Countries at COP29, organised in Baku, Azerbaijan, managed to make a breakthrough in finalising rules related to Article 6 of the Paris Agreement, which addresses carbon trading. However, concerns over transparency and environmental safeguards continue.

At COP29 in Baku, Azerbaijan, over 200 countries formally adopted key rules and guidelines for Article 6 on November 23, extending the negotiations beyond the scheduled dates of November 11–22. Two separate drafts were adopted: one for Article 6.2, addressing bilateral or multilateral carbon trading, and another for Article 6.4, focusing on a centralised carbon trading mechanism.

The host country described Article 6 as a game-changing tool that can ensure the flow of $250 billion annually to developing countries to support their climate plans. However, experts warn that the agreed language on Article 6 is so weak that it could lead to increased emissions instead of reductions.

For instance, inconsistencies when a country misreports emission reduction have been a major concern. The final draft related to Article 6.2, which deals with bilateral or multilateral carbon trading, sets several rules to correct inconsistencies. As per this draft, countries will have to submit the report to the United Nations Framework Convention on Climate Change (UNFCCC) at the beginning of the project and annually.  However, parties have no deadlines to fix the discrepancies or penalties for not following the carbon credit rules.

Few parties wanted a strong consequence, and the draft talks about putting the parties’ names in the public if persistent inconsistency is found, but is it enough? “Several other measures could have been adopted, countries could have been asked to not trade in Internationally Transferred Mitigation Outcomes (ITMOS), equivalent to a carbon unit, until a resolution is made to this particular kind of inconsistency, says Trishant Dev, a Programme Officer for climate change at Centre for Science and Environment (CSE), a Delhi-based think tank. There were other demands like incorporating human rights violations, etc, while setting the rules of future carbon trading, but it didn’t get space in the final draft, he added.

A middle path

Before COP29 began, it was evident that the presidency intended to prioritise the long-stalled approval of Article 6, which had seen only partial progress since 2021, when a broad framework was agreed upon in Glasgow.

“We are seeing an unprecedented level of enthusiasm and determination on Article 6,” said Yalchin Rafiyev, COP29 Lead Negotiator from the host country, on the very first day of the COP 29 when parties gave their nod to two standards adopted by Article 6.4 Supervisory Body in October.

Following the contentious approval of the Article 6.4 Supervisory Body’s rules related to calculating carbon emission reduction and carbon removal activities, further discussions on Article 6.4, a centralised carbon market overseen by the United Nations Supervisory Body, took a back seat. In the outcome, parties instructed the Supervisory Body to align future rules with the latest scientific findings.

The primary focus of the carbon trading negotiation revolved around resolving differences on aspects of Article 6.2, which facilitates bilateral and multilateral carbon trading. Parties tried to iron out issues related to authorisation, a process in which a country decides what emission reductions can be sold outside of the country to whom and who will be the other players involved in the process. Beyond this, issues, such as the right to change the authorisation and the functioning of international registries, were negotiated.

One contentious issue was whether host countries of emission reduction activities could change authorisations once granted. Developed countries, particularly the European Union, argued that changing decisions at a later stage would create market uncertainty, while developing countries wanted to keep the right to change. In the final agreement, a compromise was reached, allowing parties to revoke but under predefined terms and conditions agreed upon by the cooperating parties or countries engaged in carbon trading. Now, Dev from CSE informs that there is a provision for revoking but not for those ITMOS that have already been transferred.

The negotiated text also addresses the issue related to the interaction of the international registry, a mechanism to support countries unable to maintain their registries for carbon trading, with Article 6.4 Mechanism registry, as well as potential additional services to be provided to parties that request them.

The text also calls on the secretariat to provide additional registry services to Parties that request them, allowing for both the issuance of credits and their transfer to the international registry—which would be necessary for developing countries using the international registry. Parties were divided on whether the same registry should handle the issuance of credits (internationally transferred mitigation outcomes) and their transfer (enabling other parties or countries to use these reductions toward their climate goals).

Experts say that some countries, driven by the commercial interests of independent crediting mechanisms, sought to frame the rules in a manner that would have advanced the prospects of these independent crediting mechanisms as potential providers of registry services to developing countries. This faced opposition from other Parties.

Arjun Dutt, a Senior Programme Lead at the Centre of Energy Finance at Council on Energy, Environment, and Water (CEEW), a New Delhi-based think tank, said that on additional registry services for Parties that request it (likely developing countries), the final document still explicitly mentions only issuance but with cross-referencing to earlier decisions, it ensures that all Parties can have access to registries that may be used for both issuance and transfer of credits.

Whether it was about authorisation, reporting, or dealing with inconsistencies, the broader issues related to Article 6 revolved around balancing considerations of transparency and environmental integrity against the need to rapidly operationalise market mechanisms. If interpreted holistically, the text can uphold environmental integrity. However, misinterpretation could lead to exploiting loopholes, says Dutt from CEEW.

Concerns related to the carbon market

The delay in operationalising Article 6’s governed carbon market was due to many countries’ keenness to avoid it, given their previous experience with the carbon market. Many studies have highlighted the limitations of the existing carbon market, including one that appeared on November 14 when parties were working on the nuts and bolts of the future carbon market and claimed: “…less than 16% of the carbon credits issued to the investigated projects constitute real emission reductions.”  The study, published in Nature, analysed over 20% of the total one billion tonnes of CO2e (CO2 equivalent) issued so far. It said, “Carbon crediting mechanisms need to be reformed fundamentally to meaningfully contribute to climate change mitigation.”

In recent years, concerns related to environmental integrity have also affected the voluntary carbon markets. The market value of traded carbon credits has significantly dropped from $1.87 billion to $723 million. The price of carbon per unit has also dropped from $11/tCO2e in 2022 to $4/ tCO2e in 2024.

These concerns delayed any agreement on operationalising Article 6, with a fundamental divide between parties. Some parties like the European Union and the Environmental Integrity Group (EIG), which comprises Mexico, Liechtenstein, Monaco, the Republic of Korea, Switzerland, and Georgia, were pushing for a carbon market with greater transparency and environmental integrity. In contrast, oil-rich countries in the Middle East and the United States of America (USA)—where most of the world’s voluntary carbon market registries are based—focused on implementing the carbon market as quickly as possible.

Now that countries have agreed on rules, momentum is visible toward operationalising the carbon market. Several countries signed deals in November for bilateral or multilateral cooperation. Zambia signed an agreement with Singapore, while Norway entered into agreements with Benin, Senegal, Jordan, and Zambia in Baku to reduce emissions in developing countries.

The question remains whether agreed rules at COP29 will be able to ensure the integrity of the market. Giving the example of the Clean Development Mechanism, a carbon market developed under the Kyoto Protocol, Dutt says that the rules of the previous carbon market were also fine, but there were implementation issues. Similarly, the effectiveness of these newly established rules will become evident only once they are put into practice.

Banner image: Parties at the closing plenary of COP29 in Baku, where rules for the future carbon market were finalised. Image courtesy of COP29 Azerbaijan Presidency via flickr.

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Kundan Pandey Editor

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