A lack of consensus on international carbon trading at COP28 highlights the importance of voluntary carbon market mechanisms.
This year’s climate talks in Dubai have had a mixed reception. Although some commentators rejoiced at the inclusion in the final text of the words “transition away from fossil fuels”, commitments to accelerating investments in renewable energy, and reducing methane emissions, many were disappointed at the lack of progress on the rules for international trading of carbon reductions, or “Article 6”. These mechanisms allow emission reductions achieved in one country to be used against an emissions target in another country, and are seen as key to unlocking the large amounts of finance needed to fund the global energy transition.
Article 6 - Easy to say, less easy to do
Funding an activity that reduces emissions in one country and claiming the credit against the funder’s target may seem logical and uncomplicated. In fact, the concept has been around for over 20 years and was part of the Kyoto Protocol signed in 1997. The basics of Article 6 were agreed at COP26 in Glasgow. Article 6.2 allows countries to trade emission rights on a bilateral basis, while Article 6.4 operates at the project level.
Although easy to say, implementing these mechanisms is less easy to do. After COP26, a lot of the details were still to be ironed out before trading could begin. COP27 in Sharm el-Sheikh saw some progress on administrative and technical details, but many substantive issues still lacked agreement. The UNFCCC’s Article 6.4 Supervisory Body had been working flat out to bring proposals to Dubai that countries could agree on, but the differences were too large to be resolved in such a short period of time. The key division lines have been:
Article 6.2 - How to guarantee the integrity of transactions at the national level. Questions were raised over the assessment of baselines and crediting periods, with concerns that inaccuracies could lead to the issuance of bogus credits.
Article 6.4 – Even with the proviso that project-based transactions need to be backed up by adjustments in national accounts to avoid double-counting (Corresponding Adjustments), strong disagreements persisted on a number of technical issues. These open issues were mainly about ensuring high integrity of credits. Some of the key sticking points were:
• Project baselines – Generalised principles for the establishment of project baselines were not agreed. The draft Article 6.4 text also states that the baseline has to be consistent with the “host country’s climate pledge”, rather than being set against “business-as-usual” (which is used in the voluntary carbon market). According to the proposals, Article 6.4 credits also need to avoid “locking in” emissions inconsistent with climate goals, but detailed definitions were lacking.
• Permanence of “removal” credits - i.e., ensuring that carbon removed from the air is not released back into the atmosphere. Disagreements centred around the appropriateness of buffer pools for nature-based systems and the duration of monitoring required for geological systems.
• Leakage – i.e., ensuring that the climate benefits of projects in one area are not compromised by other activities elsewhere. This is an issue that the voluntary market has been grappling with for a number of years.
• Guarantees and safeguards for human rights – some negotiators wanted to ensure that local communities would be protected in the development of carbon reduction projects.
These issues are technical and different countries have different attitudes to how they should be defined and implemented. In spite of the efforts of the Article 6.4 Subsidiary Body in preparation for COP28, agreement from hundreds of countries in a such a short amount of time and against a backdrop of strongly held philosophical differences, was never likely.
The good news is that these issues mirror those in the voluntary carbon market (VCM), where the likes of the ICVCM, CORSIA, Verra and Gold Standard have been working hard to resolve them for several years. Recent developments on jurisdictional and dynamic approaches to setting baselines for nature-based projects, reduced crediting periods and improved monitoring guidelines, could all help the Article 6.4 debates.
Article 6.4 and 6.2 transactions – Proceed but with caution
Considerable work is needed to achieve consensus on these issues, with more intensity than has been shown in the past. This should take place through 2024, but given the amount of effort involved and differences of opinion, we believe a finalised Article 6 framework may be unlikely until 2025.
In the meantime, commitments between countries for international cooperation under Article 6.2 are still likely to take place. In the nature-based sector, forests are still under threat, developing countries need the capital and developed countries will need all the help they can get to achieve their 2030 emissions targets under the Paris Agreement.
In the absence of a final rule book, participating countries should ensure that their actions stand up to international scrutiny and could pass future tests of high integrity. Even though the detailed rules are a work in progress, the principles are mostly agreed: emission reductions should be clear, verifiable and additional.
The main application of Article 6.4 in the near term will be for international aviation under CORSIA, where the first compliance period is scheduled to begin in 2024 (although the deadline for demonstrating compliance for the 2024-2026 phase is not until 2028). These transactions will need government authorisation, with Corresponding Adjustments applied to the host government emissions inventories. In the longer-term, governments may also want to access these transactions to fulfil their NDC commitments, but these decisions can be deferred until 2030.
While there is disagreement on the rules for including projects under Article 6.4, the technical debates miss the bigger picture. If governments apply Corresponding Adjustments to their national emissions, they effectively under-write the integrity of the transferred emission reductions, as the adjustment process places the responsibility on the host government to make up any shortfall. To date, few governments have taken this step, but when they do it could give confidence to the market.
Voluntary carbon markets continue to do the heavy lifting
Many methodologies and standards used in the VCM build on those created under UN-based Clean Development Mechanism as part of the Kyoto Protocol (Phase 1 ran from 2008 to 2012). In the intervening years, and particularly since 2020, much of the effort to improve the methodologies has been picked up by the VCM community. Both through the standard-setting bodies and independent integrity assessment firms such as MSCI Carbon Markets, visible progress is now being made. The Article 6.4 Subsidiary Body could learn a lot from this work.
Until the international negotiating community can come together and agree the Article 6 rulebook, the VCM is likely to continue to do the heavy lifting in resolving these technical issues. Corporates and their stakeholders are more demanding than ever in their need for high-integrity emission reduction projects, and developers, standard setting bodies and integrity rating firms are responding with ever more sophisticated services.
The hullabaloo around Article 6.4, however, currently relates only to the use of carbon credits against national emission targets under the UN accounting system or CORSIA. Corporates can still set voluntary climate targets, invest in carbon reduction projects, acquire carbon credits and tell their stakeholders about the good things they have done. They should use the best market standards and guidance available to ensure their actions and claims can be substantiated. This can all take place outside of Article 6.4.
Ideally, there should be a single set of standards that define how project-based credits should be defined, measured and used in all situations – for governments and the VCM. But with hundreds of governments now starting to take an active role in these discussions, this could take some time. In the meantime, voluntary corporate climate action should continue apace with the standard-setting bodies working hard to improve the quality of their methodologies and accelerate this convergence with the UN processes. Where the private sector leads governments may follow.