In the opening plenary of COP29 on Monday, two standards underpinning the creation of a UN carbon market were waved through by the event’s Azerbaijani presidency.
The approval circumvented the usual process whereby government experts would have had the opportunity to scrutinise and negotiate the texts in detail.
The move effectively clears the way for the long-awaited carbon market set out in Article 6 of the Paris Agreement, which will be open to countries and businesses to trade through, to become operational. However, the lack of transparency after years of disagreement has caused consternation among climate campaigners.
The Azerbaijani COP29 presidency has hailed the agreement as a “breakthrough” and an “essential step” in getting the UN carbon market up and running. But others are less sure about the decision and the process.
While some climate campaigners and industry watchers, such as senior director of climate policy at non-profit Conservation International Florence Laloe, have welcomed the unorthodox approach as “getting the parties through a process roadblock”, others are outraged.
Kelly Stone, senior policy analyst at anti-poverty charity ActionAid USA, described what she considered the “gavelling through” of the SB’s recommendations as “an appalling opening to COP29”.
In a small concession that leaves the door open to some further discussion of the standards and the creation of supplementary guidance, the agreement text notes that the Article 6.4 Supervisory Body (which devised the two standards) remains accountable to the governments represented at COP29.
The COP29 presidency commented: “The standards for Article 6.4 agreed [yesterday] are not set in stone. As they are governed by the CMA (the supreme body of the COP), the parties will be able to further enhance them as they see fit.”
Campaigners highlight that unanswered questions in the text include how to address the so-called “reversal risk” of carbon being released back into the atmosphere.
Others have also criticised the standards as not being rigorous enough to avoid the creation of “risky credits”. Erika Lennon, a senior attorney at the Center for International Environmental Law, suggests the rules “will lead to human rights violations and environmental harm”.
What is Article 6?
Article 6 is the part of the Paris Agreement that defines how countries can voluntarily use carbon credits to meet the climate targets set out in their nationally determined contributions.
Under Article 6, a country can transfer carbon credits that it has earned through reducing its emissions to another country. Such credits could be generated by approved projects operating within that country.
There are two main mechanisms for trading to take place. Under Article 6.2 countries can set up carbon trading arrangements bilaterally, and Article 6.4 outlines a system where trade would happen via a UN-backed carbon market.
While the 6.2 mechanism is already operational (albeit with some notable details still to be agreed), the carbon market envisaged under article 6.4 has never been properly established, because countries have failed for years to agree on the rules to govern it.
What does a UN carbon market mean for businesses?
The creation of a UN-backed carbon market is likely to have three main implications for businesses:
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As well as countries, businesses would also be able to trade credits on the UN carbon market. This new and potentially large market for buying and selling carbon credits, which would come with a UN stamp of approval, is likely to be a more appealing place for businesses to transact than existing voluntary carbon markets.
The VCMs remain piecemeal and relatively small in scale. Environmental data platform Ecosystem Marketplace reported that $723mn of VCM transactions took place in 2023, a 56 per cent fall from the year before. Concerns about the integrity of carbon credits and reputational risk associated with VCMs has also made some businesses hesitant to use them. - Businesses that participate in activities that lead to reduced carbon emissions would be able to apply to the supervisory body for approval to sell carbon credits via the UN carbon market. Compared to existing VCMs, this could be a much bigger market opportunity for them — the Azerbaijani presidency has estimated the formation of the UN Carbon Market could unlock investment flows of $250bn a year.
- The establishment of a UN carbon market is also expected to influence standards in the VCMs. In a pre-COP29 briefing carbon credit verification body, Gold Standard reiterated its intentions to update its methodologies to be in line with “Article 6 principles and requirements”.
What was agreed on Article 6.4 at day one of COP29?
The two standards agreed cover methodology requirements for developing and assessing eligible carbon credits for a UN carbon market, and requirements for projects that remove greenhouse gases from the atmosphere, such as how removed emissions should be calculated and monitored.
The path has now been cleared for the carbon market to become operational. However, concerns remain in areas such as reversal risks and the overall rigour of the standards for creating high quality carbon credits.
There is likely to be further discussion about Article 6.4 rules during COP29, and additional guidance could be agreed by negotiators.
The agreement text also commits the Article 6.4 Supervisory Body, which is responsible for drafting the rules and standards of a UN carbon market, to build on the agreed the standards and report back to the COP parties in its annual report, including if it feels any additional guidance is needed.
Why is this agreement contentious?
In previous years, the Article 6.4 Supervisory Body has published recommendations ahead of COP meetings and its proposed rules are then given to country negotiators to scrutinise, amend and ultimately decide whether to adopt or not.
After lengthy negotiations at COP28 and COP27, countries failed to come to an agreement on the proposed Article 6.4 standards.
This year, in a bid to break the stalemate, the SB broke with its usual approach at its meeting in October, adopting the two standards itself. The COP parties were asked to endorse its approach, rather than the standards being opened up to full discussion.
Yesterday’s approval effectively means the two standards were waved through, rather than going through the usual full negotiation process.
How have industry-watchers reacted?
There have been mixed reactions.
Sebastien Cross, co-founder and chief innovation officer at carbon credit rating agency BeZero Carbon, said: “Breaking the two-year deadlock on Article 6.4 is a clear win for the COP29 presidency.” The agreement “gives a solid foundation of definitions and principles on which to build”, he added.
Conservation International’s Laloe said there was “no time to kick the can on Article 6 further down the road”.
Others, however, have been highly critical.
The agreement was a “backdoor deal” that “sets a poor precedent for transparency and proper governance”, according to Isa Mulder, global carbon markets policy expert at non-profit Carbon Market Watch. She warned it would “undermin[e] trust in UNFCCC decision-making processes” and said that the texts leave “many unanswered questions”.
ActionAid USA’s Stone, who is also network co-ordinator for membership body CLARA, which represents climate justice organisations, suggested that the way in which removals can be credited under the standards is too broadly defined. “This creates profound risks of harm to communities and that the mechanism will be filled with junk credits that do not fulfil their climate promises,” she added.
This article first appeared in Sustainable Views, a sister publication of The Banker
