COP28: Odds shorten for a deal on Article 6.4 despite some technical headwinds

There is growing optimism that key issues around the rules and technical aspects of emissions trading under Article 6.4 of the Paris Agreement will be resolved during the ongoing UN Climate Change Conference in Dubai despite some technical issues.

The carbon finance market is particularly hopeful that this will help propel this trading mechanism, by giving more clarity to project developers, and help countries move forward with their carbon policies.

If the draft text is approved by countries in Dubai, then the UN will be ready to register projects in the coming year, according to the Article 6.4 Supervisory Body, which has been tasked with drafting the guidelines for this centralized, UN-backed carbon crediting mechanism.

This comes after the UN body recently agreed on a framework on project methodologies and carbon removals after two years of talks.

First Article 6.4 methodologies may be released as early as 2024, which will also enable project registration to start next year," Mbaye Diagne, vice chair of the Article 6.4 supervisory body, said.

Besides constructing the methodologies, he said the accreditation process also needs to be ready next year, adding that the Article 6.4 registry needs to be operationalized by the third quarter of 2024.

"[If all necessary work is completed] we may expect by the second half of next year to start to have some methodologies in place, starting to receive requests for registration of projects," he added.

Article 6 of the Paris Agreement sets out the rules for global trade in greenhouse gas emissions reductions. It is seen as an essential enabler of international emissions trading, providing countries and businesses with a key pathway to meet and accelerate their climate goals.

Sense of urgency

Drafting the guidelines around Article 6.4 has been an arduous process, with the SB involved in more than two years of intense talks.

Analysts at S&P Global Commodity Insights said there was a "growing sense of urgency" to operationalization of Article 6.4.

"While there are chances that some parts of the proposed SB recommendations could be revisited by parties in Dubai, the document is likely to be adopted," they said in a recent note. "Nevertheless, additional technical work and guidance are anticipated to make the provisions fully operational, particularly around the removal activities."

The private sector, which includes the project developers, and the carbon finance community, was banking that no more delays would be seen on activating this mechanism.

"We urge parties to adopt these recommendations at COP28, because, without that, there would be a further delay of at least a year," Andrea Bonzanni, international policy director at International Emission Trading Association (IETA), said. "[Otherwise] we would not be able to have approved methodologies until after COP29."

Bonzanni said one critical concern from the private sector is whether and to what extent a project host country's government can change or revoke its authorization for the country's participation in the Article 6 market.

"It's very clear that for a project developer, for investors, having authorization versus not having authorization radically changes the economics of the project," he said. "So, we need to know this as early as possible. And we need these decisions to be firm and to limit the cases where countries can make changes to these authorizations and even revoke."

Flexibility

Bonzanni said some countries had already showed support for IETA's position, adding that it is sensible to allow project host countries to have some flexibility to make changes.

"But this has to be in very limited circumstances and these circumstances need to be known in advance so that the private actors know what they're getting into."

Bonzanni pointed out the Article 6.4 mechanism is "not the only carbon crediting mechanism in town", so it must be competitive, instead of being too complex or too costly.

Article 6.4 provides a new structure for a global carbon market, opening up fresh demand for credits, with the UN deciding the rules on eligibility. Article 6.4 specifically allows a company in one country to reduce emissions domestically and have those reductions credited so that it can sell them to a different company in another country.

These methodologies could have major repercussions for the voluntary carbon market, which has been beset by integrity concerns and greenwashing accusations. Sector advocates argue UN-backed Article 6.4 rules can provide the compass the VCM -- an unregulated market -- needs to regain trust from investors and buyers.

"Now, it's up to the parties to approve them and to allow us to proceed with the work on implementation and operationalization of the mechanism from next year," said Olga Gassan-zade, chair of Article 6.4 Supervisory Body, at the same event.

Diagne also said that revisions of methodologies and guidelines inherited under the Clean Development Mechanism, or CDM, need to be completed in 2024, to ensure a smooth transition. CDM refers to the UN carbon crediting mechanism before Article 6.4 was established, which faced significant integrity challenges.

Prices of carbon credits especially nature-based offsets have fallen sharply this year due to a lack of confidence amongst buyers.

The Platts Nature Avoidance 2023 was assessed at $4/mtCO2e on Dec. 1, its lowest price since the assessment began in August 2021. Prices in January were as high as $11.60/mtCO2e. Platts is part of S&P Global Commodity Insights.