of Finance and Economics

Research Supervision
Shen Wei
Senior Research Fellow, International Cooperation and Development Research Center
International Institute of Green Finance (IIGF), Central University of Finance and Economics