COP29: Draft Article 6.2 text reveals polarized views on revocation, authorization

The latest draft decision on Article 6.2 of the Paris Agreement, released Nov. 14 during the UN Climate Change Conference in Baku, shows stark division remains on the revocation and authorization of carbon credits under the bilateral trading mechanism.

The text, published by the UN Framework Convention on Climate Change, presents no less than eight options outlining conditions under which a project host country can cancel authorization for carbon credits, ranging from a complete ban on cancellations to allowing them at any time.

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 Transferable Mitigation Outcomes, or ITMOs, under Article 6.2.

Buyer countries like Singapore, Japan, and Switzerland have formed partnerships with project host nations globally. Their investments could be at significant risk if host countries choose to revoke authorizations unexpectedly.

Project host countries in the developing world, however, are seeking flexibility to ensure they have enough carbon credits to meet their climate commitments.

Negotiators from buyer countries have told S&P Global Commodity Insights that addressing the revocation issue is a priority at COP29.

They require assurances that Article 6.2 authorizations will remain stable in the face of elections and other political events.

Options, options

Option one in the draft text prohibits any changes to authorization after the initial transfer of carbon credits, while option two permits changes only if both host and buyer countries mutually agree.

A source close to the negotiations said project host countries were likely to reject these two options due to their inflexibility and the low likelihood of reaching mutual agreements on revocations.

Option three allows for changes to authorization if there is public agreement or under "extreme circumstances," such as violations of domestic or international law related to emissions trading. It also stipulates that the first transfer of carbon credits remains unaffected by any subsequent revocation.

Investors in Article 6.2 projects have previously told Commodity Insights that while protecting the first transfer of carbon credits is crucial, this was insufficient.

Most carbon projects have crediting periods spanning a decade, with investors expecting a steady supply of credits rather than a one-time transaction.

Other options involve the need for clearly defined and pre-agreed rules of revocation in bilateral agreements, while others permit changes to authorization at any time, or without any provisions -- this last seen as unlikely to be acceptable by buyer countries.

Finally, one option would defer decisions on revocation until further review if host and buyer countries cannot reach an agreement at COP29.

Demand for Article 6.2 credits has been slow to take off but there has been a slight shift in momentum in the past year after many developing countries expressed enthusiasm for the mechanism.

Over 90 international deals, including bilateral agreements, memorandum of understandings and letters of intent, have been signed under Article 6.2, according to data compiled by Commodity Insights and the UN Environment Program.

Platts, part of S&P Global Commodity Insights, recently heard Article 6.2-certified Household Device credits indicatively valued at $25-$30/mtCO2e, significantly above the current Platts-assessed Household Devices 2024 price just below $4.00/mtCO2e.