COP29 delivers breakthrough Article 6 deal for international carbon markets

The UN COP29 climate summit closed last week to mixed reception but can claim to have achieved a significant milestone in its long-running ambition to oversee the implementation of Article 6 of the 2015 Paris Agreement that governs international carbon markets.

The fortnight of negotiations in Baku culminated in the adoption of crucial standards and guidelines that will shape the future of global carbon trading. The agreement on carbon trading under Article 6 brings nearly a decade of negotiations to a close.

The agreement means that rules governing country-to-country trading under Article 6.2 and new international carbon market under Article 6.4 are almost complete – with the COP29 presidency stating the negotiations had achieved "full operationalisation" of Article 6 and would unlock international carbon markets and enable transnational solutions.

Article 6.2 of the Paris Agreement facilitates voluntary cooperation between countries to meet their climate targets through the trading of internationally transferred mitigation outcomes (ITMOs). Article 6.4 aims to create a UN-supervised voluntary carbon market.

'Authorisation' mechanisms

The COP29 negotiations clarified that countries can issue unilateral authorisations for cooperative approaches when ITMOs are used towards initiatives such as the Carbon Offsetting and Reduction Scheme for International Aviation, known as Corsia, or voluntary carbon markets (VCMs).

This flexibility is crucial for enabling diverse participation in carbon markets. Already member countries such as Singapore and Peru have signed bilateral transfer agreements – giving Singaporean corporates access to Peruvian credits very soon.

Authorisation is a central element of the Article 6 rulebook, as it allows for the reflection of sovereign rights and provides a legal infrastructure for the international market. The terms "authorisation" and "authorised were the focus of intense discussion at previous COP summits, particularly around process and timing, content and format, and the scope for changes.

Three types of authorisation for international carbon trading were confirmed at COP29: for the "cooperative approach", for ITMOs and for "participating entities".

The cooperative approach

Authorisation of a cooperative approach relates to the overall framework or mechanism through which countries engage to trade carbon credits. It involves the approval of the structure and rules governing the cooperative approach, which ensures that it aligns with the principles and requirements of the Paris Agreement – and establishes the approach's legitimacy and operational parameters.

ITMOs

The ITMOs authorisation involves the approval of the specific outcomes that will be generated, transferred and used under the cooperative approach. It ensures that the ITMOs meet the necessary standards for environmental integrity, transparency and accounting. This type of authorisation is crucial for maintaining the credibility and effectiveness of the carbon market.

Participating entities

This type of authorisation is for the entities – such as companies, organisations or other stakeholders – that participate in the cooperative approach. It involves the approval of these entities to engage in the generation, transfer, and use of ITMOs.

This authorisation ensures that the participating entities comply with the rules and standards set by the cooperative approach and the Paris Agreement. It is important for ensuring that all participants in the carbon market are accountable and adhere to the agreed-upon guidelines.

Market confidence

One critical stipulation is that countries cannot alter ITMO authorisations after the first transfer unless agreed upon in a bilateral agreement. This provision aims to ensure stability and predictability in carbon trading, which is essential for market confidence.

The negotiations introduced mechanisms to address inconsistencies in ITMO reporting. Persistent inconsistencies, unresolved by the next reporting cycle, will be publicly displayed and cannot be used for nationallly determined contribution (NDC) achievements or international mitigation purposes until resolved. This transparency is intended to enhance accountability and trust in the carbon market.

Article 6.4 pivotal

The establishment of a centralised crediting mechanism under Article 6.4 of the Paris Agreement represents a pivotal development in the global carbon market. This mechanism, which is overseen by the agreement's supervisory body, aims to create a UN-supervised voluntary carbon market that facilitates the trading of carbon credits derived from emission reduction and removal projects.

Methodology requirements

The supervisory body finalised comprehensive standards for the development and assessment under Article 6.4 of methodologies used to generate eligible carbon credits.

It established conservative and "below business as usual" baseline settings to ensure that credited emission reductions are additional and not merely reflecting what would have happened anyway.

