COP29: Complex Article 6 Rules Pave Way To Unruly Carbon Markets

23 November 2024

Governments approved a concerning package of carbon market rules that could end up undermining our efforts to reign in emissions rather than helping them. Some countries fought tooth and nail to bring transparency and quality to the flawed framework for decentralised emissions trading under Article 6.2, with limited gains to show for their pains.

“The flaws of Article 6 have, unfortunately, not been fixed.” said Isa Mulder, Policy Expert on global carbon markets. “It seems countries were more willing to adopt insufficient rules and deal with the consequences later, rather than prevent those consequences in the first place.”

Accountability absent

Countries face no real repercussions if they fail to abide by the rules. Any “inconsistencies”, or non-compliance of carbon credit deals, need, in theory, to be addressed. But with neither a deadline to take action nor clear penalties, countries have little incentive not to game the system. Recent investigations have revealed problems in early Article 6.2 transactions, showing that this is a real-world problem that requires oversight.

Carbon market registry arrangements culminated in a complex though seemingly transparent alternative system. Developing countries will not have to develop their own registries, but questions remain about how quickly and how effectively the new system will be established.

The final text on Article 6.2 includes some positive transparency requirements, but significant shortcomings remain. On the one hand, it’s necessary for countries to publish information when they formally approve Internationally Traded Mitigation Outcomes (ITMOs), the units used for emissions trading between countries, for use by other actors, such as companies. And importantly, any inconsistencies identified in countries’ cooperative approaches will be made public.

On the other hand, the information detailing countries’ formal approval of carbon credits as well as additional information about trade deals (such as reversal risk and uncertainties in quantification), may not come until very late for credits purchased by airlines under the UN’s CORSIA offsetting scheme or companies under the voluntary carbon market – possibly years after issuance, and as late as the moment they are actually used.

“Offering marginal improvements to transparency provisions, the package does not shine enough light on an already opaque system where countries won’t be required to provide information about their deals well ahead of actual trades,” said Jonathan Crook, Policy Lead on global carbon markets. “Even worse, the last opportunity to strengthen the critically weak review process was largely missed. Countries remain free to trade carbon credits that are of low quality, or even fail to comply with Article 6.2 rules, without any real oversight.”

Steps towards an operational Article 6.4 mechanism

Following an early and controversial approval on day one of COP of the Article 6.4 Supervisory Body’s rules on removals and methodological requirements, discussions on Article 6.4 took a back seat relative to the much more complex negotiations on Article 6.2.

Attempts to require Clean Development Mechanism (CDM) projects, from the Kyoto Protocol, seeking to transition to the Article 6.4 mechanism to be re-assessed on the basis of additionality tests were ultimately rejected, despite the large body of evidence on shortcomings in the CDM underpinning the need for extra checks. This means that old CDM projects continue to have an easy path towards issuing credits under the Article 6.4 mechanism, for emission reductions achieved between 2021 and 2025, without additional verification other than a somewhat symbolic approval by their host country.

While the Article 6.4 Supervisory Body’s rules on methodological requirements enshrine key principles, such as a required “downward adjustment” to carbon credit baseline-setting (reducing the volume of credits issued) and likely exclusion of projects that lock-in dependence on fossil fuel infrastructure, the rules on removals and permanence are sorely lacking.

Starting early next year, the Supervisory Body of the 6.4 mechanism will resume its work, in particular to clarify rules around the non-permanence risk of credits. Importantly, the Article 6.4 decision in Baku clarifies that future work must be guided by “best available science”, with one possible starting point being a recent Nature Communications study confirming that a CO2 storage period of less than 1,000 years is insufficient for neutralising emissions.

“Much lies in the hands of the Supervisory Body now,” said Federica Dossi, Policy Expert on global carbon markets. “To show that it is ready to learn from past mistakes, it will have to take tough decisions next year and ensure that Article 6.4 credits will be markedly better than the units that old CDM projects will generate. If they are not, they will have to compete in a low-trust, low-integrity market where prices are likely to be at rock bottom and interest will be low. Such a system would be a distraction, and a waste of 10-years worth of carbon market negotiations at the UNFCCC.”

Outsourced responsibility?

The Article 6 outcome in Baku creates a system that is so complex and reliant on external stakeholders to spot major shortcomings, that it will be difficult to use as a basis for high-integrity actions. Going forward, it will be up to those who choose to engage in these systems to ensure that this does not sink global climate action. In the absence of better top-down regulation, the integrity of individual actors and active scrutiny from third parties will be make-or-break features of these markets.

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