COP29 at Baku has just wrapped. The big headline was a last-minute deal for $300 billion a year to help developing countries deal with climate change. The other major breakthrough at this COP was on carbon markets, also known as Article 6. It didn’t get as many column inches, but this milestone marks the culmination of nine years of negotiations.
It can be hard to get a sense of what was actually agreed with regard to Article 6 and what that means in the real world. The LinkedIn hot takes lack detail, while the actual legal documents themselves open with uninviting sentences like “Recalling decision 3/CMA.3 and its annex and decision 7/CMA.4 and its annexes…”. This post will try to land somewhere in the middle: explaining in plain English what has been agreed, and the practical implications for buyers and sellers of carbon removal credits.
Twin peaks
Article 6 refers to the relevant section of the Paris Agreement – the landmark international climate treaty agreed in 2015 at COP21. The original few short paragraphs in the Paris Agreement have been built on since 2015 with more detailed policies and procedures. The most important outstanding details were agreed at this COP.
Article 6.2 deals with how governments can buy carbon credits from one another in bilateral deals, with a big focus on Corresponding Adjustments: an accounting process to prevent double counting of climate benefits. Article 6.4 creates a carbon credit trading system governed by the United Nations (UN), in which private and public actors can buy and sell carbon credits. This is now known as the Paris Agreement Crediting Mechanism (PACM).
This agreement means carbon credits can now be issued and traded with a stamp of approval from the UN. This is significant as it could encourage more money to flow into projects that are trying to reduce levels of carbon dioxide in the atmosphere. On the government-to-government side, Article 6.2 can give countries reassurance that if they spend cash on projects taking place elsewhere, the outcomes can be counted towards their climate goals. Whereas the expectation for PACM (Article 6.4) is that it will unlock demand from the private sector using the credits to meet their own corporate climate targets.
Hopes and fears
Will the hoped-for benefits be realised?
On the government-to-government side, it looks promising. Some countries (including the UK) have decided not to participate in Article 6, on the basis that they want to meet their climate targets with decarbonization efforts at home. But many others know it is not feasible for them to hit those targets with domestic efforts, so they are shopping around for climate mitigation they can fund overseas. Norway, Singapore, and Switzerland have all been actively preparing to sign Article 6.2 deals, and the sums on the table are significant. For example, Norway is prepared to commit over $740m to such projects.
For carbon removal projects, this provides a playbook for unlocking government money:
- Step 1: Locate your carbon removal project in a jurisdiction that is planning to become an Article 6.2 “Host Country”.
- Step 2: Select an independent registry that will verify your activities and issue the credits (the buying country may set certain criteria such as approvals from relevant accreditation bodies).
- Step 3: Come to an arrangement with the Host Country, which will negotiate the transaction and presumably take a cut.
In principle, this could benefit any enterprise taking carbon dioxide out of the atmosphere – whether through a Direct Air Capture facility or the restoration of mangroves. But in practice, traditional “nature-based” projects look set to dominate. The most active Host Countries so far have been developing countries with significant rainforests, such as Peru, Ghana, and Thailand.
PACMAN vs ghosts
The jury is out on the impact that PACM could have in spurring private demand for carbon credits. At first glance it seems promising. Many corporates currently steer clear of buying carbon credits, afraid of being accused of greenwashing. A UN stamp on a credit could change that.
Meanwhile, more governments are making it mandatory for corporates to purchase credits (for example, there is an existing UN-operated carbon credit scheme for airlines called CORSIA). PACM could become the marketplace of choice for all this new demand. However, there are some obstacles to this becoming a reality.
The experience of the previous UN-backed crediting scheme under the Kyoto Protocol, the Clean Development Mechanism (CDM), provides reason for caution. Weak safeguards on quality meant that the CDM ended up issuing millions of credits with questionable climate impact. Eventually this led to a price crash and the CDM fizzled out.
Of course, the designers of PACM are well aware of this history and have tried to build a robust framework tackling the flaws of the CDM. These rules are still high-level, so much depends on how they will be applied in practice. The current plan for implementing the rules relies on two organizations. Firstly, the Supervisory Body (SB): a working group of a dozen representatives drawn from across the UN membership. Secondly, Designated Operational Entities (DOEs) – auditors appointed by the SB to verify the work of the carbon projects.
The potential flaw in this institutional design is that there is a missing middle. In other models for carbon markets, there is an entity that writes protocols (detailed rules for carbon removal) and then oversees the auditors checking compliance against those protocols. In the EU’s regulatory framework, this entity is known as a Certification Scheme and is directly authorized by the EU to perform this role. In PACM, DOEs operate without this form of independent oversight, meaning it all falls to the Supervisory Body itself. This raises serious questions over the Supervisory Body’s capacity to do this at scale, given it is made up of a rotating staff of just 12 civil servants.
Now that the rules are in place, PACM will be operationalized once the first methodologies are approved by the SB. The first set of methodologies under consideration are carry-overs from the CDM. This will be the first test of the rigour of the new framework. It is notable that the rules permit both avoidance and removal credits (in contrast to the stricter EU rules, which focus on removals only). Avoidance credits are generally a lot cheaper than removal credits, which may mean that even if PACM does unlock additional private demand, it may not help scale up much-needed carbon removal activities.
Good vibrations
Markets are driven by animal spirits. The news from Baku may well have lifted those spirits and this could have a real-world impact on the carbon markets. It remains to be seen whether this has a lasting impact and how beneficial it is for the critical task of scaling up carbon removal. A lot will depend on how the recently agreed rules are put into practice over the next 12 months. The negotiations may be over, but expect this to remain a hot topic at COP2030 in Belém.
