Charting a Course for Carbon Markets: COP29’s Article 6 Outcomes and the Path Forward
The 29th Conference of the Parties (COP29) to the United Nations Framework Convention on Climate Change, held in Baku, Azerbaijan, concluded with a mixed bag of outcomes. While the conference saw the establishment of a new climate finance goal, the lack of progress on phasing out fossil fuels left many disappointed.
However, one area where significant strides were made was Article 6 of the Paris Agreement, which focuses on international cooperation through carbon markets. After years of negotiations, countries finally reached a consensus on the rules governing these mechanisms, potentially paving the way for a more robust global carbon market.
Understanding Article 6: A Primer on Carbon Market Mechanisms
Article 6 of the Paris Agreement provides a framework for countries to cooperate in achieving their emission reduction targets through market-based mechanisms. It has three key components:
- Article 6.2: This section establishes a framework for bilateral agreements between countries to trade carbon credits, formally known as Internationally Transferred Mitigation Outcomes (ITMOs). These agreements allow countries exceeding their emission reduction targets to sell credits to other countries struggling to meet their Nationally Determined Contributions (NDCs).
- Article 6.4: This section establishes a centralised, UN-managed system for trading carbon offsets, known as the Paris Agreement Crediting Mechanism (PACM). This mechanism allows countries and companies to compensate for their emissions by investing in projects that reduce or remove emissions in other countries.
- Article 6.8: This section facilitates non-market-based cooperation between countries to implement mitigation, adaptation, and sustainable development actions.
Key Outcomes of COP29’s Article 6 Negotiations
COP29 witnessed the culmination of years of intricate and drawn out discussions and negotiations. This resulted in concrete agreements on the operationalisation of Article 6. Here’s a breakdown of the key outcomes:
Article 6.2: Strengthening Bilateral Carbon Trading
- Authorisation Procedures: Clearer procedures for authorising bilateral agreements and outlining conditions for their cancellation were agreed upon, providing greater certainty for countries engaging in ITMO trading.
- Registry Framework: A dual approach to registries was established, involving an international registry for tracking and accounting and the provision of registry services for countries to issue Mitigation Outcomes as units.
- Enhanced Transparency: Requirements for initial reports detailing additionality, carbon accounting, and non-permanence of Mitigation Outcomes were established, aiming to increase transparency in Article 6.2 markets.
- Addressing Inconsistencies: A process was established to identify and address inconsistencies or inaccuracies in reported information, though without concrete penalties for non-compliance.
Article 6.4: Launching the Paris Agreement Crediting Mechanism (PACM)
- Adoption of Methodological Standards: The Conference endorsed the standards for methodologies and removals developed by the Article 6.4 Supervisory Body (SBM), paving the way for the development of PACM-aligned methodologies.
- Authorisation and Issuance: Provisions for authorising emissions reductions for use towards NDC achievement or other international mitigation purposes were established, alongside the possibility of issuing units that are not authorised for corresponding adjustments.
- Share of Proceeds: The decision mandates that the Share of Proceeds for the Adaptation Fund, a percentage of generated emissions reduction units, must come from authorised units, with exemptions for least developed countries and small island developing states.
- Registry Interoperability: The agreement acknowledged the voluntary connection of national registries to the central PACM registry, enabling the transfer of units and data access.
- Transition of CDM Projects: Afforestation and reforestation projects developed under the Clean Development Mechanism (CDM) are allowed to transition to the PACM, subject to meeting specific requirements.
Article 6.8: Promoting Non-Market Approaches
- Non-Market Approaches Platform: The agreement highlighted the importance of the Non-Market Approaches (NMA) platform for facilitating knowledge sharing and climate finance for activities that do not generate tradable units.
Charting a Path Forward: Addressing Challenges and Building Momentum
The agreements reached on Article 6 at COP29 represent a significant step forward in operationalising carbon markets under the Paris Agreement. However, the path forward requires addressing key challenges and building upon the momentum generated:
Strengthening Accountability and Transparency:
- Robust Review Mechanisms: The current process for identifying and addressing inconsistencies lacks robust consequences for non-compliance. Implementing stricter review mechanisms and penalties for failing to adhere to the rules is crucial to ensure the environmental integrity of the market.
- Timely Disclosure: The delayed disclosure of information related to authorisation and carbon credit deals raises concerns about transparency. Enforcing upfront disclosure requirements for countries and companies is vital to build trust and prevent gaming the system.
