ANALYSIS: UN agrees greenhouse gas market rules, paving way for Article 6 trade
Quantum Commodity Intelligence - UN climate talks predictably went deep into additional time at COP29 in Baku, but late on Saturday November 23 adopted texts to fully enable the Paris Agreement's international carbon markets under Article 6, a move that gives developers of projects, investors and buyers of credits much greater visibility on how credits are created and traded.
Several hours after the Article 6 texts were gavelled through, the COP Presidency announced to exhausted delegates that the talks had also adopted a $300 billion a year global finance target by 2035, up from $100 billion previously, to help poorer nations pay for greener energy and deal with the impacts of climate change.
In addition, an aspirational goal was agreed to "secure efforts of all actors to work together" to scale up finance from public and private sources to $1.3 trillion by the middle of next decade.
While the financial goals were the main focus of COP29, which had been dubbed the 'Finance COP' ahead of its November 11 start, the adopted texts key to the functioning of the Article 6.2 and Article 6.4 will deliver a major boon to countries and companies keen to expand carbon markets. Expansion that proponents hope could reach a magnitude of many tens of billions of dollars by the end of the decade.
Done
"Just like that, it's done. The details and their implications will emerge with time, what's most important is the signal the conclusion of the Article 6 negotiations send to the world: there is no more uncertainty, real or perceived," said Olga Gassan-zade, a long-term negotiator on Article 6 and a recent chair of a UN-appointed Supervisory Body panel on Article 6.4 (SBM).
"Article 6 is the most tangible and measurable tool the world has to scale up climate investments in developing countries. It's time to demonstrate what it can do," she added.
"Article 6 is the most tangible and measurable tool the world has to scale up climate investments in developing countries. It's time to demonstrate what it can do"
The gavelling through of both texts by the COP29 president prompted elation from developers of projects, and the wider carbon market, which is keen to massively widen the scope of project-based carbon markets so that they have an Article 6 'stamp'.
"Altogether these two mechanisms have the potential to lead to a marked improvement in carbon markets under the UNFCCC. However, much depends on two factors: progress on defining further several standards under Article 6.4., and the proper scrutiny of standards and approaches used under Article 6.2," said NGO Environmental Defense Fund (EDF).
EDF's Associate Vice President for Carbon Markets and Private Sector Decarbonization, Pedro Martins Barata, who is also a former negotiator at UN talks, described the adoption of Article 6 is a "historic milestone" to help mobilise climate finance. "However, we need critical fixes on Article 6.4 standards to ensure nature-based solutions - and the communities protecting these resources - aren't sidelined," he said.
"The Article 6.4 Supervisory Board must get these standards right, and that may require further refinements in 2025. These standards must prioritise robust engagement with indigenous peoples and local communities. Climate justice and social safeguards can't be afterthoughts - they are fundamental to the success and fairness of these mechanisms," he added.
Importance
The government-to-government Article 6.2 is seen as particularly important to decarbonise on a broader scale in fast-growing developing countries, through programmes in sectors such as agriculture, energy use, buildings and transport that are too costly for host nations to abate, or, reduce, themselves.
Carbon trading lobby IETA linked the adoption of both texts on Article 6 to the wider, and enormous, task of getting countries at COP30 in Brazil next year to agree to a massive scale up in targets for 2035, as part of the Paris Agreement's 'ratchet' mechanism.
"[Article 6] can now help countries aspire to higher ambition in the next round of Nationally Determined Contributions [climate targets] due in 2025. Nine years after the signing of the Paris Agreement, it is time for this potential to be unleashed and fully utilised in pursuit of ambitious climate goals," IETA said.
Predictably, the full adoption of markets under the Paris Agreement drew flak from sceptics of carbon trading, who say that the penalties for inconsistencies aren't strong enough, although they did acknowledge that transparency measures now have considerable improvements.
"The carbon market mechanism agreed at COP29 is not a climate finance solution and will only provide a lifeline to the polluting fossil fuel industry, allowing it to offset emissions," said An Lambrechts, a biodiversity politics expert at Greenpeace International.
Jitters
COP29's backing of Article 6 markets came amid some last-minute jitters about whether US concerns about the role and scope of a centralised UN registry would prompt an objection to the draft decision on Article 6.2.
Carbon market proponents had also grown nervous that a dispute about a climate finance vehicle in another strand of the talks would torpedo approval of Article 6 texts, but a positive decision on markets got through unscathed.
The 19-page Article 6.2 text was considered more complex than the five-page document on Article 6.4, because it relates to various, highly-technical elements that are essential to tracking credits and how they are transferred.
