What Lies Ahead for Carbon Markets After COP28?

21 December 2023| When voluntary carbon standards such as Plan Vivo, Gold Standard, and the Chicago Climate Exchange emerged in the late 1990s and early 2000s, they aimed to create transitional mechanisms to test new concepts and support early action until a global regulatory apparatus emerged.

More than 20 years later, that apparatus is still in limbo, and regulation of International Carbon Credits (ICCs) won’t be operational for at least another year – and probably two – after delegates to the UN climate conference in Dubai (COP 28) failed to find agreement on operationalizing Article 6 of the Paris Climate Agreement.

That’s good news for the Voluntary Carbon Market (VCM) because it can continue operating without cumbersome and counterproductive corresponding adjustments.

It’s bad news for the planet because it delays the advent of a global compliance market that could double the climate impact per dollar spent on reducing emissions.

In the week since our last dispatch from COP, we’ve dug into the documents, listened in on webinars, and followed the LinkedIn debates to produce this simple synthesis of the status quo. We’ve chosen not to quote anyone in the piece in an effort to avoid emphasizing views from those who can speak on the record over those who can’t.

More Positive than Initially Reported?

Our reporting from the final day of COP mostly stands, but not all of it.

Countries are moving forward with the piloting of government-to-government transfers, labeled Internationally Transferred Mitigation Outcomes (ITMOs) under 6.2, and they can even execute corresponding adjustments on Emission Reductions and Removals (ERRs) from projects, turning them into ITMOs – although it’s not clear the UNFCCC will recognize those.

What’s changed since our final dispatch is the degree to which market proponents welcome the delayed progress on Article 6.2.

Several pro-market observers concede that another year of negotiations could lead to a clearer and more manageable mechanism without being the cause of delays.

That’s because countries still need time to build their capacities, and there’s s more than enough clarity to move forward under Article 6.2.

The downside: only the most advanced countries are moving forward under Article 6.2, while at least 70 are taking steps to utilize Article 6.4.

To help develop sovereign action on Article 6, Ecosystem Marketplace is working with the US Department of State to develop new carbon credit pricing intelligence tools and support services for developing counties (also known as host countries) through an International Carbon Credits Console.

Article 6: The Component Parts

Under the Paris Agreement, Article 6.2 covers bilateral agreements between countries that have exceeded their Nationally Determined Contribution (NCDs) to the Paris Agreement and those falling short. At the national level, those surplus ERRs don’t need to demonstrate additionality to be transferred as ITMOs; they merely need to represent reductions beyond the selling country’s NDC. At the project level, however, ERRs should meet additionality requirements under a recognized standard.

Article 6.4 covers a centralized credit issuance mechanism for countries that either can’t operate under 6.2 or want the flexibility of using both.  It’s the rebirth of the Kyoto Protocol’s Clean Development Mechanism (CDM), and it’s methodologies must deliver project-level additionality.

Article 6.3 defines ITMOs, which apply to ERRs from both 6.2 and 6.4 when transferred via 6.2.

The Good News

COP 28 opened with a commitment to fund the Loss and Damage Fund, and it closed with an agreement to phase out fossil fuels through a variety of mechanisms – including dramatically ramping up the use of renewable energy, support for energy efficiency, and even carbon removals and Carbon Capture and Storage (CCS).

The Global Stocktake explicitly called for accelerated action on Art 6.

The Bad News

The failure to reach an agreement on Article 6 means there will be no centralized UN-driven mechanism under Article 6.4 for at least another year and probably two.

It also leavies uncertainty around bilateral agreements between countries under 6.2, despite the optimism expressed above, because all of the Article 6 guidance must pass as a package.

That means any delays in guidance for 6.4 will also impact 6.2 – not to mention the UN’s global pact for offsetting airline emissions (CORSIA).

That’s because CORSIA, while it operates outside the Paris Agreement, requires corresponding adjustments. The failure to reach an agreement on the enabling tools for providing transparency and building registries, not to mention the need for corresponding adjustments, could stifle progress on CORSIA.

The Good News About the Bad News

Market proponents are divided over whether the failure to reach an agreement on Article 6 reflects legitimate quality issues or obstructionism by the market opponents – or a combination of the two.

A large minority of proponents said they believe further negotiations can yield a more robust mechanism.

Either way, countries continue piloting activities under Article 6.2, which lets countries like Thailand transfer ITMOs that represent reductions exceeding their NDCs to countries like Switzerland.

Then there’s the VCM, which has emerged more coherent than ever.

Centralized VCM and the Future of Legacy Standards

Those carbon standards that already passed muster under CORSIA[1] announced they’d continue to align around best practices, while the organizations promoting those practices[2] announced they’d work on end-to-end agreement about what works (the standards) and how it’s used (corporate claims).

At the same time, national regulators, such as the US Commodities and Futures Trading Commission (CFTC), and international organizations, such as the International Organization of Securities Commissions (IOSCO), stepped up with rational plans for regulatory certainty of the VCM.

The upshot: we’re getting more clarity on where experts align and where they diverge. This should help to ensure outlier views don’t have an outsized impact on the market.

