Countries participating in the upcoming 29th Conference of the Parties to the UN Framework Convention on Climate Change (COP29) in Baku, Azerbaijan, aim to establish a global system for trading carbon emission credits

. These credits allow parties to emit a specified amount of greenhouse gases, with each credit allowing the emission of one ton of carbon dioxide or an equivalent of other greenhouse gases.

If a party reduces its greenhouse gas emissions beyond its allowed limit, it gains excess credits that can be sold to other companies, providing a profit opportunity.

Understanding Carbon Emission Credits

Some governments and companies may find it challenging to reduce their greenhouse gas emissions to meet their climate goals. Proponents of carbon emission credits view them as essential for achieving these targets. Carbon emission credits permit countries or companies to compensate for their emissions by investing in emission reductions elsewhere, such as installing solar panels in rural communities or converting petrol-powered buses to electric ones.

What is Article 6?

Article 6 of the Paris Agreement facilitates reducing carbon emissions by outlining two options for trading carbon credits. These credits help nations and companies meet the greenhouse gas reduction targets outlined in their climate action plans, known as nationally determined contributions (NDCs).

In addition, Article 6.2 allows any two countries to create their own terms for a bilateral agreement to trade carbon credits.

Article 6.4 aims to establish a centralized system, managed by the United Nations, for countries and companies to offset and trade their carbon emissions.

Article 6 is crucial for channelling climate finance to developing countries. The carbon market under the Paris Agreement would continue to function even if the United States, under Donald Trump, withdrew its support for the Agreement.

What has been decided so far?

At the COP26 in Glasgow, negotiators reached a significant agreement that provided a framework for regulating the trading of carbon credits. By last October, the UN reported that 91 agreements had been reached among 56 countries. For instance, Thailand and Switzerland completed their first transaction in January. However, the market for bilateral trade deals remains quite small.

Some buyers express concerns about the lack of regulations preventing countries from altering or cancelling the terms of their agreements. Additionally, there is no robust system ensuring that credits bought and sold are not double-counted by both the selling and buying countries.

What will be decided at COP29?

Officials are eager to secure early progress on Article 6 at this year’s climate conference. Market observers hope to see an agreement that establishes safeguards for bilateral deals and activates the UN-backed centralized market.

These safeguards include checks to ensure countries engage in transactions based on actual emissions reductions. Countries will also negotiate whether the UN central registry can handle tradable credits or should only be used for accounting purposes.

A group of experts appointed under UN regulations has already developed a framework for the multilateral trading system to ensure that credits adhere to basic quality standards. However, countries at COP29 will have the option to sign, reject, or request further discussions on this standard.

Following the conference, the technical expert group will reconvene to agree on the methodologies for generating carbon credits from various projects, such as cook stove initiatives or reforestation efforts, which could be integrated into a new system aligned with the Paris Agreement.

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

Implications for the Voluntary Carbon Market

Despite having no legal obligation to reduce emissions, some companies have set voluntary targets, part of which they can meet by purchasing credits on the voluntary carbon market. In 2022, this market was valued at approximately $2 billion globally, but it dropped to $723 million last year.

Linking carbon projects from the voluntary market to a system in line with the Paris Agreement could restore confidence in the market. Developers of projects like mangrove restoration for regenerative agriculture could apply to sell their credits under the UN system. If approved, they could sell credits through either the UN framework or the voluntary market, with experts predicting that prices will be higher for UN-certified credits.