COP29: What is carbon credit? What is Article 6?

Some governments and companies may struggle to reduce planet-warming greenhouse gas emissions to meet climate goals. Supporters of carbon offsetting see them as an essential tool to help achieve these goals.

These offsets allow a nation or company to offset some of its emissions by paying for actions to reduce emissions elsewhere. These actions could include rural solar panel installations or converting the gasoline bus fleet to electric.

Article 6 of the Paris Agreement helps countries work together to reduce carbon emissions. It lays out two options for countries and companies to swap offsets to help them meet targets they set for reducing planet-warming gases in their climate action plans, known as nationally determined contributions (NDCs).

One allows two countries to set their own terms for a bilateral carbon trading agreement; this is known as Clause 6.2. The second, known as Article 6.4, aims to create a centralized, UN-led system for countries and companies to begin offsetting their carbon emissions and trading those offsets.

Article 6 is seen as an important mechanism for providing climate finance to developing countries, and if a Paris Agreement carbon market is launched, it could continue to operate even if the United States under Donald Trump withdraws its support for the Paris Agreement.

Negotiators at the COP26 climate summit in Glasgow reached a groundbreaking agreement creating a broad rulebook for regulating carbon credit trading.

But after two weeks of talks at COP28 in Dubai, countries have failed to sign an agreement on the details needed to operationalize a centralized carbon trading system or clarify rules for countries seeking to establish bilateral arrangements.

Some countries, such as Japan and Indonesia, have decided to continue bilateral agreements without these disclosures and are currently preparing to trade carbon credits known as “international transferable mitigation outcomes” (ITMOs). The UN announced that 91 agreements were signed between 56 countries as of October this year. Thailand and Switzerland completed the first sale in January, and the market for bilateral trade agreements is still quite small.

Some buyers worry that there are not enough rules to prevent countries from changing or canceling the terms of the deal and that there is no robust system to ensure that credits bought and sold are not counted by both buying and selling countries.

Officials are keen to score an early “win” on Article 6 at this year’s climate conference.

Market observers are hopeful that an agreement can be reached to put up barriers to bilateral agreements and launch the UN-backed central marketplace.

Guardrails include checks and balances to provide assurance that countries are buying and selling actual emissions reductions. For example, some countries want international control of the methods nations use to generate credit.

Countries will also negotiate whether the UN’s central registry system will house loans that can be traded and retired, or operate only for accounting purposes.

A group of experts selected under United Nations rules created a framework for the multilateral trading system to ensure that loans meet basic quality standards. But countries at COP29 can decide to sign this standard, initiate further discussions, or reject it.

Following COP29, the technical expert group will meet again to agree on which methodologies for generating carbon credits, for example through stove projects or reforestation, can lend credit to the new Paris Aligned system.

If important points are resolved this year, the system could be operational as soon as 2025.

Some companies, which have no legal obligation to reduce their emissions, have set voluntary targets that they can partially meet by purchasing credits in the voluntary carbon market. In 2022, the voluntary market was worth approximately $2 billion worldwide. However, the market value of the company, shaken by repeated scandals, fell to $ 723 million last year.

Linking carbon projects currently on the voluntary market to the Paris Agreement system could increase confidence.

Developers of projects such as mangrove restoration for regenerative agriculture can apply to have their credits sold under the UN system; This means that if approved, they can sell in this system or on the voluntary market. Experts expect UN-approved loans to carry a higher price tag.

Some governments and companies may struggle to reduce planet-warming greenhouse gas emissions to meet climate goals. Supporters of carbon offsetting see them as an essential tool to help achieve these goals.

These offsets allow a nation or company to offset some of its emissions by paying for actions to reduce emissions elsewhere. These actions could include rural solar panel installations or converting the gasoline bus fleet to electric.

Article 6 of the Paris Agreement helps countries work together to reduce carbon emissions. It lays out two options for countries and companies to swap offsets to help them meet targets they set for reducing planet-warming gases in their climate action plans, known as nationally determined contributions (NDCs).

One allows two countries to set their own terms for a bilateral carbon trading agreement; this is known as Clause 6.2. The second, known as Article 6.4, aims to create a centralized, UN-led system for countries and companies to begin offsetting their carbon emissions and trading those offsets.

Article 6 is seen as an important mechanism for providing climate finance to developing countries, and if a Paris Agreement carbon market is launched, it could continue to operate even if the United States under Donald Trump withdraws its support for the Paris Agreement.

Negotiators at the COP26 climate summit in Glasgow reached a groundbreaking agreement creating a broad rulebook for regulating carbon credit trading.

But after two weeks of talks at COP28 in Dubai, countries have failed to sign an agreement on the details needed to operationalize a centralized carbon trading system or clarify rules for countries seeking to establish bilateral arrangements.

Some countries, such as Japan and Indonesia, have decided to continue bilateral agreements without these disclosures and are currently preparing to trade carbon credits known as “international transferable mitigation outcomes” (ITMOs). The UN announced that 91 agreements were signed between 56 countries as of October this year. Thailand and Switzerland completed the first sale in January, and the market for bilateral trade agreements is still quite small.

Some buyers worry that there are not enough rules to prevent countries from changing or canceling the terms of the deal and that there is no robust system to ensure that credits bought and sold are not counted by both buying and selling countries.

Officials are keen to score an early “win” on Article 6 at this year’s climate conference.

Market observers are hopeful that an agreement can be reached to put up barriers to bilateral agreements and launch the UN-backed central marketplace.

Guardrails include checks and balances to provide assurance that countries are buying and selling real emissions reductions. For example, some countries want international control of the methods nations use to generate credit.

Countries will also negotiate whether the UN’s central registry system will house loans that can be traded and retired, or operate only for accounting purposes.

A group of experts selected under United Nations rules created a framework for the multilateral trading system to ensure that loans meet basic quality standards. But countries at COP29 can decide to sign this standard, initiate further discussions, or reject it.

Following COP29, the technical expert group will meet again to agree on which methodologies for generating carbon credits, for example through stove projects or reforestation, can lend credit to the new Paris Aligned system.

If important points are resolved this year, the system could be operational as soon as 2025.

Some companies, which have no legal obligation to reduce their emissions, have set voluntary targets that they can partially meet by purchasing credits in the voluntary carbon market. In 2022, the voluntary market was worth approximately $2 billion worldwide. However, the market value of the company, shaken by repeated scandals, fell to $ 723 million last year.

Linking carbon projects currently on the voluntary market to the Paris Agreement system could increase confidence. Developers of projects such as mangrove restoration for regenerative agriculture can apply to have their credits sold under the UN system; This means that if approved, they can sell in this system or on the voluntary market. Experts expect UN-approved loans to carry a higher price tag.