Carbon Markets’ Baku Boost
Article 6 negotiations enjoyed an early breakthrough at COP29, but further progress may depend on the approach of the US delegation.
Talks on use of carbon markets to support national climate plans have begun well at COP29, with approval for standards and methodologies for activities conducted through an international carbon crediting mechanism.
The relief was palpable, partly because the path towards agreement on how countries work together to tackle climate change has been bumpy and, at times, fraught with conflict.
Last year’s COP28 in Dubai was a turbulent affair. Controversy surrounding its oil-rich setting and the fossil fuel interests of conference president Dr Sultan Al-Jaber immediately cast a shadow over the proceedings. Countries were, however, able to agree to “transition away from fossil fuels”, representing the first time a COP text had made such a commitment.
The drama wasn’t limited to headline statements in its final text. Deep within the bowels of the conference, negotiators fought over final guidance for a section of the Paris Agreement designed to enshrine international cooperation on carbon markets, named Article 6, originally approved at COP26 in 2021.
Different nations and groups have held varying interpretations of the status of Article 6 following the Glasgow summit, according to David Newell, a negotiator for the Swedish government.
“Some thought that it was a done deal,” he tells ESG Investor. “Some didn’t want to [revisit] it thinking we had sufficient guidance, and others felt that there were certain areas that needed to be worked out still.
“A lot of those things stemmed from different understandings of what was agreed on in Glasgow,” he continues, including definitions. “These are, I believe, non-trivial differences of understanding.”
In Dubai, countries and international groups locked horns over guidance for Article 6.2, which would allow countries to trade emissions reductions and use these towards their nationally determined contributions (NDCs) to the Paris Agreement. They also battled over Article 6.4, which would establish a UN-recognised mechanism for the validation, verification and issuance of carbon credits.
In a disagreement that pitted the US against the European Union, which also carried differences between other nations and groups, negotiators were unable to come to an agreement, requiring talks to resume at COP29.
In the interim. talks progressed “at nothing like the speed needed, and in fits and starts”, says Simon Puleston Jones, Managing Director of Emral Carbon, a carbon markets brokerage and advisory firm.
Further uncertainty was caused immediately ahead of COP29 by Donald Trump’s re-election to the US presidency.
Approval for Article 6.4
Despite past failures, the Article 6.4 Supervisory Body has now approved guidance for an international carbon crediting mechanism. In October, the body had agreed at a meeting in Azerbaijan to recommend that parties to the Paris Agreement – often referred to as the ‘CMA’ – endorse its approach.
On 11 November, negotiating parties achieved a consensus on standards for Article 6.4. “This is a critical step towards concluding Article 6 negotiations,” COP29 Lead Negotiator Yalchin Rafiyev told a press conference.
“This will be a game-changing tool to direct resources to the developing world and help us save up to US$250 billion a year when implementing our climate plans.”
The agreement was welcomed by the International Emissions Trading Association (IETA), a non-profit focused on the development of cross-border frameworks for carbon trading.
“The new standards will give market participants the certainty they need to proceed to develop projects around the world that will generate millions of tonnes of mitigation outcomes that put the world on a path towards meeting its goal to keep global temperature increases to below 1.5°C,” it said in a statement.
“The work on Article 6.4 has not finished,” it continued. “Parties should continue to develop further guidance to help the mechanism develop further.”
The speed at which these rules have been endorsed did not please everyone, however.
“Approving these carbon market rules without discussion or debate, sets a dangerous precedent for the entire negotiation process,” said Erika Lennon, the Center for International Environmental Law’s Senior Attorney, asserting the agreement bypassed essential scrutiny.
“States’ oversight is all the more critical as the Supervisory Body’s efforts have resulted in risky rules that will lead to human rights violations and environmental harm.”
Bilateral agreements
Focus will now turn to Article 6.2, which allows nations to trade carbon credits and so-called internationally transferred mitigation outcomes – or ITMOs – which countries can buy from each other in order to achieve their NDCs.
Although COP28 failed to approve final guidance, countries have nevertheless begun to sign bilateral agreements with each other. In December 2023, Switzerland and Thailand conducted the first ITMOs trade, supporting the rollout of an electric bus initiative in Bangkok. Switzerland, Japan, Singapore, South Korea, Sweden and Norway are among countries to have signed bilateral agreements so far.
There remain several key points of contention as talks continue at COP29. The creation of an international registry under Article 6.2 to help monitor trades and the usage of ITMOs towards NDCs caused division between negotiating parties, placing the US at loggerheads with the European Union, Switzerland, the Independent Alliance of Latin America and the Caribbean, and the African Group.
