More than two decades ago, a simple idea was introduced to financial and environmental communities around the world, a clever solution to help countries that signed the Paris Climate Agreement meet their commitments while providing a new income for countries in the Global South. That idea was international emissions trading. Now, a new set of international standards may help it take off.
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Through international emissions trading, countries unable to reduce enough greenhouse gas emissions through conventional methods would be able to purchase credits from other countries that implemented emission-reduction projects such as afforestation. Alongside these large-scale “compliance” markets – those designed for countries aiming to comply with their commitments – smaller “voluntary” markets would allow corporations to purchase carbon credits to offset their emissions. The companies buying voluntary offsets could then confidently make claims such as “net-zero emissions” or “carbon neutral”.
At the national level, emissions trading markets have been established in Europe – the largest market – and in many other jurisdictions including China, Korea, Japan, and Australia. In November, Brazil introduced a cap-and-trade system, and new domestic markets across Asia – Vietnam, Thailand, Indonesia, India, Malaysia and Taiwan – are following suit. Collectively, these global markets stand at US$100 billion per year.
Trading such credits internationally is a different story.
While individual countries already conduct limited trading with each other on a bilateral basis, there is still no standard today that allows the establishment of robust international markets. In 2015, the signatories of the Paris Climate Agreement agreed to set up a mechanism to do so – also known as the 6.4 mechanism, which refers to Article 6, Paragraph 4 of the accord. 10 years later, however, both the financial community and project owners are still waiting. A key roadblock is the lack of means to establish credible and verifiable emissions-reduction projects.
“There has been frustration at the very low speed,” Andrea Bonzanni, International Policy Director for the International Emissions Trading Association (IETA), told Earth.Org. “There were still negotiations ongoing until COP29, and the fact that the mechanism is not yet operational led several countries to hold back. Some projects are not really additional; they already existed. And monitoring and verification is not always impactful.”
More on the topic: Explainer: What Is Article 6 of the Paris Agreement?
Aiming to address these issues, a UN body has now adopted new standards to guide how emission-reduction projects measure their impact. Known as the Paris Agreement Crediting Mechanism (PACM), it fulfills the promises of the 6.4 mechanism, enabling countries and other actors to collaborate on reducing greenhouse gas emissions by exchanging carbon credits that are more credible and verifiable.
Last month, two standards were agreed. The first is a standard for estimating the baseline emissions that would have happened without a project under the mechanism. This is designed to help avoid over-crediting, or using the same project more than once. The second is a standard for accounting for any unintended increases in emissions that might happen elsewhere as a result of a project, referred to as leakage.
Along with the adoption of the baseline and leakage standards, the Supervisory Body for PACM also decided on ways to support implementation of the standards. One goal is to ensure that the project benefits can be shared equitably with host countries, where the projects are taking place, as well as with the countries purchasing the credits. Another is to build capacity so that more host countries can take part in the mechanism.
Jean-Marc Champagne, Managing Director of Seneca Impact Advisors, a development finance advisory firm, is optimistic about the potential of the new standards. “One of the biggest challenges we’ve seen from the financing side has been the lack of consistency and transparency in emissions calculations and verification,” Champagne told Earth.Org in a written response.
“I expect this to help unlock much-needed climate finance in markets like those in Southeast Asia. There, we see a high potential for emissions-reduction projects, and the new PACM standards can help scale these efforts by improving credit integrity.”
Bonzanni said PACM is expected to set a “very high bar in terms of environmental integrity – ensuring that everything that generates a carbon credit under this mechanism is absolutely representing tons of carbon that is being produced or removed, and there are no loopholes down the line.”
“The key delegations, the expert community, want this to be a stringent and ambitious mechanism to increase the trust in carbon markets,” he continued.
The Supervisory Body also adopted a decision on how cookstove activities can be credited and monitored, aligning earlier projects with the latest guidance. However, major emissions-reduction initiatives like regenerative agriculture and other nature-based solutions may still be excluded under the new system.
A new study by the European Alliance for Regenerative Agriculture estimates European farmers across the board could mitigate 141.3 million metric tonnes of carbon dioxide equivalent (CO2e) per year already in the first years of transition, which is about 84% of the net greenhouse gas emissions from the EU agricultural sector. Despite this enormous potential, Climate Farmers, a major European regenerative agriculture group, announced last week that it was stepping back from carbon markets after years of attempting to pioneer soil credits. “The current carbon market system is not built for the kind of agriculture we set out to support,” Co-Founder Ivo Degn said in a statement.
“For nature based projects like carbon farming, it will be challenging to meet the requirement to ensure the emissions are permanent,” Bonzanni told Earth.Org. “There’s always been a bias in UNFCCC that’s made nature-based solutions more difficult to credit. But the expectation is that raising the bar of quality will raise prices and demand.”
Champagne also highlighted the importance of this area: “Southeast Asia has a very high potential for nature-based solutions and coastal restoration projects.”
Ultimately, the expert community agrees that emissions trading is only one element of what is necessary to counter climate change. In a post on social media LinkedI about voluntary markets, Lisa Sachs, Director of the Columbia Center on Sustainable Investment, said activities financed through carbon markets, such as conservation, ecosystem restoration, and regenerative land use, are “essential.” But, she continued, “they deserve robust financing on their own terms: not as a way to justify ongoing pollution, and not through a patchwork of project developers, verifiers, standard-setters, brokers, traders, registries, and data platforms that each absorb capital, shape incentives, and extract value from the system – and collectively divert scarce financial and political capital away from the kinds of strategic, publicly guided financing frameworks we urgently need.”
Greenwashing Risk
Greenwashing of carbon credits is a serious problem in particular in voluntary markets, and anti-greenwashing groups are fighting back.
Last month, EnergyAustralia settled a lawsuit brought by advocacy group Parents for Climate that claimed the company’s “Go Neutral” carbon offsetting product was misleading or deceptive. EnergyAustralia is the country’s third-largest domestic emitter and the largest participant in the government’s Climate Active carbon neutral certification scheme. As part of the settlement, it acknowledged Parents for Climate’s key factual argument – that “offsets do not prevent or undo the harms caused by burning fossil fuels.”
Despite the risks, renowned climate scientist and communicator Katherine Hayhoe says transparently and independently verified carbon credits can do “far more” than protect carbon. “Many represent a key way to transfer funds to low-income communities that are often most at risk from climate impacts and lack the resources to protect the nature that sustains them,” she wrote on LinkedIn.
“If energy and cost-effective direct air capture can be developed at the same time that emission mitigation options are being implemented to their fullest degree, it can account for a fraction of emissions we can’t currently mitigate – and we know that ‘every bit of warming counts’.”
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