COP29: Rules for UN-led carbon market under Article 6.4 approved in Baku

Negotiators from almost 200 governments Nov.11 endorsed a framework to create a new structure for a global carbon market led by the UN, opening up fresh demand for carbon credits.

After around three years of fraught talks and intense negotiations, representatives struck a final deal on Article 6.4 of the Paris Agreement on day one of the UN Climate Change Conference after a few opposing parties compromised on the final wording of the decision.

In a speech, COP29 President Mukhtar Babayev said this adoption starts the "full operationalization" of this carbon trading mechanism, and he called for "a spirit of compromise" in other negotiations in Baku.

"This will be a game-changing tool to direct resources to the developing world. Following years of stalemate, the breakthroughs in Baku have now begun. But there is much more to deliver," he added.

Article 6 of the Paris Agreement sets the rules for global trade in greenhouse gas emissions reductions, under Article 6.4, an integrated and global carbon mechanism will be established, overseen by a UN body for the trading of emissions mitigation units created globally by various projects. This replaces the clean development mechanism from the Kyoto Protocol and Article 6.4 Supervisory Body will operationalize and supervise the mechanism.

A resolution in Baku comes after the Article 6.4 Supervisory Body agreed to a standard for project methodologies and carbon removals in early-October, setting the stage for the operationalization of Article 6.4.

This move by the body was viewed as a significant step as it required COP29 negotiators to reach a consensus to reject, rather than adopt, the standards.

"The Supervisory Body engaged in extensive deliberations throughout the year, with the last meeting in October, concluding all the important elements for operationalization of the [Article 6.4] mechanism. We welcome this positive momentum," Babayev said.

COP29 runs through Nov. 22 in Baku.

Pushback

Getting endorsement from all the parties and countries was not easy with some still uneasy with some of the flexibility.

The Coalition for Rainforest Nations was one of the parties that had to compromise in agreeing on the final Article 6.4 text. Kevin Conrad, executive director of CfRN, and former special climate envoy of Papua New Guinea, said the move by the Article 6.4 Supervisory Body did not follow the CMA's mandate, and instead adopted standards rather than recommendations.

The Conference of the Parties of the Paris Agreement, or CMA, serves as the supreme body of the UN Framework Convention on Climate Change and oversees all climate agendas. CMA meets annually during the same period as each COP.

"[The Article 6.4 Supervisory Body] went back, adopted it themselves, made it effective immediately and then came back to the CMA and said, please endorse this approach, which we cannot do," Conrad said. "If we have any other subsidiary boards or bodies that now decide similarly ... it creates horrible precedent."

He pointed out that, in the approved text, the wording used is to "take note" of the two documents submitted by the Supervisory Body, namely the requirements for the development and assessment of Article 6.4 methodologies, and the requirements for activities involving carbon removals under the Article 6.4 mechanism.

Conrad said the COP29 presidency showed a strong will to make some progress on Article 6-related negotiations this year, so the parties compromised to accept the documents for methodologies and removals, but the indifferent wording "take note" was an alert to the Supervisory Body that warned them to not to make a similar move again.

But Babayev also added that the proposed decision would not conclude the work on Article 6.4., and said that discussions relating to details on Article 6.2, under which countries allow cross-border exchanges of credits, will also continue at COP29.

Heavy scrutiny

In a statement, the COP29 Presidency said this decision will increase "demand for carbon credits and ensure that the international carbon market operates with integrity under the supervision of the UN."

Project methodologies under this mechanism will be ready to register in the second half of next year, according to the Article 6.4 Supervisory Body, which has been tasked with drafting the guidelines for this centralized, UN-backed carbon crediting mechanism.

The operationalization of Article 6.4 is seen by many carbon market participants as a landmark move for the carbon markets, which are currently facing headwinds do to integrity issues leading to subdued demand and low prices of credits.

Article 6.4 specifically allows a company in one country to reduce emissions domestically and have those reductions credited so that it can sell them to a different company in another country.

"Breaking the two-year deadlock on Article 6.4 is a clear win for the COP29 Presidency," according to Sebastien Cross, chief innovation officer and cofounder at rating agency BeZero Carbon. "There is still lots of work to do on Article 6.4, and countries will have a say in the final outcome, but this agreement gives a solid foundation of definitions and principles on which to build. Most importantly, this looks very different from carbon markets of old and builds on the information, data and tools available to us to make carbon markets work."

The carbon finance market is relieved that this will help propel this trading mechanism, by giving more clarity to project developers, and help countries move forward with their carbon policies.

The Platts Nature-Based Avoidance price from S&P Global Commodity Insights, which reflects the most competitive internationally fungible carbon credits issued by nature-based projects such as REDD+ projects, has been trading at low levels for most of 2024.

Platts assessed the Nature Avoidance 2024 price at $4.35/mtCO2e on Nov. 11, up from the record low of $2.70/mtCO2e seen in most of February, Commodity Insights data showed.