The creation of credits through bilateral agreements, known in UN jargon as authorisation, was said by project developers ahead of COP29 to be the most important element of clearer rules for 6.2, because buyers need the chain of credits to be clear and accountable.
The decision text adopted requires a much higher threshold of information on parties that trade under the 6.2 mechanism, which proponents say is a major safeguard against double counting and environmental harms.
Text on authorisation has also signposted clear "sequencing" for the transfer of credits, and how inconsistencies are addressed. Sequencing refers to the consecutive procedural steps that apply to reporting, issuance and transfer of credits.
Reports on Article 6.2 bilateral deals, known in UN jargon as co-operative approaches, must embed measures that increase transparency. Meanwhile, for registries, a "dual-layer" approach establishes a UN international repository alongside a looser less formal "pull-and-view" listing of projects.
In the 'country-to-company' Article 6.4. a text delivers greater clarity on the authorisation links between Articles 6.2 and 6.4, enhancing "interoperability" between them.
PACM
Much of the progress on Article 6.4, which is to be known as the Paris Agreement Crediting Mechanism (PACM), came on day one of the COP. The climate talks removed hurdles to methodologies and registry infrastructure by adopting standards previously agreement by the SBM, and enabled the country-to-company PACM.
It may take at least a year for methodologies to be published and approved for Article 6.4 by the SBM in both carbon avoidance projects and removals, and voluntary carbon market (VCM) standards and registries have updated or published new methodologies, partly because of wider integrity initiatives.
"During this nine-year gap, the role of the voluntary carbon markets VCM has grown, and the convergence of compliance and voluntary markets will also play out in the context of Article 6," said Eve Tamme, a Netherlands-based consultant in a social media post in reference to the time take to agree rules on Article since the Paris Agreement was signed.
And, she noted, the "infrastructure of voluntary markets is already used under 6.2, and its methodologies will likely be featured in the PACM".
However, it remains questionable whether large-scale corporate demand through the PACM will emerge in the near-to-medium term, amid a wider stagnation in corporate action on climate, some commentators pointed out on social media.
"Corporate buyers are not suddenly going to rush into buying. The market dynamics remain the same. The complexities of carbon credits and corporate commitments are still there. Nothing has fundamentally changed. So, let's not get too excited," said Adrian Wons, founder and chief executive of digital carbon marketplace Senken.
In addition, the relief and jubilation from many in the carbon market in immediate response to the Article 6 decisions will likely be tempered by wider political and financial contexts that were major themes at the talks.
Major emitting countries such as the US, EU member states and many big emitters in Asia-Pacific are thought likely to remain unwilling to buy credits through Article 6.
Meanwhile, on the sell side, developing countries seeking to major suppliers of credits under Article 6 are required to deliver a range of bureaucratic functions to assure buyers that the credits won't be double counted against NDCs, and so far, just a handful of countries have done so because of legal and financial constraints.
Buyers
Although a blockbuster announcement by Norway at COP29 to invest $740 million in Article 6-eligible programmes showed that some countries are prepared to step up involvement in the Paris mechanisms.
In an irony that wasn't lost on delegates to COP29, the re-election of climate-sceptic Donald Trump as US President and a Republican clean sweep of Congress was said by some to have imbued a greater dose of urgency than what was the case at COP28, when efforts to agree a decision text on Article 6 ended in acrimony.
The $300 billion financing figure agreed is deemed inadequate by developing countries, but the deal was only achieved after richer countries agreed to increase their contributions by $50 billion a year compared with a previous text, following a walkout from talks by small island states and least developed countries.
"The commitments made in Baku - the dollar amounts pledged and the emissions reductions promised - are not enough. They were never going to be enough. And even then, based on our experience with such pledges in the past, we know they will not be fulfilled," said Ralph Regenvanu, Special Envoy for Climate Change for the Pacific island of Vanuatu.
UN climate chief Simon Stiell said the new finance goal "is an insurance policy for humanity" amid worsening climate impacts in all countries. "But like any insurance policy - it only works - if premiums are paid in full, and on time. Promises must be kept, to protect billions of lives," he added.
The aspirational goal of scaling finance to $1.3 trillion by 2035 through public and private contributions leaves open where this finance will come from. Earlier texts at COP29 had included language related to the contribution of carbon financing and the VCM, but this was removed from the final texts. Beyond carbon finance, what other mechanisms are there for the private sector to scale climate finance to the lofty aim of $1 trillion in 10 years?