Market stalls over bilateral vs. unilateral debate: climate lawyer

Corrects sentence to clarify that Kenya hasn't yet issued LOAs.

Quantum Commodity Intelligence - Despite progress under the Paris Agreement's Article 6 mechanisms, host countries are cautious about engaging in carbon transactions due to legal ambiguity, unclear authorisation processes, and risks to national climate targets, according to a climate finance lawyer.

In a recent podcast titled "ESG Decoded," Peter Zaman, a legal partner at international law firm HFW, outlined two distinct approaches: Ghana's structured bilateral partnerships and Kenya's more controversial unilateral path.

"Ghana has bilateral agreements with Switzerland, Sweden, and Singapore," Zaman explained.

"If a project falls under one of those agreements, the government can choose which country to transact with - often based on speed or efficiency."

However, even in countries with frameworks, uncertainty persists.

"Switzerland doesn't allow private sector participation, while Singapore supports both government-to-government and business-to-business models," said Zaman, noting that Singapore's framework offers additional legal protection through investment treaties.

Kenya, by contrast, intends to issue Letters of Authorisation (LOAs) without bilateral agreements and to self-declare credits as Internationally Transferred Mitigation Outcomes (ITMOs).

An LOA is an official document from a host country government that approves a carbon project and promises the application of a corresponding adjustment under Article 6.

"There's no global consensus on whether unilateral declarations are legitimate," Zaman said.

"Some countries may accept them, others may not - and with no further UN guidance expected for four years, buyers proceed at their own risk."

The podcast interview also highlighted complications arising from new guidance agreed at COP29 in Baku.

LOAs must now include three elements: use authorisation, entity authorisation, and endorsement of the cooperative approach.

"Most LOAs issued before Baku didn't meet these criteria," Zaman said, "so developers now have to go back and request revised letters - a bureaucratic burden."

Zaman further warned that stricter rules under Article 6.4 could exclude many voluntary carbon market projects.

"If a project is in a sector covered by a host country's NDC, it becomes very hard to prove that it's additional," he said.

"I suspect 60-70% of existing voluntary projects would not pass the new 6.4 additionality criteria," said Zaman.