What was agreed?
Article 6 is a section within the Paris Agreement that enables countries to trade emissions reductions and work together to meet their nationally determined contributions (NDCs). The rules for implementing two key sections of it, Articles 6.2 and 6.4, were agreed at COP29. Both focus on market-based approaches and enable the international trade of carbon credits, recognising that they will be a valuable additional tool for channelling finance to developing countries for emission reduction projects.
- Article 6.2 (A6.2) allows countries to trade credits for emissions reductions, known as ITMOs - Internationally Transferred Mitigation Outcomes. This allows one country to enable emissions reductions in another country and use it to count towards their own emissions targets.
- Article 6.4 (A6.4) creates a global carbon market - the Paris Agreement Crediting Mechanism (PACM) - with a UN supervisory body and registry that records transactions (e.g. credits issued, transferred, retired). Projects can apply to issue Article 6.4 aligned credits (known as A6.4ERs) and it is expected that the first will be available from early 2025.
Both article sections aim to reduce the likelihood of double counting emissions reductions – a country that sells a credit to another cannot claim the reduction itself if the buyer country is also claiming it. This is done by applying a ‘corresponding adjustment’: subtracting the emissions reduction from the host country’s NDC, adding it to the buyer country’s NDC.
What does it mean for carbon markets?
Fundamentally this agreement at COP29 is a vote of confidence in carbon markets as a lever for decarbonisation.
It has in effect created a new carbon market, the PACM, separate to the existing global voluntary carbon market and compliance markets around the world. The intention is that countries, companies, and individuals will be able to buy the credits, A6.4ERs, on the PACM to financially support emissions reduction projects and help offset their emissions elsewhere.
- Voluntary carbon market (VCM)
A6.4, and the PACM, implicitly establishes a minimum quality standard. Certain project methodologies, such as onshore wind power projects, are unlikely to be accepted by the UN supervisory body. It’s possible that these limitations filter through to the existing VCM, with reduced demand for those types of projects and, in time, less supply as project developers create fewer of those projects.
Project developers will have a choice which market they use – PACM or the VCM. The VCM, through its unofficial regulator, the Integrity Council for the Voluntary Carbon Market (ICVCM), is in the process of producing a set of quality standards, the Core Carbon Principles, but it isn’t clear why projects or credit buyers would choose to use the VCM when there is now the UN-supervised PACM available, which may offer them more confidence.
We can expect to see increasing alignment between the PACM and VCM. Standards bodies like Verra in the VCM want to work with the UN supervisory body so that the PACM can use Verra’s existing project methodologies to generate credits, and new project methodologies for the VCM are likely to be created in line with what is accepted by the UN supervisory body for the PACM.
- Compliance markets
Compliance markets, where emissions are priced in a country or jurisdiction (the European Union’s Emissions Trading Scheme or California’s Cap & Trade Program, for example), are minimally impacted as Article 6 changes apply to the voluntary trade of credits.
However, we are already beginning to see examples for the convergence between the VCM and compliance markets. Under Singapore’s Carbon Tax and Taiwan’s Carbon Levy, ‘voluntary credits’, i.e. carbon credits that are ordinarily bought/sold on the VCM, can be used for compliance with government emissions requirements. It could be that in the long-term there is a broader convergence between the VCM, PACM, and compliance markets.
What does it mean for business?
On the compliance side, little change directly. Even before CO29 agreed the details of A6.2, there were already a number of countries making trades in anticipation of it: Singapore, for example, has struck deals with several countries that host emission reduction projects, allowing it to import the credits and claim an emission reduction.
So, for businesses with compliance obligations in jurisdictions where they intend to allow ‘voluntary credits’ to be used against some emissions, as they do in Singapore, they may start to see ITMOs become available as a compliance mechanism.
For buyers in the VCM, the agreement is a boost for their confidence that the market is still a credible lever for decarbonisation after a year of challenging academic studies and very negative headlines, for the market and the businesses which use it.
