COP29 sets clear pathway for global carbon markets, but challenges remain

World leaders formally adopting key rules and guidelines for carbon trading under Article 6 of the Paris Agreement at the 29th UN Climate Change Conference have set a clear pathway for the new era of international carbon markets, but critical challenges remain in safeguarding integrity, restoring demand and advancing national-level implementation.

COP29 in Baku, Azerbaijan, defined the rules for two distinct carbon market mechanisms. Under Article 6.2, a decentralized market is defined, allowing countries to create bespoke, bilateral mechanisms. Meanwhile, Article 6.4 outlines a centralized market managed by the UN, which oversees the issuance and transfer of carbon credits.

The International Emissions Trading Association has estimated that the Article 6 markets will help countries save about $250 billion/year in 2030 for meeting their nationally determined contributions, namely their climate targets committed under the UN's Paris Agreement.

Industry participants told S&P Global Commodity Insights that realizing cost savings requires countries to develop clear policies in the near future. The participants said the UN must manage the Article 6 markets cautiously; otherwise, these nascent markets could face the same issues as the voluntary carbon market, such as a crisis of trust, low prices and weak demand.

"Looking ahead, market actors will need to converge on approaches to additionality and set more conservative baselines," said Frederic Gagnon-Lebrun, global senior director for policy and strategy with climate consultancy South Pole. "This will drive more standardization across the market, which will help it scale and improve its ability to mitigate global emissions."

"Ultimately, we are moving toward a high-integrity and potentially high-price market that could drive more significant, transformative climate action," Gagnon-Lebrun said.

Article 6.2 struggles

Before the Article 6.2 rules were fully established, buyer countries like Singapore, Japan and Switzerland had already begun signing bilateral agreements, paving the way for international carbon trading with dozens of partner countries.

There is no uniform approach agreed upon among these pilot countries for implementing Article 6.2. Countries like Singapore have leveraged existing voluntary carbon market standards, like Verra and Gold Standard, to produce Article 6.2 credits. In contrast, countries like Japan have opted to develop their own carbon crediting standards.

Industry participants said the absence of uniform implementation approaches could lead to fragmented standards in this decentralized market, potentially undermining integrity, demand, and prices once again.

"Verra is encouraged by this [Article 6] decision and believes it will open avenues for governments to engage with established crediting programs, optimize climate finance and create meaningful impact," Verra, the world's largest VCM credit issuer, said in a statement after COP29.

Singapore, Verra and Gold Standard announced plans during COP29 to develop a uniform protocol to guide countries in using the established carbon crediting programs for Article 6.2.

The US Environmental Defense Fund stated that additional assessments are necessary to evaluate the quality of various Article 6.2 carbon credits. "Integrity initiatives like the Carbon Credit Quality Initiative (CCQI) and the Integrity Council for the Voluntary Carbon Market (ICVCM) will be central to this role," the EDF said.

Article 6.4 dilemmas

The Article 6.4 market is intended to be an enhanced version of the Clean Development Mechanism, or CDM. In light of the CDM's shortcomings, it is crucial for this new market to avoid repeating similar mistakes.

Serafino Capoferri, Macquarie Group's global carbon strategist, said new Article 6.4 methodologies are anticipated to be submitted for approval in the second quarter of 2025. The first issuance of 6.4 credits is likely to occur in 2025-26, originating from legacy CDM projects that have transitioned to the new framework.

"The hope is that a global, UN-administered system will fix some of the integrity issues that have jeopardized the existing voluntary carbon market," Capoferri said. "The main criticism of last week's [Article 6] agreement is that there are no penalties for countries that do not follow the rules or have inconsistencies in their reports."

The EDF highlighted that "CDM units [transitioned to the 6.4 mechanism] have been discredited over time and through various assessments," urging countries not to use these credits toward any commitments.

The EDF said critical fixes to Article 6.4 standards for nature-based projects are necessary to safeguard local communities and indigenous people, adding that these standards may require further refinement in 2025.

Domestic signals

Many countries have not formulated policies to guide the private sector to participate in Article 6 markets.

Industry participants from Australia and China have raised concerns over the lack of policy signals, given the significant challenges and decarbonization costs.

Australia's Carbon Market Institute said Nov. 23 that the country must decide whether to engage in or relinquish influence over international cooperation through carbon markets, as interest and investment are increasing in the Asia-Pacific region.

A Beijing-based carbon entrepreneur said that "in the long term, China will become a buyer country for Article 6 credits, especially buying from BRI [Belt and Road Initiative] partner countries. However, we are still waiting for the government to tell us what to do."