COP27: Deterrent to carbon market investments as key Article 6 decisions deferred

The lack of an agreement on key rules around international emissions credit trading at the UN Climate Change Conference in Egypt is a deterrent to investment in carbon reduction projects, Andrea Bonzanni, international policy director at the International Emissions Trading Association, said Nov. 21.

After long and sometimes fraught negotiations over two weeks in Sharm el-Sheikh -- ultimately concluding in the early hours of the morning Nov. 20 -- key provisions were removed from the final version of text covering Article 6.4 of the Paris climate agreement.

Article 6.4 sets out a new emissions crediting system governed by the UN.

"After much discussion throughout the two weeks, the provisions addressing the timing of authorization, changes to it and revocation were removed from the final version of the 6.4 text due to lack of agreement among Parties," Bonzanni told S&P Global Commodity Insights.

The voluntary carbon market was bearish at the start of the week, following no significant announcement regarding the implementation of Article 6.

Platts CORSIA-eligible carbon credit prices were at $3.15/mtCO2e Nov. 22, down from $3.40/mtCO2e Nov. 3, while nature-based credits shed a further 5 cents/mtCO2e on the day to $5.60/mtCO2e, down from a peak of $7/mtCO2e before COP27, according to data from S&P Global.

The key decisions on Article 6.4 will instead be deferred to COP28 in the UAE in 2023.

The first Article 6.4 credit was not likely to be issued before 2024 or 2025, delegates at COP27 said.

These include details around baselines, additionality and removals, Global Carbon Council CEO Kishor Rajhansa said in a webinar Nov. 22.

Bonzanni said the authorization of credits from a country hosting a project would be one of the most important issues to be addressed at COP28.

"There seems to be agreement that any future rules should be consistent across 6.2 approaches and the 6.4 mechanism," Bonzanni said. "Until a decision on this matter is made, countries are free to implement their own rules. The threat of revocation and frequent changes is a deterrent to investment, so we hope countries will devise policy frameworks that take that into consideration."

The delays leave the market with fewer options to invest in carbon abatement projects for the coming years, with options limited to the voluntary carbon market, Bonzanni added.

Article 6.2 progress

However, enough progress has been made for countries to implement bilateral agreements on Article 6.2, which sets out accounting rules for the transfer of international emissions units between countries, Bonzanni said.

COP27 had brought a lot of clarification on letters of authorization, interoperability and trading of Internationally Transferred Mitigation Outcomes, Rajhansa said.

During COP27, there was a first ITMO trade between Switzerland and Ghana, Bonzanni added.

Japan was planning to become one of the largest buyers, he said, while there were also signs that China was looking to use Article 6 credits in addition to domestic offsets.

Furthermore, some guidance on the scope of projects available for "Mitigation Contribution Article 6.4 Emission Reduction" credits came from the increasing clarity around Article 6.2, Programme Director at the Energy and Resources Institute Rajani Rashmi said at the webinar.

By implication, looking at the national markets under Article 6.2 gave an indication of which sectors would be left for Article 6.4 credits and voluntary markets, said Rashmi, a former UN lead climate negotiator for India.