What is Article 6 Carbon Credit?

BAKU: Countries at the COP29 UN climate summit in Azerbaijan will try to agree rules for a global carbon offset trading system.

Here’s what you need to know:

What are carbon offsets?

Some governments and companies may be struggling to reduce global warming greenhouse gas emissions to meet their climate goals. Proponents of carbon offsets see them as a key means of achieving these goals.

These offsets allow a nation or company to offset some of their emissions by paying for actions to reduce emissions elsewhere. These actions may include rural solar panel installations or converting a fleet of petrol buses to electric.

What is Article 6?

Article 6 of the Paris Agreement helps countries work together to reduce carbon emissions. It sets out two options for countries and companies to trade offsets, helping them meet the targets they set for reducing global warming gases in their climate action plans, known as nationally determined contributions (NDCs).

One allows two countries to set their own terms for a bilateral carbon trading agreement, known as Article 6.2. The second aims to create a central, UN-managed system for countries and companies to begin offsetting carbon emissions and trade those offsets, known as Article 6.4.

Article 6 is seen as an important mechanism for providing climate finance to developing countries and a Paris Agreement carbon market, if launched, could continue to operate even if the United States under Donald Trump withdraws support for Paris Agreement.

What has been decided so far?

At the COP26 climate summit in Glasgow, negotiators reached a landmark deal establishing a broad rulebook to regulate carbon credit trading.

But after two weeks of talks at COP28 in Dubai, countries have failed to seal a deal on the details needed to operate a central carbon trading system or to spell out rules for nations wanting to make bilateral arrangements.

Some countries such as Japan and Indonesia have decided to proceed with bilateral agreements without these clarifications and are already preparing to trade carbon credits, known as “internationally transferable mitigation outcomes” (ITMOs). The UN says 91 agreements had been concluded between 56 countries as of October this year. Thailand and Switzerland completed the first sale in January and the market for bilateral trade deals is still quite small.

Some buyers are concerned that there are insufficient rules to prevent countries from changing the terms of the agreements or revoking them, and that there is no robust system in place to ensure that credits bought and sold are not counted by both the markets and the selling countries.

What will be decided at COP29?

Officials are keen to secure an early “victory” on Article 6 at this year’s climate conference.

Market watchers hope a deal can be reached to put guardrails on bilateral deals and get the UN-backed central market up and running.

Guardrails include checks and balances to provide assurance that countries are buying and selling real emissions reductions. Some countries, for example, want the methods nations use to create credit to be internationally controlled.

Countries will also negotiate whether the central UN registry can itself house credits that can be traded and withdrawn, or whether it should operate only for accounting purposes.

A panel of experts elected under UN rules has already established a framework for the multilateral trading system to ensure that credits meet basic quality standards. However, countries at COP29 can decide to either sign this standard, open further discussions or reject it.

After COP29, the group of technical experts will meet again to agree which methodologies for generating carbon credits through cookstove or reforestation projects, for example, can issue credits in the new Paris Aligned system.

If the key points are resolved this year, the system could launch as early as 2025.

What does this mean for the voluntary carbon market?

Some companies that have no legal obligation to reduce their emissions have set voluntary targets, which they can achieve in part by buying credits in a voluntary carbon market. In 2022, the voluntary market was valued at approximately $2 billion worldwide. But its market value fell to $723 million last year after being rocked by a series of scandals.

Linking coal projects currently in the voluntary market to the Paris Agreement system could boost confidence.

Developers of projects such as mangrove restoration in regenerative agriculture can apply to sell their credits under the UN system, which means that if approved, they could sell either in that system or on the voluntary market. Experts expect credits approved by the UN to command a higher price.

What are carbon offsets?

Some governments and companies may be struggling to reduce global warming greenhouse gas emissions to meet their climate goals. Proponents of carbon offsets see them as a key means of achieving these goals.

These offsets allow a nation or company to offset some of their emissions by paying for actions to reduce emissions elsewhere. These actions may include rural solar panel installations or converting a fleet of petrol buses to electric.