COP29: Watershed moment for carbon markets as leaders resolve impasse over Article 6

Key rules and guidelines for international carbon trading under Article 6 of the Paris Agreement were formally adopted by world leaders on Nov. 23 at the UN Climate Change Conference in Baku, Azerbaijan.

Market participants hope the deal represents a turning point for voluntary carbon markets after a lengthy period of falling demand for carbon credits.

"We have unlocked one of the most complex and technical challenges in climate diplomacy," said COP29 lead negotiator Yalchin Rafiyev.

The COP29 presidency said the deal would help create a trusted, transparent, high-integrity carbon market.

"Article 6 is hard to understand, but its impacts will be clear in our everyday lives. It means coal plants decommissioned, wind farms built and forests planted. It means a new wave of investment in the developing world," Rafiyev said.

Greater clarity

Parties to the talks agreed to key guidance around Article 6.4, establishing a framework for a global carbon market run by the UN, almost two weeks after adopting key standards on carbon removals and project methodologies.

Article 6.4 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.

At the same time, enhanced guidance and clarity around authorization and transfer of credits under Article 6.2 were agreed at COP29 after many years of negotiations.

Authorization and revocation are crucial under Article 6.2 to build integrity and reliability in the mechanism.

"The big step forward is around how to flag inconsistencies, how they have to be resolved, and how that impacts use" of credits, a source actively involved in Article 6 negotiations said.

Article 6.2 sets out a system of national accounting for greenhouse gas emissions, with common principles that countries can adopt to allow cross-border exchanges of credits.

Countries can adopt credits, known as Internationally Transferred Mitigation Outcomes or ITMOs, under Article 6.2.

Negotiators acknowledged the guidance might not be perfect but represented a positive step towards transparency and accountability in a market lacking confidence.

"Countries now can accelerate climate action, leverage proven methodologies for monitoring, reporting and verification (MRV) and mobilize private-sector finance to meet and exceed Nationally Determined Contributions," said Mandy Rambharos, CEO of carbon registry Verra.

Verra, the world's largest carbon registry, was "encouraged by this decision and believes it will open avenues for governments to engage with established crediting programs, optimize climate finance, and create meaningful impact," Rambharos said.

Under duress

The voluntary carbon market has endured two turbulent years, with press and academia drawing attention to poor quality projects, resulting in low liquidity and a steep fall in carbon credit prices.

Sebastien Cross, co-founder and chief innovation officer at carbon ratings agency BeZero Carbon, said the COP29 deal was "built on stronger foundations" and should result in a more efficient and transparent carbon market.

"Of course, further steps will need to be taken to implement Article 6 effectively...but with proper implementation, Article 6 will unlock billions in capital flows, a large part of which will go toward developing nations, bringing benefits above and beyond decarbonization," he said.

Renewable energy consultancy Veyt said agreement may not immediately reignite interest in the voluntary carbon market, but it would reverse the recent sharp downward trend.

"Article 6 does not create a global carbon market, but it does set a credible and transparent architecture for global carbon trading, which is a necessary precursor to channeling climate finance towards low-carbon projects and unlocking more ambitious national targets," analysts at Veyt said Nov. 25.

Not everyone was so positive. Carbon Market Watch, a non-profit climate policy organization, said the deal "risks facilitating cowboy carbon markets at a time when the world needs a sheriff."

"It seems countries were more willing to adopt insufficient rules and deal with the consequences later, rather than prevent those consequences in the first place," said Isa Mulder, policy expert at Carbon Market Watch.

The Platts Nature-based Avoidance price, reflecting the most competitive internationally fungible carbon credits issued by nature-based projects such as REDD+ projects, is starting to rise after it reached a record low earlier this year.

The price was assessed at $4.35/mtCO2e on Nov. 22, a slight recovery from a record low of $2.70/mtCO2e in February, according to S&P Global Commodity Insights data. Platts Nature-Based Avoidance prices averaged $6.23/mtCO2e and $13.14/mtCO2e in 2023 and 2022, respectively.