As COP29 begins in Baku, Azerbaijan, global attention is on Article 6 of the Paris Agreement. This provision has the potential to foster international cooperation through carbon markets. However, key challenges remain in creating a transparent, effective system for carbon trading.
What is Article 6 of the Paris Agreement?
Article 6 enables countries to cooperate to meet their climate mitigation goals. While nations are committed to reducing their greenhouse gas emissions, the agreement recognizes different challenges and capacities across countries. Article 6allows countries to trade carbon credits, offering flexibility to achieve climate targets.
There are three main components of Article 6:
- Article 6.2: This allows bilateral agreements between countries, where nations set their own carbon trading terms.
- Article 6.4: This establishes a centralized carbon market, managed by the UN, for trading emission reductions.
- Article 6.8: This focuses on non-market approaches to help countries implement their Nationally Determined Contributions (NDCs), focusing on sustainable development and poverty eradication. Non-market mechanisms under Article 6.8 may include activities related to mitigation, adaptation, finance, technology development and transfer, and capacity building.
These mechanisms provide an opportunity for nations to generate and trade emission reductions, fostering greater global climate ambition.
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The Promise and Challenges of Article 6
Article 6 offers significant benefits, especially for developing countries. These nations can access climate finance through carbon markets to fund low-carbon projects. By trading carbon credits, countries can offset emissions from sectors that are difficult to decarbonize.
However, creating a fully functional global carbon market is challenging. At COP26 in Glasgow, negotiators agreed on a broad rulebook for carbon trading. But key details, such as the implementation of a centralized carbon market, were left unresolved. Further discussions at COP28 in Dubai also failed to break the deadlock.
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Countries like Japan and Indonesia have already moved ahead with bilateral agreements, known as “Internationally Transferable Mitigation Outcomes” (ITMOs). While these agreements progress, concerns about the integrity of carbon credit trading persist. The main issue is double counting, where both the buyer and seller claim the same emissions reductions.
What Has Been Decided So Far?
At COP26 in Glasgow, negotiators agreed on a broad rulebook for carbon credit trading. However, key details remain unresolved, particularly about how to operationalize the centralized carbon market under Article 6.4.
At COP28 in Dubai, discussions stalled on these issues. While some countries like Japan and Indonesia have moved forward with bilateral agreements, double-count concerns persist. As of October 2023, 91 agreements have been made, but questions remain about the integrity of these trades and whether the terms can be changed after the fact.
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What Will Be Decided at COP29?
As COP29 continues, discussions are focused on resolving key issues related to Article 6 of the Paris Agreement. Officials aim to secure a significant agreement on carbon market mechanisms. Market experts hope COP29 can establish clear rules for bilateral carbon trading agreements and operationalize the centralized UN-managed carbon market.
Key areas of discussion include:
- Guardrails for Bilateral Agreements: Countries are pushing for safeguards to ensure that the carbon offsets being traded represent genuine emission reductions. Some nations propose that the methods used to generate credits be subject to international verification.
- UN Central Registry: Another point of discussion is whether the UN should manage a central registry that allows credits to be transacted and retired, or if the registry should serve only as an accounting tool.
- Quality Standards for Carbon Offsets: An expert group has already developed a framework to ensure that credits meet basic quality standards. COP29 will decide whether to approve this framework, continue discussions, or reject it.
If these issues are resolved at COP29, the global carbon market could be operational as early as 2025. However, if key decisions are delayed, the market may face further setbacks.
The Impact on the Voluntary Carbon Market
The voluntary carbon market, where companies voluntarily purchase carbon offsets to meet emissions reduction targets, could be significantly impacted by decisions at COP29. The market was valued at $2 billion in 2022, but it shrank to $723 million in 2023 due to scandals and concerns over the integrity of some offset projects.
Linking carbon offset projects in the voluntary market to the Paris Agreement system could rebuild confidence. Projects like mangrove restoration or regenerative agriculture could gain access to the UN-backed carbon market. If approved, developers of such projects could sell their credits either through the UN system or in the voluntary market, potentially commanding higher prices due to the added credibility of being Paris Agreement-compliant.
This integration of the voluntary market with the formal carbon market could help increase transparency and ensure that carbon offset projects are credible, creating a more reliable and robust system for global emissions reduction.