COP29: Negotiators under pressure to deliver ‘quick win’ on carbon markets

Azerbaijan, the host of this year's UN Climate Change Conference, is pushing hard for negotiators to swiftly agree on rules and guardrails around Article 6 on international carbon credit trading, several delegates told S&P Global Commodity Insights on Nov. 11 in Baku.

"[The presidency] wants an early result on COP29. They need a win in the first few days, so they are pushing for a resolution on Article 6," said a negotiator from a European country delegation. "They are putting pressure on us to deliver a quick win but it will not be that easy."

A draft decision concerning the rules, modalities and procedures, and guidance for Article 6.4 of the Paris Agreement, was released on Nov. 11, with negotiators under pressure to agree on the guidance.

"The presidency would like to get it approved today. Most parties agree. Only [one or two parties are] currently against it," said a source close to the Article 6.4 talks.

Article 6 of the Paris Agreement sets the rules for global trade in greenhouse gas emissions reductions, with Article 6.2 and Article 6.4 listed as the two main market-based carbon trading mechanisms.

Significant strides

There is cautious optimism that rules around Article 6.4 wll be agreed to in Baku after almost three years of discussions.

In early October, the Article 6.4 Supervisory Body agreed to a standard for project methodologies and carbon removals, setting the stage for Article 6.4 to operate.

Many in the carbon market viewed this as a significant step as it requires COP29 negotiators to reach a consensus to reject, rather than adopt, the standards.

The International Emissions Trading Association has called on parties to avoid further politicization and swiftly move ahead with the outstanding Article 6.4 guidance.

"This decreases the chances that Article 6.4 operationalization will be blocked by technical details and can help speed up the process," IETA said. "Still, some parties and stakeholders have raised governance concerns with the process, which may result in difficult talks in Baku."

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, according to the UNFCCC.

Negotiations to activate Article 6.4, which will create a new market and open up fresh demand for credits, have been fraught in recent years due to integrity concerns and issues related to carbon removals and project methodologies.

Article 6.2 tweaks

The outstanding issues on Article 6.2, under which countries can adopt to allow cross-border exchanges of credits, also need to be decided at COP29 in Baku.

These deal around revocation and authorization of creidts under Article 6.2

"Under Article 6, there's primarily the role of authorization, so ensuring that when a host country gives an authorization to an Article 6 project to deliver ITMOs, Internationally Transferred Mitigation Outcomes, that authorization is firm and should not be able to be revoked or changed later down the line," said Björn Fondén, international policy adviser with IETA.

Some government officials from Singapore and Japan, two major buyer countries of Article 6.2 credits, also shared the same thoughts that, without restricting project host countries from revoking their authorization, investors from buyer countries will be exposed to significant political risks.

IETA notes that a wide spectrum of positions have been expressed with parties split between those who give priority to national sovereignty and do not want their sovereign rights restricted by UN guidance and those who worry about the impact on investment certainty and environmental integrity if authorisations are not firm.

Interest in more country-level collaboration is growing, with many countries submitting letters of authorization under Article 6 for carbon projects.

Demand for Article 6.2 credits has been slow to take off but there has been a slight shift in momentum in the past year after many developing countries expressed enthusiasm for this trading mechanism.