Unpicking the COP29 Article 6 deal: a step forward for global carbon markets?
While the final COP29 deal has drawn criticism, does the agreement on Article 6 offer progress on the road towards global carbon trading rules?
Alongside the last-minute pledge to commit £300bn annually to climate finance, COP29 also delivered a breakthrough on Article 6, following stalled negotiations for the past four years.
Under Article 6 of the Paris Agreement, countries can trade mitigation units among themselves, with this trade potentially yielding $250bn in savings towards meeting climate targets, according to a study by the International Emissions Trading Association.
At the beginning of COP29, the standards for a centralised carbon market convened by the UN, under Article 6.4 of the Paris Agreement, were unanimously approved. However, a consensus on Article 6.2 was only reached at the closing of the conference in the early hours of Sunday morning.
The rules governing country-to-country trading under Article 6.2 provide clarity on how countries will authorise the trade of carbon credits and how registries tracking this will operate.
Overall, investor sentiment towards the pledge has been positive. Alex Godfrey, investment director for natural capital at Octopus Investments, welcomed the decisions around Article 6 at COP29 as a “significant step”. Godfrey is part of Octopus' bid to establish a natural capital strategy including UK-based carbon credits.
He told Net Zero Investor that the agreement on Article 6.2 “provides much-needed clarity on how countries will authorise the trade of carbon credits”, “crucial for ensuring transparency and environmental integrity”. While Article 6.4 addressed the historical challenges of credibility and efficiency within the market.
Market and implementation risks
Despite stating that the new framework under Article 6 for carbon credits is a “great step forward”, Godfrey warned that investors must remain aware of underlying market risks.
“It’s important to recognise the risks associated with trading in certain markets. Political, geographical, social, and climate risks remain significant, especially in regions of the Global South. To mitigate these risks, the value of carbon credits in these markets must be substantially higher,” Godfrey added.
Alongside Godfrey, Edward Baker, net zero manager at £26.9bn investment pool LGPS Central, cautiously welcomed the agreement on Article 6. He told Net Zero Investor that there are “well-known and substantive challenges” in establishing carbon markets.
“We cautiously welcome the developments on Article 6.4, although the devil will be in the detail of how the new UN trading mechanism would operate in practice and address concerns over the integrity of the underlying credits,” Baker said.
Proper implementation of Article 6 was also highlighted by Seb Cross, chief innovation officer and co-founder of BeZero Carbon, who stated: “Of course, further steps will need to be taken to implement Article 6 effectively – including the use of independent, risk-based ratings to bolster nations’ confidence in leveraging market mechanisms to achieve their climate goals.”
Loopholes
Critics of carbon credits point out that the Article 6 agreement reached in Azerbaijan contains significant loopholes. Two key challenges in assessing the validity of carbon credits are the risk of double counting and the lack of meaningful regulatory oversight. Yet, the the non-profit Carbon Market Watch points out that the agreement to prevent double counting does not apply to the voluntary carbon markets.
"Voluntary credits purchased by private companies do not have to go through the Article 6 system. This means that largely unregulated private schemes can still allow double counting, even though this defies logic and environmental integrity. It remains unclear whether buyers will even want double-counted credits when properly adjusted credits will be available" the organisation warns.
The voluntary carbon market is still significantly smaller than the regulated market, by October 2024, it was valued at $2bn, compared to approximately $1trn held in the regulated market.
Moreover, no supranational body has been established to ensure the integrity of carbon markets, this has been handed back to countries to enforce. "While a review team composed of UN technical experts will analyse countries’ ITMO trade agreements, this may largely amount to a tick-the-box exercise" Carbon Market Watch warns.
Asset owner caution
While asset owners such as pension funds are keen to embrace natural capital as an asset class, they are generally more cautious on carbon credits, amid concerns over the lack of common standards and greenwashing.
NGO's and researchers have long been critical of carbon credits. A row over the validity of such instruments in partially offsetting Scope 3 emissions was at the heart of an internal dispute at the Science Based Targets initiative (SBTi) which resulted in the departure of the group's CEO. While the SBTi has pushed a firm decision on the matter into 2025. Yet an SBTi review of third party studies published in July said that carbon credits were "largely ineffective."
Similarly, more recent research published in the journal nature communications in November based on 2346 carbon mitigation projects found that only 16% contributed to real emission reductions.
Yet despite these challenges, some asset owners are seeing significant opportunities for the market due to their important role in realising corporate net zero targets for some of the world's largest tech firms among others. In the UK, Cushon Master Trust has been one of the first to embrace carbon credits as part of its net zero strategy.
‘Substantial growth in demand'
The agreement at COP29 regarding carbon credits comes as there is growing sentiment among investors that every company committing to net zero will need to rely on offsets.
According to Angus Whiteley, CEO of Stafford Capital Partners, the developments of Article 6 at COP29 will “lead to substantial growth in both demand and pricing for voluntary carbon market (VCM) credits”.
Whitely stated that having a single, global standard for carbon credits, incorporating lessons learned from the VCM over the past years, would “potentially” remove much uncertainty for investors.
“The focus of this demand is expected to be on removals-based credits, particularly those providing long-term durable removals through technologies such as direct air capture (DAC) or bioenergy with carbon capture and storage (BECCS), which appeared to be the focus of discussions at COP29,” he told Net Zero Investor.
In addition, Whitely stated that with the recent forecast by the Global Carbon Project indicating that total global CO2 emissions for 2024 are expected to reach 2.0% above the previous record set in 2023, the mechanisms provided by Article 6 “become even more crucial”.
“The International Emissions Trading Association estimated that Article 6 markets will help countries save $250bn per year in 2030 towards meeting their nationally determined contributions.
“In doing so, Article 6 mechanisms might also encourage countries to increase their ambition regarding climate targets.”
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