Focus on Article 6 as VCM flounders

As the UN Cop 29 climate summit in Baku, Azerbaijan, approaches in November, the focus is increasingly on whether countries will finally agree on the rules that can unlock future carbon markets under Article 6 of the Paris agreement.

Market proponents consider a repeat of last year's Cop 28 in Dubai — where parties failed to agree on the mechanism's rules — would be the worst possible outcome. But they are optimistic given Article 6's placement high on the agenda. "Now it is at the heads of delegation level, which we've never seen," International Emissions Trading Association managing director Katie Sullivan says. But she warns that uncertainty over Article 6's fate is keeping potential carbon market capital "on the sidelines".

The voluntary carbon market (VCM), which allows firm to offset their emissions with carbon credits, has found itself in a reputational crisis since last year, with prices crashing. Many potential host countries that are Article 6-ready have felt the impact of climate change this year as they battle with droughts or floods. A functioning market could plough much-needed finance into those countries.

But the recent difficulties in the VCM also highlight the importance of integrity. And it is precisely the issues that set Article 6 apart from the VCM that have proved the trickiest to solve. A crucial difference is the need for a corresponding adjustment under Article 6 to prevent double counting by countries of mitigation outcomes. It took five years of talks leading up to Cop 26 in Glasgow to resolve the issue, an EU negotiator said at a World Bank event in Berlin this month.

The negotiator, also a member of the supervisory body for the more regulated Article 6.4 mechanism, stressed that "only" three years have passed since Glasgow, and that integrity will continue to go before speed in reaching an agreement. Progress has been slow this year, as the supervisory body works on the rules and standards for the permitted methodologies underlying mitigation and removal activities, and on revising the methodologies of the Kyoto Protocol's Clean Development Mechanism (CDM) that Article 6.4 essentially replaces.

Some progress was made this summer on standards for proving "additionality" — that the mitigation would not have happened without the project finance — and setting the "baseline" against which the emissions outcome is measured.

Missing rules

In contrast, Article 6.2, which allows parties to form bilateral agreements for carbon mitigation projects that generate "internationally traded mitigation outcomes", already provides the possibility of engaging in carbon credit trades. In Berlin, several buyer countries, including Japan and Singapore, made it clear that they will press ahead with deals even if an agreement fails in Baku.

Parties under Article 6.2 will typically resort to CDM or the strictest VCM methodologies to underpin their mitigation activities, as they await a final agreement at UN level. And there are no removals projects in the Article 6.2 pipeline, given the lack of precedent in the CDM.

They said the main problem is a lack of capacity at host country level, and not so much the missing rules. But some of those missing rules also affect Article 6.2, such as those for credit registries, and more crucially, the timing and scope of credit authorisation, and the extent to which an authorisation might be revoked.

German deputy special envoy for climate action Norbert Gorissen last week called for progress on mitigation and ambition at Cop 29. "I'm very concerned that the focus of the incoming presidency is only on finance," he said. The EU does not intend to take part in Article 6 activities. One reason behind the failure in Dubai was stiff opposition from the EU, on grounds of environmental integrity.

By Chloe Jardine and Michael Ball

Voluntary carbon credits