COP26: Nations strike deal on international carbon markets at Glasgow summit

Negotiators from almost 200 governments have reached a final deal on the rules governing the international trade of emissions reduction units after six years of haggling that had held up the Paris Agreement rulebook.

Representatives struck a final deal on Article 6 of the 2015 Paris Agreement at the UN Climate Change Conference Nov. 13 as part of the Glasgow Climate Pact, in a move that is likely to unlock billions of dollars of investment in carbon reduction projects around the world.

"The agreed Article 6 rules give countries the tools they need for environmental integrity, to avoid double counting and ultimately to clear a path to get private capital flowing to developing countries," said Kelley Kizzier, vice president for global climate at US-based non-governmental group Environmental Defense Fund.

"The carbon market rules allow countries to focus their efforts on ambitious implementation of their emissions-cutting targets," she said in a statement Nov. 13.

Agreement on Article 6 was critical because it was holding back agreement on the wider rulebook that sets out how the Paris Agreement will operate.

The decisions made at the COP26 summit in Glasgow provide the tools needed for a robust, transparent and accountable carbon market, allowing governments to trade emissions reductions to provide flexibility in how they meet their national climate goals, according to EDF.

"The decision eliminates double counting for compliance markets and establishes a strong framework to ensure appropriate accounting for voluntary carbon markets that also supports emissions reductions in countries hosting carbon market activities," said Kizzier.

CDM carryover

Crucially, negotiators agreed to limit the use of pre-2020 credits from the UN's Clean Development Mechanism in the Paris architecture, avoiding a wholesale flooding of the market for carbon credits that could have sent their price plummeting.

The final text states that only CDM credits registered after Jan. 1, 2013 may be used for national targets under the Paris system.

"The carryover of credits left over from the Clean Development Mechanism is restricted to some 120 million mt and their use is restricted to the first cycle of national commitments," said Kizzier.

CORSIA-eligible carbon credit (CEC) prices have increased by 944% this year and were assessed at $8.35/mt CO2e at the close Nov. 12, according to S&P Global Platts assessments, compared with 80 cents/mt when the assessment was launched Jan. 4.

Meanwhile, nature-based credit (CNC) prices have increased by 181% this year and were pegged at $13.05/mt CO2e at the close Nov. 12, according to Platts assessments, compared with $4.65/mt when they were launched on June 14.

Corresponding adjustments

The final Article 6 rules allow a country hosting an emissions reduction project to decide if the reductions will be counted towards its own target or sold elsewhere for other purposes, and the country must notify a UN supervisory board accordingly.

The Article 6.4 text states that voluntary emissions reductions may only be used towards a country's Nationally Determined Contribution if they are authorized by the UN, and the host country must apply a corresponding adjustment for any units sold abroad. This measure avoids one emissions reduction being counted by two countries.

Other observers said the final deal on Article 6 clears the way for an expansion of emissions trading under the Paris Agreement.

"The guidance for Article 6 sets up a new structure for carbon markets to work in the service of the Paris Agreement goals," the International Emissions Trading Association said in a statement Nov. 13.

"The decisions provide clear accounting guidance for emissions trades between countries and launch a new crediting mechanism that will give market access to all countries interested in attracting green investment through the global carbon market," IETA said.

"This is a solid and ambitious outcome, because it establishes an integrity framework to support the expansion of carbon markets to help governments and businesses deliver higher climate ambitions," said IETA CEO Dirk Forrister.

Share of Proceeds

The final Article 6 text also included agreement on the so-called Share of Proceeds -- a fixed tariff on emissions trading that aims to generate funding for climate adaptation in developing countries.

Negotiators agreed this will be set at 5% of all emissions reductions created under Article 6.4 of the Paris Agreement, levied at the point of issuance.

However, in order to find overall agreement, negotiators had to reach a compromise in which the share of proceeds would only apply to the trade of voluntary emissions credits, but not on national transfers under Article 6.2.

"Instead, countries using Article 6.2 are encouraged to contribute to the Adaptation Fund," IETA said.

The rules also included a measure that would cancel 2% of all emissions reduction units generated under Article 6.4 -- a move that aims to ensure an overall mitigation in global emissions. This would work by cancelling units from an emissions registry and ensuring they could not be transferred or used for any purpose.

Recent increases in climate ambition from governments have supported carbon prices worldwide.

"In the lead-up to COP26, carbon markets surged in many jurisdictions, as businesses contemplated the enhanced ambitions of many countries," IETA said.

"This included growth in every carbon market in 2021, with a near doubling of voluntary market transactions and the launch of China's national ETS. Markets in Europe, California, Quebec, New Zealand, Australia and RGGI have seen record prices in the past month," the group said.