At the UN Framework Convention on Climate Change (UNFCCC) Conference of the Parties (COP29), which ended on 24 November, negotiators finalized an agreement on Article 6 of the Paris Agreement, furthering the creation of an internationally coordinated carbon market (link). These developments are already impacting corporates working their net zero targets.
Historical context: From CDM to VCM
A global carbon market, where climate change mitigation units (measured in tons of Carbon Dioxide equivalent or tCO2e) are generated and traded, first emerged under the UNFCCC Clean Development Mechanism (CDM) (link). However, post-2018, a lack of agreement to extend the CDM led to its collapse, increasing the prominence of the Voluntary Carbon Market (VCM) as a private-sector-driven alternative.
The past few years have seen countries negotiate a new international, UN-backed carbon market under Article 6 of the Paris Agreement, which has three components:
- Article 6.2: Trade based on bilateral agreements between governments.
- Article 6.4: Trade based around a centralized UN mechanism.
- Article 6.8: Non-market approaches.
COP29 has now delivered further clarity on the implementation of Articles 6.2 and 6.4., setting the stage for their operationalization. This has implications for the VCM.
Article 6.2: Bilateral trade between governments
Article 6.2 establishes a framework for bilateral cooperation in trading greenhouse gas (GHG) mitigation units. Referred to as “Internationally Transferred Mitigation Outcomes” (ITMOs), these can be used to meet Nationally Determined Contributions (NDCs) where a national framework exists (e.g., in Switzerland), for example. This requires countries to have robust systems for tracking and registering transactions.
COP29 provided further guidance on the transparency and scaling of Article 6.2, including:
- Authorization process: Clear rules on how units are authorized by participating countries.
- Data sharing: Requirements for sharing transaction information with the UN.
- National registries: Requirements for national tracking and managing GHG emissions and mitigation actions.
There is also an explicit reference to avoiding “double counting” – i.e., avoiding that a mitigation outcome is claimed by multiple entities. Double counting remains a concern, both between nationally claimed and internationally sold mitigation units, and those implemented by private sector (e.g., under the VCM).
Article 6.4: UN-endorsed, new international carbon crediting mechanism
The evolution of Article 6.4, also known as the Paris Agreement Crediting Mechanism (PACM), presents an opportunity to align various carbon markets. By introducing a centralized registry and trading system for Article 6.4 Emission Reductions (Art6.4ERs), this mechanism may help to combat an increasing proliferation of private and NGO-backed VCM standards, registries, and units.
Under this mechanism:
- Like in the CDM, a centralized UNFCCC agency will review and approve methodologies for generating credits (Art.6.4ERs). Many of the “old” methodologies that were used during CDM, and that are also used in the VCM, are expected to be grandfathered into Article 6.4.
- Also like the CDM, a central database of approved methodologies, projects, and credits will be established.
- Projects must demonstrate co-benefits using the Article 6.4 Sustainable Development tool. (link)
- Host countries – through their National Designated Authorities (NDAs) – must approve projects and issue Letters of Authorization (LoAs) for “exporting” credits. Host countries must also perform “Corresponding Adjustments” in their national registries to ensure that the credits are properly tracked and accounted for.
CDM projects may be grandfathered into the new system before the end of 2025. This offers a pathway for VCM projects to come into a more unified UN-endorsed global carbon market.
Note that the situation for Avoided Deforestation / REDD / REDD+ projects* under Article 6.4 remains unclear.
Implications for buyers in Voluntary Carbon Markets
The emerging UN-backed carbon market is already impacting the VCM. For example, several of our clients are prioritizing purchases of credits that are approved by host governments and that have received, or are likely to receive, LoAs. And for a while we have been recommending that credits and credit financing (investment) opportunities are assessed for overlap with bilateral arrangements and NDC contributions. We also encourage clients that enter longer-term arrangements to embed regular monitoring and reporting of these topics into agreements.
We believe that these changes, and Article 6.2 in particular, might pave the way for more holistic, high-integrity programs, including jurisdictional programs that combine a range of mitigation activities. This might be particularly interesting for “supply shed” approaches (which include Scope 3 emission reduction initiatives), as those being considered by the Biosphere Integrity Fund. (link)
For buyers operating under the International Civil Aviation Organization (ICAO) Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), there is already an obligation to obtain an approval from the host (issuing) country. CORSIA is expected to continue to update the list of approved carbon credit types. It is therefore likely that this will align further with Article 6 in the future.
Conclusion
It is expected that voluntary carbon neutrality and net zero standards will (rightly) continue to push companies to prioritize investing to mitigate their direct, within value chain GHG emissions over purchasing carbon credits.
The situation vis-à-vis “insets” and Article 6 approaches is less clear. However, the emerging Article 6 framework – notably Article 6.2 – does provide an interesting pathway for high-integrity jurisdictional and supply chain programs that may address emerging EU sustainability obligations. This could potentially be a boost to demand. For those seeking to purchase credits alongside their internal and supply chain investment programs, it is well-advised to consider the implications of both the emerging UNFCCC architecture and national arrangements in their programs.
We believe that the outcomes of COP29 are broadly positive for international climate finance, providing clearer direction for carbon markets. However, the landscape will remain fluid over the next 12 – 18 months. As the UNFCCC framework under Article 6 gains prominence, VCM mechanisms may once again become secondary to the UN-backed system. Companies and stakeholders should proactively monitor and adapt to these changes, ensuring that their strategies align with evolving global standards and remain robust and forward-looking in the face of a rapidly evolving climate policy landscape.
* Note: REDD refers to Reducing Emissions from Deforestation and forest Degradation, and REDD+ the same plus conservation on forest carbon stocks, sustainable management of forests and enhancement of forest carbon stocks.