Article 6: The Problem

The Glasgow Rulebook governs the implementation of Article 6, and it lets countries establish their own rules for implementing Article 6.2 while creating detailed rules for implementing Article 6.4.

In Dubai, talks bogged down over how prescriptive the UN’s rules for 6.2 should be and the role of nature-based solutions under 6.4, among other contentious aspects of what continues to be a highly technical and nuanced climate market.

Article 6, Paragraph 2: Who’s the Boss?

Four issues began bubbling up in technical discussions over the summer and erupted in Dubai:

1. The degree to which countries can designate which information is considered confidential and which must be disclosed.
2. The sequencing and timing of reporting obligations before ICCs could be issued.
3. The degree of consistency among international trading linkages.
4. The role of registries and the need for linkages among them.

The European Union pushed for more prescriptive language in Dubai, and the United States called foul. Countries then split into two factions – one arguing that the new requirements amount to renegotiating the Glasgow Rulebook and that countries engaged in 6.2 are sophisticated enough to develop their own rules, and the other arguing that lax guidance could lead to abuse and confusion.

There were also provisions in both 6.2 and 6.4 arguing that ITMOs could be canceled after being transferred abroad – provisions some argued would underpin integrity, while others said it would undermine demand.

While the preponderant view is that there’s enough agreement under 6.2 for countries to move ahead, many acknowledged serious risks. Some said corresponding adjustments made now won’t be recognized under the UNFCCC, and others worried that individual trades made now could be canceled later.

Article 6, Paragraph 4: Why Can’t we All Just Agree?

As of December 12, 2023, 67 countries had identified Designated National Authorities for engaging Article 6.4, and the draft agreement asked the Article 6 Supervisory Body (A6 SB) to establish a Designated National Authorities Forum “to facilitate the exchange of information and experience among designated national authorities and the identification of common challenges at the regional and subregional level in operationalizing the mechanism.”

Because Article 6.4 governs a central apparatus, the Article 6 Supervisory Body is charged with developing methodologies that govern transactions, and talks bogged down over two methodological issues: first, whether nature-based solutions (NBS) should be recognized and second, whether Avoidance should be treated as a third category additional to Reductions and Removals.

The European Union became the most prominent opponent of NBS – including both Afforestation/Reforestation/Regeneration (ARR) and Avoided Deforestation and Degradation (ADD) – due to uncertainty over the risk of reversal.

The Philippines became the most prominent proponent of treating Avoidance as a separate category, in part because they see it as a way of encouraging countries like themselves to leapfrog over (avoid) fossil fuels altogether and go straight to renewables. They have argued that such a leap represents a legitimate avoidance that should be treated differently from reducing current fossil fuel use.

Corporate Claims

At COP 27 in Egypt, negotiators agreed to recognize Mitigation Contribution Units (MCUs) for ICCs that don’t require corresponding adjustments, while the leading VCM actors are also aligning around agreement on what claims companies can make.

There appears to be a wide variance in how proponents perceive the new claims guidance. Some argue that if claims are too vague, companies won’t see the value in engaging the market, while others argue that current claims of carbon neutrality are overstated. This issue is not going away any time soon.

Previous Coverage

Piloting to Continue Under Article 6 Despite COP28 Failure

COP28 Update: Progress Towards Agreement on Avoidance Under Article 6.4, but Backsliding in 6.2

African Countries Mobilize for Carbon Markets Despite Article 6 Deadlock

Analysis: Article 6.4 Talks Have Stalled in Dubai. Here’s What’s At Stake

What to Watch for Voluntary Carbon and Article 6 at COP 28

Bionic Planet Podcast

Related Links

This LinkedIn post by Jos Cozijnsen of the Climate Neutral group offers a short and sweet summary of the differences between Articles 6.2 and 6.4, as well as a brief analysis of issues with 6.2 as it currently stands.

This Webinar hosted by Patch took place a few days after COP. It offers a deep dive into the prognosis of the VCM in 2024 and features Alexia Kelly of the High Tide Foundation, Stephen Donofrio of Ecosystem Marketplace, and Emma Parry of McKinsey & Company.

This Webinar hosted by BusinessGreen and sponsored by Sylvera also explores the prospects of the VCM in 2024 and features Ben Rattenbury of Sylvera, Jonathan Shopley of Climate Impact Partners, Simon Puleston Jones of Climate Solutions, Rich Gilmore of Carbon Growth Partners, and Anna Hickey of Phillip Lee LLP.

Footnotes

[1] The American Carbon Registry (ACR), Architecture for REDD+ Transactions (ART), Climate Action Reserve (CAR), Global Carbon Council (GCC), Gold Standard (GS), and Verra/Verified Carbon Standard (VCS).

[2] The Voluntary Carbon Market Integrity initiative (VCMI), the Integrity Council for the Voluntary Carbon Market (ICVCM), the Science Based Targets Initiative (SBTi), the GHG Protocol, the We Mean Business Coalition and CDP (formerly the Carbon Disclosure Project).