FACTBOX: COP29 breakthrough triggers key global carbon crediting mechanism

Guidelines underpinning a UN-regulated global carbon market under Article 6.4 of the Paris Agreement were endorsed by almost 200 governments at the COP29 climate talks in Baku Nov. 11.

Article 6 enables countries to transfer carbon credits earned from eligible domestic projects to other countries, helping them meet their climate targets.

Article 6.4 sets out rules for a carbon crediting mechanism, whereby an entity can reduce emissions in one country, have the reductions credited, and then sell them to another entity in another country.

Here S&P Global Commodity Insights reporters provide price, project and market context.

Infrastructure

After three years of intense negotiations, the adoption of Article 6.4 triggers "full operationalization" of a global carbon crediting mechanism, creating "a game-changing tool to direct resources to the developing world," COP29 President Mukhtar Babayev said.

• Article 6.4 replaces the Clean Development Mechanism from the Kyoto Protocol.
• CDM projects can transition to Article 6.4 if they meet its standards. Among CDM projects approved to transition are hydroelectric projects in Bhutan, wind farm projects in the Dominican Republic and cookstove projects in Ghana and Myanmar.
• Developers can submit new projects for registration from the second half of 2025. The first issuance of carbon credits could also take place next year.
• Article 6.4 will include carbon removal projects including technology and nature-based schemes. This will be a first for Article 6, which has so far only focused on avoidance projects.
• Carbon removals encompass a wide array of approaches, including technology-based methods like direct air capture or bioenergy with carbon capture and storage, as well as nature-based projects such as afforestation and reforestation.

Prices

Competitive, internationally fungible carbon credits issued by nature-based projects such as REDD+ forestry activities have been trading at low levels for most of 2024.

• Platts, part of S&P Global Commodity Insights, assessed the Nature-Based Avoidance (current year) price at $4.35/mtCO2e Nov. 11, recovering from a low of $2.70/mtCO2e in mid-February. The price peaked at $16.10/mtCO2e in early 2022 following COP26 in Glasgow.
• Platts assessed the Household Devices (current year) price at $3.85/mtCO2e Nov. 11, a modest recovery from Sept. 26's $3.50/mtCO2e, the lowest since Platts began assessing the price in June 2021.
• Platts recently heard Article 6.2-certified Household Device credits indicatively valued at $25-$30/mtCO2e between an African country (host) and Switzerland (buyer) for forward vintage and delivery.

Some high-quality removals-based projects have shown resilience in depressed voluntary markets and can command premium prices.

• Platts Tech Carbon Capture price was assessed at $125.00/mtCO2e Nov. 11 and is averaging $124.00/mtCO2e year to date.
• This contrasts with Platts Natural Carbon Capture price of $12.30/mtCO2e Nov. 11 amid a lack of trading activity.

Trade flows

Ahead of finalization, bilateral agreements to transfer emission mitigation outcomes across national boundaries under Article 6.2 have started to emerge.

• Some 91 bilateral deals have been signed under Article 6.2, according to data compiled by Commodity Insights and the UN Environment Program.
• In June, the Japanese government published a draft Article 6.2 methodology for issuing credits from projects that improve water management and cut emissions in Philippine rice paddy fields -- a first in the field of agriculture.
• Ghana, Kenya, Rwanda, Zambia and Malawi have made steady progress in Article 6 in recent years. In May, Ghana signed two deals with Singapore and Sweden to host mitigation projects. Singapore signed a similar deal with Papua New Guinea in December 2023.
• Switzerland has been another front-runner in Article 6 emissions trade, completing the mechanism's first Article 6.2 deal with Thailand and following up with various projects in Ghana, including distribution of 180,000 improved cookstoves announced in February 2024 with the Switzerland-based KliK Foundation buying the resulting credits.

Discussions relating to Article 6.2 are continuing at COP29, with a focus on the revocation and authorization of credits. Article 6.2 allows countries to exchange Internationally Transferred Mitigation Outcomes directly through cooperation agreements.

• Corresponding adjustments between countries are seen as essential to avoid double counting under Article 6. These must be made when a country buys carbon credits from another country to meet its Nationally Determined Contributions.
• Some parties are pushing back on any restriction of sovereign rights under UN guidance, while others worry about the impact on investor confidence if Letters of Authorization, allowing the transfer of credits or ITMOs abroad, are not wholly trustworthy.
• On Nov. 11 Singapore's National Climate Change Secretariat, Gold Standard and Verra issued initial recommendations for procedures to help countries use existing carbon market frameworks to meet their climate targets.
• The agencies are working to improve governance. For instance in October Verra issued a new methodology on "Energy Efficiency and Fuel-Switch Measures in Cookstoves" following its decision to suspend 27 projects it had earlier certified. This followed allegations of over-issuance.