Following an eight hour row over the agenda, parties unanimously approved the standards under Article 6.4 of the Paris Agreement for creating carbon credits on the first day of COP29 in a major milestone for the summit.
The UN-backed Article 6, aims to provide “trusted and transparent” carbon markets for countries, allowing them to trade credits to meet their climate targets. It also positions carbon markets as a vital investment channel for developing countries.
According to the UN, the standards for Article 6.4 agreed in Baku ensure that the international carbon market operates with “integrity”, guaranteeing that emissions reductions and removals are “real, additional, verified, and measurable.”
On the agreement of Article 6, COP29 president Mukhtar Babayev, said: “This will be a game-changing tool to direct resources to the developing world.”
Sideshow to the main event?
Speaking to Net Zero Investor, Lindsey Stewart, director of investment stewardship research and policy at Morningstar Sustainalytics, called this an “important step” in delivering more rigorous carbon emissions offsets. He also picked up on Babayev’s comments, suggesting that this is “an important means of providing climate-focused financing to the global South, where much of the offsets will be sourced”.
“However, many will also feel this is something of a sideshow to the main stage event at COP: namely, delivering real emissions reductions rather than just offsets,” Stewart warned.
Stewart’s thoughts were also shared by Oscar Warwick
Thompson, head of policy and regulatory affairs at the UKSIF, who told Net Zero Investor: “The main focus ultimately must be on emissions reduction by greenhouse gas emitting companies and projects first and foremost, though we expect investors will be cautiously optimistic that a functioning UN-governed carbon market now looks more likely to become operational.”
“The details of the standards and implementation by countries will determine its success,” Warwick Thompson added.
Noura Hamladji, assistant secretary-general and deputy executive secretary of the UNFCCC, called the decision “groundbreaking”. She stated on LinkedIn that it will “unlock significant technology and finance to accelerate climate action, paving the way for impactful emissions reductions worldwide”.
The International Emissions Trading Association also welcomed the adoption of Article 6.4, noting that the new standards will give market participants the “certainty” they need to proceed with project development globally.
It is worth noting that the standards for Article 6.4 agreed at COP29 are not yet final, as they are governed by the Parties of the Paris Agreement (CMA) and may be further enhanced over time.
In addition, despite the consensus on Article 6.4, there remain outstanding issues related to Article 6, including Article 6.2, which establishes the framework for bilateral carbon trading between countries.
Concerns over procedural transparency
Mahabub Rahman, director at Bangladesh’s ministry of foreign affairs, commented on LinkedIn: “Today’s decision undoubtedly represents a milestone; however, it was reportedly made without the in-depth discussion and negotiation that such a development would typically require, raising concerns about procedural transparency. These concerns could perhaps be mitigated among stakeholders.”
In addition, some have questioned the process of the Supervisory Body, with Leo Mercer, policy fellow at the Grantham Research Institute, stating “the opacity of
the process by the Supervisory Body is undesirable and risks embedding poor
practice from the outset as has been seen with the precursor clean development mechanism and the incumbent voluntary carbon market.”
This comes as some investors have started to acknowledge the role of carbon credits in the net zero transition, with pension funds such as the Canadian Pension Plan Investment Board and some within the LGPS allocating to the market. Marc Barnett, head of investment at the £2.3bn Cushon Master Trust, stated at Net Zero Investor’s Annual Conference that there have been “enormous tailwinds for carbon credits”.
Alongside him, Alex Godfrey, investment director at Octopus Investments stated that: “No one will reach net zero without carbon credits, and so far, they have been a failure.” Octopus Investments has launched a new Natural Capital Strategy this summer, aimed at offering institutional investors access to UK-based carbon credits.
Yet some investors question whether carbon credits genuinely facilitate decarbonisation or merely enable continued emissions. Paul Guilliotti, director of financial services at Richmond and Wandsworth Councils, raised this issue at Room151’s LGPS Investment Forum in London last week, noting that high-emitting companies mainly use carbon credits to offset their emission rather than decarbonise through other means.