It is likely to open an opportunity for more structured critiques of companies’ use credits: as it is, companies often simply say that they intend to use ‘high-quality credits’, but there is no universal definition of what that means. With the creation of what is effectively a minimum threshold for quality, these claims will experience greater scrutiny. At the very least, it will require buyers to engage with the market and its principles to the extent that they can explain their purchasing decisions.
For sellers and traders of credits, it is more nuanced. They too benefit from a credible VCM, but many will have portfolios of older credits, which may not meet the standards of the PACM and for which they may have difficulty finding buyers.
A bright spot for all market participants is the shift in narrative, which accelerated over COP29, where the benefits of the VCM to countries in the Global South are receiving renewed attention. This has included a coalition of project developers from the Global South writing to the Science Based Target initiative (SBTi) to ask that they allow the use of credits against scope 3 targets because of the benefits projects deliver. This narrative of the market as a mechanism for redistribution fits well with a COP focused on climate finance for the Global South, but it also bodes well for buyers looking for reassurance that this is a long-term market.
Similarly, COP29’s focus on corporations and the private sector as a source for climate finance will help support the narrative of companies engaging with the VCM as a means of investing in nature and communities.
Ultimately, the Article 6 outcome sets up a structure with many of the details still-to-come and/or be decided by market participants themselves. There is no UN oversight on what can become an ITMO, nor are there many specific yet on what will make the A6.4ERs better than the old, unreliable, Clean Development Mechanism (CDM) credits.
What has the media and NGO response been?
The agreements were welcomed by many, particularly in the trade press – market participants have been waiting for clarity for the last nine years. Even well-known critics of the VCM have received the news positively; the feeling is one of relief that a mechanism that has been mired in controversy for so long may now have an opportunity to improve.
Patrick Greenfield in the Guardian said, “if it works well, the market would fund the low-hanging fruit of climate mitigation while making sure emissions are capped in line with the Paris Agreement”; Carbon Pulse hailing it as a “momentous win for international carbon markets”; China Daily, wrote that COP29's breakthroughs, including on Article 6, “marked a tremendous stride forward for humanity's joint efforts to redress one of the most damaging consequences of ways of life and production”.
Reception amongst the traditionally activist NGOs has been cold, in line with their long-standing opposition to carbon markets as a mechanism for climate action. Greenpeace International has dismissed the agreements, describing it as only providing “a lifeline to the polluting fossil fuel industry, allowing it to offset emissions”, similarly Friends of the Earth argue that “we have seen the impacts of these schemes: land grabs, Indigenous Peoples rights and human rights violations and more”.
However, there is also a healthy contingent of more supportive NGO and sector expert reaction, that notes the significant progress but points to the further improvements required if the market is to deliver on its promise, particularly in improving transparency, oversight on credit generation, or stipulations on how credits are used.
Environmental Defense Fund describe the agreements as “a practical, reasoned step forward – and if well implemented, can unlock the potential of carbon markets to drive deeper emissions cuts and deliver real benefits for people and nature”; Injy Johnson a research fellow at the University of Oxford, said, “The deal leaves a lot of trust in the hands of [countries]”; Jonathan Crook, policy lead at Carbon Market Watch, has said that “the package does not shine enough light on an already opaque system where countries won’t be required to provide information about their deals well ahead of actual trades”; Oeko-Institut, the German research and policy institute, said that if “quality issues continue under article 6, this could undermine our efforts to achieve our climate targets”.
Most businesses have so far not publicised their thoughts, but it will be instructive to see which choose to do so and the forums that they use. There is undoubtedly space for business voices in the debate, not least because discussions over the details will be ongoing over the next year to COP30, and as Reuters notes, “COP29 deals on finance and carbon markets could lead to billions more dollars flowing around the business world if countries next year can deliver climate plans with clear policies for markets and investment”.