Negotiators at the COP29 climate summit last week looked to mark an early win with an agreement on rules for a UN-backed global market for trading carbon credits.
The proposed rules include two standards: a methodology for developing and assessing eligible carbon credits and a set of requirements for projects that remove greenhouse gases. They were proposed by the Article 6.4 body, which is tasked with developing and supervising carbon market requirements and processes.
Carbon markets are a polarising issue in climate policy. Some see it as an effective way to incentivise firms and funnel critical investment into cutting emissions. Others argue that the purchasing of credits allows companies to continue polluting without making any meaningful progress on reducing their carbon footprint. Last year, for example, over 90% of rainforest carbon offsets by the world’s biggest certifier were found to be worthless. A lack of clarity about how it works has led several major companies to label the practice as ‘junk’.
However, the new standards have been hailed by some as a breakthrough. Proponents believe that they will bring much-needed credibility and transparency to the carbon market. However, critics question the overall rigour of the standards for creating high-quality carbon credits.
The new carbon market rules are a meaningful step in the right direction
The new rules are an important step forwards in the creation of a credible, transparent and accountable carbon market. I’m optimistic that the push for standardisation, widespread information-sharing and market interoperability will help to address lingering concerns about the integrity of carbon credits that have made some businesses hesitant to use them.
Specifically, the new rules do a good job of bringing some structure and rigour to what has long been an incredibly complex and controversial process. They set out clear requirements for projects that remove greenhouse gases from the atmosphere, such as how removed emissions should be calculated and monitored. They also underline the need for very detailed analysis around non-leakage. This means that when decommissioning a plant, for example, firms will have to decide what happens to the equipment.
It doesn’t need to be perfect to be a meaningful step forward
There has also been some positive discussion around third-party monitoring of the UN’s carbon market system and how this will work across different regimes. We can therefore expect a higher degree of accountability and transparency among those that use it.
Because of these factors, it will likely be a more appealing place for businesses to transact than existing voluntary carbon markets, which tend to be unstructured and messy. We’ve seen the difference it makes when a carbon market is enforced effectively, with heavy regulation, monitoring, rules and standards. For example, the price of a carbon credit in the European Union’s Emissions Trading System, has reached upwards of €100 (£84) per ton. That is a significant cost or incentive for firms to reduce their emissions.
Another positive outcome from this agreement on rules for a UN-administered carbon market is that participation does not necessarily require governments to buy into it. There’s a lot of talk about whether or not the US is going to pull away from some of the incentives around decarbonisation and efforts to create carbon markets. But a lot of companies in the US are willing to continue making that investment, even if the government doesn’t necessarily support it. Therefore, I think it’s important to create as many tools and mechanisms as we can to incentivise companies to want to reduce their carbon footprint.
There is still some clarity and substance that’ll need to be developed, but it is an ongoing project. It doesn’t need to be perfect to be a meaningful step forward.
The new standards fails to address core issues
The proposed rules are largely symbolic, with a fully operational market still a long way off. They vaguely brush over eligibility standards for carbon mitigation activities and complicate matters by adding yet another framework into the already overcrowded voluntary carbon markets. Furthermore, the lack of clear procedure and available infrastructure that would apply these standards to potential carbon credits makes their impact dubious.
The standards aren’t exactly ground-breaking. They largely overlap with the Core Carbon Principles developed by the Integrity Council for Voluntary Carbon Markets, which are designed to be a global benchmark for high-quality carbon credits. They could even be considered a less robust version of these CCPs.
There’s still a long list of outstanding questions that need to be resolved
According to the standards, carbon offset methodologies to be approved by Article 6 should demonstrate several key traits, including additionality, non-leakage, permanence or non-reversal and transparency – all of which were outlined in the CCPs. However, the CCPs categorise methodologies for different project sectors, introducing a more granular approach when assessing emission-reduction integrity. By contrast, the new standards proposed by the Article 6.4 body neglect these differences and provide an overview for all methodologies apart from removal activities and, in doing so, fail to address sectoral nuances.
There’s still a long list of outstanding questions that need to be resolved before a UN-operated marketplace becomes a reality. Technical issues regarding the practical trading frameworks must be agreed upon, including an authorisation process for credits through host countries, an international registry and corresponding adjustment mechanisms to avoid double-counting of emission reductions.
The probability these will be ironed out at COP29 is just 40%, according to BloombergNEF. That lack of optimism reflects the prolonged history of disagreements, especially from governments with established compliance carbon markets, where entities are required to purchase allowances to cover their emissions and there is regulatory pressure to decarbonise.
Regions with compliance programs are often wary of inconsistencies in carbon accounting and the oversupply of credits in the voluntary market, which can jeopardise climate targets and result in low carbon prices around the world. Ironically, the new Article 6.4 standards do not address the core issue of double-counting of emission reductions that many firms are worried about.
