COP28: Lack of progress on Article 6 likely to further limit carbon market growth

In a major setback to international carbon trading, countries at the 28th UN Climate Change Conference failed to adopt key texts laid out under Article 6 of the Paris Agreement, though an agreement on non-market mechanisms was passed on Dec. 13.

Parties did not reach a consensus on either Article 6.2 or Article 6.4, for a variety of technical reasons, with many countries clashing on carbon removals and issues of transparency and climate ambition over the final text.

Many in the voluntary carbon market were disappointed that the lack of a deal would delay market-based and private sector involvement. But those on the opposing side insisted that there were not enough safeguards and regulations in the texts to ensure a functioning and transparent market.

Article 6 of the Paris Agreement sets out the rules for global trade in greenhouse gas emissions reductions. It is seen as an essential enabler of international emissions trading, providing countries and businesses with a key pathway to meet and accelerate their climate goals.

Article 6.4 specifically allows a company in one country to reduce emissions domestically and have those reductions credited so that it can sell them to a different company in another country.

There was a lot of optimism at the start of COP28 that a deal on the guidelines of project methodologies and removals around Article 6.4 would be agreed in Dubai.

The operationalization of Article 6.4 would have provided a new structure for a global carbon market, opening up fresh demand for credits, with the UN deciding the rules on eligibility.

Sticking points

Approval of Article 6.4 is now likely to be delayed until the next UN climate summit, set to take place in Baku next November.

One of the main sticking points for Article 6.4 was the rules around carbon removals, with many saying the guidance on environmental integrity wasn't strong enough.

The process for overseeing carbon removal credits has faced strong scrutiny, with some of the current methodologies perceived as not being scientific enough, raising integrity concerns.

The International Emissions Trading Association bemoaned the "lack of consensus", saying this reflects the politicization of carbon markets.

"We missed an opportunity to expedite the operationalisation of a crediting mechanism that would have set a high bar on environmental integrity, safeguards, and human rights. The delay of the Article 6.4 mechanism is not a victory for environmental integrity, it is a victory for the anti-market agenda," said Andrea Bonzanni, international policy director at IETA.

However, some sources were less pessimistic, saying more issues simply need to be ironed out.

"No deal is better than a bad deal but this is certainly a setback for carbon markets under the Paris Agreement and makes the work under the voluntary market even more important," said Lina Barrera, senior vice president at Conservation International.

This is a pivotal time for the voluntary carbon market, which has been beset by credibility issues, with the efficacy of many projects and carbon credits coming under fire from the media and academia, leading to a steep fall in liquidity and a subsequent drop in confidence, with many buyers reducing their activity.

The Platts Nature-Based Avoidance price, which reflects the most competitive internationally fungible carbon credits issued by nature-based projects, such as REDD+ projects, is currently languishing at a record low level. This was assessed at $3.90/mtCO2e on Dec. 12, its lowest price since the assessment began in August 2021. Prices in January were as high as $11.60/mtCO2e. Platts is part of S&P Global Commodity Insights.

Carbon Market Watch, a non-profit climate policy organization, said the lack of any breakthrough leaves the UN-led carbon market in a continued state of uncertainty, although it also "avoids the adoption of inadequate rules that would have chained down climate ambition, enabled questionable trading and facilitated greenwashing."

Uncertainty persists

Participants at COP28 also failed to agree key details under Article 6.2, which sets out rules for country-to-country carbon credit deals.

Article 6.2 will however continue to be operational, after major guidelines were agreed at the COP26 summit in Glasgow in November 2021. However, many had been hoping the necessary guidance to create more legal clarity would be agreed at COP28.

Article 6.2 sets out a system of national accounting for GHG emissions, with common principles that countries can adopt to allow cross-border exchanges of credits.

IETA said it will still be possible to implement Article 6.2, although further guidance on reporting and rules on the authorization of Internationally Transferred Mitigation Outcomes would have been ideal.

"Countries can and should implement international carbon markets under Article 6.2. While the lack of consensus at COP28 is disappointing, we are excited by the numerous agreements signed and projects underway," said Dirk Forrister, president and CEO at IETA.

After years of political wrangling, demand for Article 6.2 has been limited by a lack of carbon market infrastructure in many developing countries.

Meanwhile, parties at COP28 did adopt a deal on Article 6.8, which provides opportunities for countries to cooperate toward the achievement of their Nationally Determined Contributions, without relying on carbon markets.

The adopted text says it is hopeful that development of the UN web-based platform will be finalized, and that this mechanism will be fully operationalized as soon as possible, and no later than June 2024.