The EU and its allies on this part of the text “see the international registry as a fully-fledged transactional registry” akin to the Article 6.4 mechanism, according to an IETA briefing note.
The US, meanwhile, views it as a “registry that gathers annual balances of Article 6.2 transactions rather than as a facility of individual transactions”. Under this approach, national registries would play a more significant role, and an international registry “would not provide details on individual positions by participation entities”.
The EU also submitted that this international registry should have quality controls on credits being recorded by the system, IETA notes.
“We were not willing to put up with anything if we felt it would be a significant risk to the integrity of the system, and that’s why we did not accept the text,” Newell says, observing that the two major areas of Article 6.2 to be addressed at COP29 are on reporting and authorisations.
Parties currently disagree on whether the authorisation elements of Article 6 – which cover the authorisation of cooperating approaches, participating entities, and ITMOs – should be consolidated under a single process, or remain separate. There is also no consensus on the information that should be kept for authorisation statements.
Rules governing the revocation of previously-issued authorisations are also on the line. “Under what terms can a country revoke that authorisation – can it be done at any point in the process, can it be done for any reason?” queries Sebastien Cross, Chief Innovation Officer at carbon ratings agency BeZero, observing that this may affect investor confidence.
“If you run the risk that country X is going to take that away at some point because it’s missing its targets, or it thinks it can get a higher price if it takes it back to market, then it’s also going to stymy investment.”
Trump returns
In May, the Biden administration signalled support for carbon credits with the publication of a Joint Statement of Policy and Principles for Responsible Participation which outlined practices to support supply, demand and market integrity in the voluntary carbon markets (VCMs). This suggested the US would take an active part in COP29 negotiations as agreements between countries would help to spur coordination with and stimulate development of the VCMs.
But the re-election of Donald Trump as US president has sparked broader conversations about the future of US climate policy, and its impact on global action. During his previous term, Trump withdrew the US from the Paris Agreement.
Given that the US delegation at COP29 is still operating under the aegis of the current administration, Juan Carlos Arredondo Brun, Director at carbon market solutions provider Abatable, believes that the US may either push for as many climate agreements as possible, or keep a more discrete profile, knowing that circumstances will change in a few weeks.
“Countries would appreciate the effort and intention” should the US adopt the former approach, he says. Should the US play a reduced role, “it would be understandable but would create an uncomfortable situation given the role and weight of the US on international climate finance and global climate mitigation” he continues.
Newell says that “it is an open question” to what degree US negotiators now feel they have a mandate at COP given the prospect of withdrawal.
“This could significantly limit the scope of the market for Article 6 ITMOs as well as the influence of Article 6 on carbon markets more generally,” he says.
Others are less fazed by the prospect of Trump’s return. “We remain optimistic about progress on Article 6 at COP29 and hope negotiators can take agreed mandates forward to give people confidence in these markets,” Cross says, adding that “we hope that the new administration in the US upholds its commitments to international climate agreements”.
“If the US does decide to remain absent, we hope that all other Paris signatories can roll their sleeves up and negotiate the remaining aspects required to scale Article 6 markets to make a meaningful contribution to achieving net zero,” he continues.
Puleston Jones does not believe that US withdrawal limits the scope of the Article 6.2 market. “The US has not been an active buyer or seller of ITMOs, so the loss of liquidity resulting from a US withdrawal is notional/theoretical rather than real US dollars leaving the Article 6.2 market,” he says.
The US Department of State was contacted for comment.
Overcoming differences
Experts are broadly optimistic that overall agreement on Article 6 can be reached at COP29. “The negotiations, as with any other negotiation under the United Nations Framework Convention on Climate Change, have at some point been bogged down into technical details,” says Arredondo Brun.
“We will be closer to having [an] agreement by Baku,” he continues. “This kind of bilateral interaction…is not uncommon,” he says, citing the differences between the US and the EU.
“It may be the case that the negotiations get stuck at some point because of different views,” Arredondo Brun says. “That’s natural to the process.”
There is nevertheless a recognition that in the context of climate change, time is not on our side. “2030 is only five years away, so we need to get on with things,” says Anirudh Keny, director of business development at Boomitra, a carbon marketplace.
“If governments can provide a letter of authorisation, or at least create a ledger of sorts…that will really enable confidence in 6.2,” he continues, citing double-counting as a key concern in carbon markets.
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