The latest Article 6 agreement has enhanced the market's transparency and provided flexibility for project developers and investors to participate, but it may still take years to see significant supply and demand growth, Karolien Casaer-Diez, global senior director for Article 6 at South Pole, told S&P Global Commodity Insights in a recent interview.
The UN's COP29 climate change conference has been widely recognized as being productive for the carbon market, which landed essential frameworks for the new, UN-backed carbon market.
South Pole, one of the world's largest carbon project developers and climate consultancies, said COP29 sent an encouraging signal to the market.
Revocation
In the past, project developers and investors have been hesitant to enter this market because there has been no clear definition regarding under what conditions a carbon project's host country can revoke their authorization for the exports of Article 6 credits.
"The agreement at COP was that revocation can only happen under conditions that are clearly defined in the authorization letters. That does provide more clarity for carbon project developers, and I think it's a good outcome," Casaer-Diez said.
"It mitigates some of the policy risks that we face when we move to the market, and it gives us clarity [about] under what conditions we can or cannot invest."
She added that the World Bank Group has released a template for authorization letters for governments to consider following. Meanwhile, Article 6 project developers like South Pole will receive the authorization letters to enable their project registration.
In addition, she highlighted that the UN would publish authorization letters on its website and make it publicly available, so people who have not entered the Article 6 market can also access the letters, evaluate the policy risks, and make informed investment decisions.
Flexibility for private sector
Another controversial issue was whether a carbon project's host country can make unilateral authorization without indicating a specific buyer country. The final text has allowed such unilateral authorization, and Casaer-Diez said it provided flexibility for project developers and investors.
"If your authorization letter specifies that you have to sell to Singapore, then the credits can only be used for Singapore's NDCs [Nationally Determined Contributions]. If you leave that open, you might be able to sell it to Singapore, to Switzerland, to Korea, or into CORSIA [Carbon Offsetting and Reduction Scheme for International Aviation] ... So, it gives much more options."
For project developers like South Pole, unilateral authorization could create a bigger pool of potential buyers, she pointed out.
She added that such an arrangement also enabled intermediaries and secondary traders, who are willing to take risks, to make early-stage investments before a bilateral agreement is up and running.
High-quality supply
Under the newly landed framework, Article 6 credits will come from three sources: bilateral emission trading mechanisms under Article 6.2, the UN's centralized Paris Agreement Crediting Mechanism under Article 6.4, and legacy projects transitioned from the UN's Clean Development Mechanism (CDM).
Casaer-Diez said legacy CDM projects would contribute to the early supplies and there would be some interest for procurement, however, it would take time to deliver Article 6 credits from the other two sources.
"For 6.2, the bilateral agreements are quite demanding and take time to negotiate, and a lot of host countries are still putting in place their regulatory frameworks. For 6.4, we have the standards now. The next task at hand is to write the methodologies and to write the actual projects, so that they can start issuing," Casaer-Diez said. "We're still a few years away from a fully liquid market, I would say."
She highlighted that the Article 6 credits are expected to be priced higher because of the stronger demand and higher transaction costs. Driven by such price signals, South Pole plans to develop methodologies and projects focusing on innovative technologies in hard-to-abate sectors, like retirement of coal-fired power plants, hydrogen, shipping and steel decarbonization.
Casaer-Diez added that the Article 6 methodologies and voluntary carbon market methodologies are expected to align with one another, especially regarding how to define quality and integrity.
"The more we get alignment in infrastructure and in principles, the more scalable and liquid the market becomes," she said.
Patient demand
Casaer-Diez said that demand in the Article 6 market is generally projected to be high and to outweigh supply. However, it takes time to see significant demand growth, she added.
"[Demand] is going to ramp up either towards 2028, because it's in Q1 of 2028 that airlines have to surrender their offsets for CORSIA phase 1, or the demand will ramp up towards 2030, because that's when the sovereigns have their NDC deadline."
She said that, for project developers, it would be helpful if more material demand growth could happen in the short term. For buyers, it is also wise to sign offtake agreements early to get a better price.
When asked who the next buyer countries would be, she said New Zealand and Australia both see substantial interest, but procurement strategies have not been announced by either government.
Meanwhile, she noted that there was a recent study by Climate Action Centre of Excellence in Doha calling for the EU to allow the use of Article 6 credits under its Emission Trading System or Carbon Border Adjustment Mechanism. If that happens, it could offer a very strong demand signal, she added.
