Pressure is building on the UN to finalize rules and methodologies for Article 6.4 of the Paris Agreement ahead of the upcoming Climate Change Conference in Dubai.
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The UN's Article 6.4 Supervisory Body, tasked to agree criteria upon which carbon projects qualify under the mechanism, is holding its eighth and final meeting in Bonn, Germany from Oct. 30 to Nov. 2 and will seek to finalize the rules.
"[This] meeting is the last chance to adopt these documents in time for endorsement by parties at COP28,"said Andrea Bonzanni, international policy director at the International Emissions Trading Association. "Without this, the operationalization of the mechanism will be delayed by another year."
The operationalization of Article 6.4 will provide a new framework for a global carbon market, opening up fresh demand for credits, with the UN deciding the rules on eligibility. If a text is endorsed by countries at COP28, then the UN can proceed to registering projects under Article 6.4 next year.
Article 6.4 matters for the voluntary carbon market because it will effectively create a new compliance market. Until rules are clarified, however, there is uncertainty among buyers and carbon project developers on which projects will see increased demand and potentially higher prices.
Methodologies and guidelines
The finalized Article 6.4 text will include the guidelines, rules and principles underpinning a new project methodology. This 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.
This contrasts with Article 6.2, which sets out a system of national accounting for greenhouse gas emissions, with common principles that countries can adopt to allow cross-border exchanges of credits.
Rules for Article 6.2 were agreed at the COP26 summit in Glasgow in November 2021 after years of political wrangling, but demand has been limited due to lack of carbon market infrastructure in many developing countries.
The most contentious issues for the current Bonn meeting include requirements for methodologies, and recommendations for activities involving carbon removals.
Bonzanni said significant progress was made at the body's September meeting, but it had still not adopted crucial documents on these two topics.
In mid-October, Olga Gassan-zade, the chair of the Article 6.4 Supervisory Body, said she was "confident but apprehensive" on the ratification of a finalized document by countries at COP28 in Dubai.
Gassan-zade also said she expected Article 6.4 project methodologies to be ready from 2024.
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.
Compliance and voluntary ties
Mark Kenber from the Voluntary Carbon Markets Initiative said there are "important links and overlaps" between VCM and compliance markets with regards to Article 6.
The carbon governance body VCMI is offering support to host countries to build capacity and maintain the infrastructure to engage in Article 6 as well broader compliance to voluntary markets, helping with authorizations, approvals, and accounting requirements.
"While VCMI supports the emergence of thriving high integrity VCMs as a complement to economy-wide climate policies and corporate decarbonization, it also believes and actively encourages broader regulation and the expansion of compliance markets," Kenber said.
The body is also working on two further critical pieces of the Article 6.4 regulatory framework. One is the sustainable development tool, framing the environmental, developmental, and social safeguards for activities under the mechanism. The other is the appeal and grievance procedure, enforcing environmental and integrity safeguards.
The carbon trading mechanism is seen as a replacement for the UN's Clean Development Mechanism, which allowed emissions reduction projects in developing countries to generate carbon credits under the Kyoto Protocol.
Yuvaraj Dinesh Babu, executive director of the carbon datahub CAD Trust was cautiously optimistic on the path ahead, noting the lessons learned under the UN's CDM.
"Our immediate goal needs to be the operationalizing Article 6, enabling cooperative approaches by supporting internationally compatible national registry systems," Babu said. "What gives me confidence is the experience stakeholders have gathered since the CDM era, and the ability to apply this experience in response to the challenges that exist now."