Article 6 progress at COP29 could hit a wall after parties failed to reach consensus over terms under 6.2 that create hurdles for the secondary trading of carbon credits called ITMOs or Internationally Transferred Mitigation Outcomes, sources close to the negotiations told S&P Global Commodity Insights.
ITMOs are carbon credits that countries can trade to meet their Nationally Determined Contributions under the UN Paris Agreement and Article 6.2 outlines the framework within which this trade can be conducted called the "cooperative approach."
On Nov. 16, the UN published a draft document noting that the parties had not agreed to the guidance on "cooperative approach" under Article 6.2.
People close to the negotiations said the main areas of disagreement are whether a private company needs authorizations from the host country for secondary trading of the Article 6 credits and whether a host country can authorize an ITMO for NDC claims without identifying the buying country, called unilateral authorization.
On the other hand, a bilateral authorization means two countries agree to trade with each other, such as the agreement between Switzerland and Thailand to trade Article 6.2 credits. This also gives the host country full control and visibility over the use of the credits it has issued.
Disagreements over authorization had also held up Article 6 discussions at the previous COP28 in the UAE. Participants in favor of developing a carbon market believe that requiring host country authorizations would create market barriers and inefficiencies that hinder liquidity, and unilateral authorizations are needed for the development of a secondary market.
"If we want a liquid market, a price signal, we need countries to authorize toward multiple NDCs and then it will be the final user that will decide where to retire," an Article 6 expert said. He said the clause (1b) requiring host country authorization could "kill" the CORSIA and the voluntary carbon market.
The current draft of 1b "creates barriers for intermediaries or end users that may not necessarily be involved in direct engagement with host countries or G2G agreements," a second market participant said.
Both players questioned whether airlines, for example, in the CORSIA market, would be expected to negotiate directly with host countries because that is not how the mechanism was expected to work, and it would make CORSIA unworkable.
Meanwhile, the Article 6 expert said that parties met to discuss Article 6.4 on the morning of Nov. 18, but the text around 6.2 was more difficult and ambiguous, and it wasn't clear whether the impact on secondary trading was an intentional or unintended consequence.
Market hurdles
Lack of consensus over authorization sends a negative message to the private sector that has been anticipating a deal to enable participation, a Singapore-based trader said. "It can be more disruptive than the revocation issue. It transmits political uncertainties across the entire carbon ecosystem," he said.
The revocation issue refers to risks around project host countries revoking their authorization for Article 6.2 carbon credit exports, and has been addressed in previous negotiations.
The revocation issue is mainly a risk for government-to-government transfer of credits, the trader said. "This unilateral or bilateral [authorization] issue, if not settled, will confuse and discourage everyone in the private sector."
"In Singapore, we build trading houses, hire brokers, establish exchanges, expecting a liquid, vibrant carbon market, but if every private deal needs authorization from both countries, it simply makes all secondary trading sophisticated and difficult," the trader said.
A Chicago-based carbon project and policy advisor echoed concerns over how bilateral authorization of carbon trading might damage liquidity and discourage private sector participation. However, the need for project host countries to have complete transparency and control over the usage of credits was also understandable, given concerns about middlemen taking an unreasonably large share of profits from local communities, the advisor said.
An investor in Japan's Article 6.2 Joint Crediting Mechanism said the country was aware of concerns from both sides. He said there could be an acceptable option under which unilateral authorization is allowed, but the Article 6.2 system should be equipped with very solid technologies, like blockchain, that can ensure the same level of traceability as bilateral authorization.
It is essential to avoid the double counting issue that might trigger another round of trust crisis and make the carbon price collapse in this market, the member of the Japanese delegation said.
Singapore and Japan are the most active buyer countries for Article 6 credits in Asia and both governments have already signed dozens of bilateral agreements with project host countries globally.