Ensuring Quality and Additionality of Carbon Credits:
- Re-assessing Legacy CDM Projects: The incorporation of CDM projects into the PACM without mandatory re-assessment for additionality raises concerns about the quality of credits. Implementing robust mechanisms to verify the additionality and environmental integrity of these projects is crucial.
- Stringent Methodologies: The Article 6.4 Supervisory Body must qualify and agree upon robust methodologies that ensure the high integrity of carbon credits generated under the PACM. This includes addressing concerns related to baselines, leakage, and permanence, particularly for nature-based solutions.
Prioritising Emission Reductions Over Offsetting:
- Clear Guidance on Credit Use: Establishing clear guidelines on the use of carbon credits, particularly for companies and countries with net-zero targets, is crucial to prevent over-reliance on offsetting. This includes promoting emission reductions as the primary means of achieving climate goals.
Ensuring Equitable Access to Finance:
- Targeted Climate Finance: While the new climate finance goal represents progress, it lacks a specific adaptation finance target. Ensuring that developing countries have adequate and accessible finance for adaptation and restoration efforts, particularly for vulnerable communities, is essential.
Engaging Stakeholders and Building Capacity:
- Multi-stakeholder Collaboration: Effective implementation of Article 6 requires active collaboration between governments, the private sector, civil society, and Indigenous communities. Fostering open dialogue and inclusive decision-making processes is crucial for building trust and ensuring equitable outcomes.
- Capacity Building: Providing developing countries with the necessary technical and financial support to develop robust domestic carbon market frameworks, participate effectively in international carbon trading, and implement high-quality projects is essential.
Conclusion: Towards a Robust and Equitable Global Carbon Market
Criticisms of the COP29 Article 6 Agreements
Although negotiators reached agreements on all three components of Article 6 at COP29, the outcomes were met with criticism from activists and some experts.
The rules were seen as overly complex and lacking the necessary consequences for non-compliance. While the agreements established procedures for authorising bilateral carbon trades and outlined requirements for a new UN-backed carbon offset market (the Paris Agreement Crediting Mechanism, or PACM), critics argue that these mechanisms could ultimately undermine efforts to reduce emissions rather than advance them.
Specific concerns centre around the lack of strict penalties for countries that fail to comply with the rules, the potential for “double counting” of emissions reductions, and the possibility that the new carbon markets will be flooded with low-quality credits from legacy projects.
The decision to allow older Clean Development Mechanism (CDM) projects, created under the Kyoto Protocol, to be transferred to the PACM without additional verification was especially controversial.
Despite the inclusion of some transparency requirements, critics are also wary of the opacity of the system and the lack of guarantees to prevent human rights abuses and protect Indigenous communities. The inclusion of a mandatory “sustainable development tool” was seen by some as insufficient to prevent repeating a history of harm.
Potential Impact on the VCM:
- Increased Demand and Investment: The agreement on Article 6 could stimulate demand for carbon credits, leading to greater investment in VCM projects. This is because countries that are struggling to meet their emissions targets under their Nationally Determined Contributions (NDCs) can now purchase credits from other countries or through the new UN-backed carbon offset market, the PACM. The clarity provided by Article 6 could give countries and companies more confidence to invest in emission reduction projects, especially those in developing countries.
- Scaling High-Integrity Projects: The rules established for the PACM, which will operate alongside bilateral carbon trading agreements under Article 6.2, aim to ensure high integrity and avoid issues like double counting. If implemented effectively, this mechanism could help to channel funding to projects that deliver genuine emission reductions and sustainable development benefits.
- New Opportunities for VCM Standard Bodies: The PACM’s bottom-up approach to methodology development could create opportunities for existing VCM standards bodies to submit their methodologies for consideration. This could help to align the voluntary market with the standards of the PACM, potentially leading to greater harmonisation and acceptance of VCM credits.
Final Thoughts
The COP29 agreements on Article 6 offer a framework for potentially scaling up climate action and channeling finance towards emission reduction and removal activities.
However, the path forward requires vigilance, transparency, and a commitment to ensuring that carbon markets genuinely contribute to a just and sustainable transition.
By addressing the challenges outlined above, the international community can work towards a robust and equitable global carbon market that delivers tangible climate benefits for all
