APPEC: COP29 talks to address political uncertainties in carbon project host countries

COP29 negotiations are expected to provide clear guidance on the circumstances under which a carbon project host country can revoke authorizations for carbon credits to be traded under Article 6.2, potentially reducing political uncertainties in this nascent market, experts said at the Asia-Pacific Petroleum Conference 2024 on Sept. 11.

Article 6.2 is an UN-backed system that supports the international trading of carbon credits under bespoke, bilateral agreements between individual countries. This mechanism enables countries with limited resources and high domestic decarbonization costs to invest in foreign countries and use those emission reductions to meet their own climate targets.

Revocation is a pain point currently hindering the Article 6.2 market from scaling up. If a project host country revokes its authorization for the carbon credits to be traded under Article 6.2, project developers in the private sector will face significant losses, and the government of the buyer country will also face difficulties meeting their climate targets.

Benedict Chia, director-general for climate change at Singapore's National Climate Change Secretariat (NCCS), said there are currently two options to settle the revocation issue, pending for discussions at this year's COP29.

One option is for the UN to allow individual countries to decide their own terms and conditions for revocation and to define the actions to be taken if revocation happens.

The other option is for the UN to clearly define under what circumstances the revocation can be accepted. Chia emphasized that, to reassure investors, revocation should only be allowed under extreme circumstances, such as human rights disputes.

He added that besides negotiations at the government level, some companies have provided insurance to cover such political risks in carbon market investments, which can be regarded as a market-based approach to addressing this revocation issue.

Karolien Casaer-Diez, global senior director for Article 6 at South Pole, said revocation-related negotiations are being closely monitored and supports revocations to be allowed only in very serious circumstances. South Pole is one of the world's largest carbon project investors and developers, as well as a key private sector enabler of the Article 6.2 market.

If a host country revokes its authorization for Article 6.2 credits, it could deter future investments in that country, Casaer-Diez said, adding that insurance products provide a pragmatic solution but may not be able to cover all costs and losses in carbon credit supplies.

Risk dilution

Casaer-Diez emphasized the importance of enabling one carbon project eligible for multiple international carbon trading schemes. Compared with having one project eligible for just one bilateral Article 6.2 agreement, making projects and credits fungible under different regimes can effectively dilute risks.

Chia, meanwhile, pointed out that Article 6.2 is decentralized in nature. To make the projects and credits fungible, meta-standards are expected to play an important role, he said.

Meta-standards, such as ICAO (International Civil Aviation Organization) and ICVCM (Integrity Council for the Voluntary Carbon Market), allow carbon credits issued by different registries to receive common labels that justify their quality and enable them to be used universally, he added.