It finalised the standard for "additionality" assessments that demonstrate that projects would not have occurred without the incentive provided by the carbon market, which ensures that credits represent genuine emission reductions.

The standards also address "leakage prevention" and any potential increases in emissions outside a project's boundary that could negate the benefits of the project. Monitoring and reporting measures also implement robust systems for the continuous monitoring, reporting, and verification of emission reductions to maintain transparency and credibility.

Standards for carbon removal projects

Specific standards were also established for projects that remove greenhouse gases from the atmosphere. These include the quantification and monitoring of detailed guidelines on how removed emissions should be calculated and monitored over time to ensure accuracy and consistency.

They also address permanence and the risk of reversals – in which stored carbon might be released back into the atmosphere – to ensure long-term durability of carbon storage. Environmental and social safeguards were also established to ensure that removal projects do not have an adverse impact and contribute positively to sustainable development goals.

Independent validation and verification

To uphold environmental integrity, clear requirements for third-party validation and verification were established under Article 6.4. These requirements include the accreditation of verifiers to ensure that independent verifiers are accredited and meet stringent criteria for competence and impartiality.

There are also verification processes to standardise procedures for the validation of project design and the verification of emission reductions, including site visits and data audits. Public disclosure of verification reports also aims to enhance transparency and stakeholder confidence in the carbon credits.

The introduction of these verification standards is expected to boost market confidence by ensuring that carbon credits represent genuine and verifiable emission reductions. This move is crucial for attracting investment and fostering trust in the carbon market.

The operationalisation of Article 6.4 is anticipated to mobilise significant climate finance, particularly in developing countries. Article 6 could unlock up to $1 trillion annually by 2030 in private and public climate financing. This influx of funds is expected to support NDCs through the provision of financial resources to support countries to achieve their climate targets.

Standardisation and market integration

By standardising frameworks and linking compliance markets under NDCs, Article 6.4 is expected to increase carbon credit demand.

Standardisation is expected to bring the benefit of enhanced market liquidity: standardised methodologies and verification processes will drive a more liquid and efficient carbon market, making it easier for buyers and sellers to trade carbon credits.

Increased participation is also expected with clear and consistent rules encouraging more countries and entities to participate in the carbon market, fostering a collective approach to combating climate change.

A further benefit will be to boost market confidence. Robust standards and third-party verification will enhance the credibility of carbon credits, restoring trust and encouraging high-value participation from both public and private sectors.

Challenges and future directions

One of the challenges highlighted during the negotiations is the potential for high transaction costs associated with achieving credibility in carbon markets. These costs could lead to higher carbon credit prices, underscoring the importance of prioritising emissions reduction activities before addressing residual emissions.

Countries will need to integrate Article 6.4 mechanisms into their national and regional policies to ensure compliance with the Paris Agreement and achieve global climate goals. This integration will be critical for maintaining high-quality credits and ensuring robust monitoring.

Capacity-building initiatives that recognise the complexity of the carbon market landscape, capacity-building initiatives are essential. Coordination among technical assistance providers, such as the Article 6 Implementation Partnership and the World Bank, aims to streamline countries' access to appropriate technical support, enabling them to make informed decisions and maximise their carbon market potential.

But there are some mixed signals. VCM credits were a point of focus in the months leading up to COP29. The Science Based Targets Initiative (SBTi) released a series of white papers in which the use of carbon offsetting was characterised as "low impact" based on the methodologies and claims made in VCMs.

While the Article 6 agreements will reposition the conversation among market participants, questions will remain on the use of carbon offsets in credible transition plans as well as the applicability of ITMOs as environmentally attributable commodity – which is an approach that has been favoured by the SBTi.

Osborne Clarke comment

The outcome of the Article 6 negotiations at COP29 represents a significant step forward in the establishment of a global carbon market. By setting clear standards and guidelines, the negotiations have laid the groundwork for increased transparency, environmental integrity, and robust accounting in carbon trading. For stakeholders, including countries and companies, these developments offer new opportunities for investment in climate projects and collaboration on emission reduction efforts.