Article 6 developments at COP29 and their implications for carbon markets

The 29th Conference of the Parties (COP29) to the United Nations Framework Convention on Climate Change (UNFCCC) took place in Baku, Azerbaijan, between 11 November and 24 November 2024. Parties at COP29 agreed four decisions with regard to Article 6: two with regard to Article 6.4, one with regard to Article 6.2 and one with regard to Article 6.8. Notably these decisions, after nine years of negotiations since the Paris Agreement in 2015, contained the final agreements necessary for the Article 6 carbon markets to finally move towards becoming operational.

This article, following on from Clyde & Co’s COP29 Briefing Paper and COP29 Summary Paper, contains the following:

Part 1 (Introduction) - a summary of the Paris Agreement’s Article 6 carbon markets.

Part 2 (COP29 Summary) - a review of what was agreed at COP29 with regard to Article 6 carbon markets, including what activity can now take place in the Article 6 carbon markets and what still needs to occur for the markets to become fully operational.

Part 3 (Implications for the VCM) - some key takeaways regarding the practical effect of the COP29 decisions on the voluntary carbon market (VCM).

 

Part 1 - Introduction

 

What are the Article 6 Carbon Markets? 

Article 6 of the 2015 Paris Agreement allows for states that are party to the Paris Agreement to work together on a voluntary basis to cooperate in the implementation of their nationally determined contributions (parties’ commitments to reduce emissions and adapt to the effects of climate change - “NDCs”).

Article 6.2 sets out that if one party possesses what is known as a mitigation outcome (i.e. something that causes a reduction in greenhouse gas emission (GHG) levels in the atmosphere), then instead of this mitigation outcome counting towards its own emission reductions, it can transfer that mitigation outcome to count towards the emission reductions of another country. In the context of Article 6.2, this transferred mitigation outcome is known as an internationally transferred mitigation outcome (ITMO) and can be understood more simply as an emission reduction (ER) credit tradable between states that are party to the Paris Agreement. An ITMO can be created by both states and private, i.e. non-state, actors. Once the ITMO has been traded it can be used either to implement the acquiring party’s NDC or by a private company based in the acquiring country to offset its own emissions, for instance in the VCM. 

Article 6.4 sets out that in order to facilitate the process by which the creation and exchange of ERs contributes to the mitigation of GHG emissions, a mechanism should be established under the guidance of the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement (CMA). This mechanism, now established and known as the Paris Agreement Crediting Mechanism (PACM), is in effect a market for the sale and purchase of ER credits (widely known in the market as A6.4ERs but following COP29 expected to be known as PACM ERs – please see Part 2 below) that can be accessed by both states and private actors. Article 6.4 provides that this mechanism should be supervised by a separate body designated by the CMA, known as the Article 6.4 Supervisory Body or SBM. Article 6.4 also provides that the PACM should ensure that the creation and exchange of ER credits:

1. Promotes the mitigation of GHG emissions while fostering sustainable development;
2. Incentivises and facilitates states and private actors to participate in the mitigation of GHG emissions;
3. Contributes to the reduction of emission levels in the country in which the ER credit originated, with that ER credit also able to be used by another country as an ITMO to fulfil its own NDC emission reduction targets; and
4. Delivers an overall mitigation in global emissions.

Articles 6.2 and 6.4 in combination therefore set out the basis for carbon markets in which countries which are surpassing their emission reduction targets in their NDCs, and consequently possess a surplus of ERs, can sell their surplus ERs as ITMOs to countries that require the emission reductions contained in those ITMOs to meet their own NDC emission reduction targets. Such a market should incentivise countries to meet and surpass the emission reduction targets in their NDCs so as to benefit from the sale of surplus ERs/ITMOs, and incentivise countries to preserve and foster projects and environments that lead to emission reductions that can be sold as ERs/ITMOS. This should thereby lead to an overall reduction in global emissions and foster sustainable development.

Article 6.8 sets out that while the market-based approaches provided for by Articles 6.2 and 6.4 are important, non-market-based approaches should also be available to Parties to assist in the implementation of their NDCs. Examples of such non-market approaches include the provision of capacity building assistance for the implementation of NDCs and technology transfer from developed to developing country parties.

 

Part 2 - COP29 Summary

 

What was Agreed at COP29 with regard to Article 6.2?

The CMA’s Decision with regard to Article 6.2 of the Paris Agreement was extensive and wide ranging. The key issues that were agreed within the Decision are explored below:

1. Authorisation

A key element of the Article 6.2 Decision was with regard to the authorisation of ITMOs. Authorisation is a key part of the Article 6.2 process as it ensures that an ITMO is properly accounted for and the ER generated/possessed by the host/transferring party is transferred to the acquiring party. Both parties must authorise the use of the ITMO towards either the achievement of the acquiring party’s NDC or towards other international mitigation purposes (OIMPs). OIMPs are defined in 2/CMA.3 Annex 1(f) as mitigation (i.e. emission reduction) outcomes that have been authorised by a party to the Paris Agreement for a purpose other than that of meeting the emission reduction targets contained in the authorising party’s NDC. Examples of OIMPs include the trading of ITMOs under the “cooperative approach” set out in Article 6.2 so that the ER can be used to meet the acquiring country’s NDC, the use of the authorised ITMO in the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) which is administered by the International Civil Aviation Organisation (ICAO), and the use of the ITMO by private actors in the VCM.

Once the authorisation process for an ITMO takes place, both parties are considered to have committed to applying a corresponding adjustment to their emissions balance which will be recorded on their national registry. A corresponding adjustment (CA) is an accounting process by which the emission reduction that was recorded as belonging to the transferring party is now recorded as belonging to acquiring party; this is recorded by both parties making a corresponding adjustment to their recorded ERs in their own respective registries.

Process and Timing of Authorisation

COP29’s Article 6.2 Decision included confirmation of the structure of an authorisation set out in 2CMA.3 Annex 18(g), which provides that an ITMO authorisation must include the authorisation of the cooperative approach undertaken by the transferring and acquiring parties, the use of the ITMO itself, and the entities involved. The authorisation process may involve all elements required for authorisation being contained in a single consolidated submission, or separate elements of the authorisation being submitted sequentially. The parties’ submission of the required information for an authorisation to take place is sometimes known as a Letter of Authorisation (LoA).

Content of Authorisation

The content of the authorisation is listed in CO29’s Article 6.2 Decision at paragraph 5. This list is relatively extensive, but notably includes a requirement for the authorisation to contain:

1. A unique identifier for the cooperative approach, obtained from the centralized accounting and reporting platform, where that is available;
2. The date and duration of the authorization, including the final date for mitigation outcomes to be issued, or to be used or cancelled;
3. The specification of the first transfer of the mitigation outcome (see below for more information on the nature and contents of an ITMO’s “first transfer”);
4. The uses covered by the authorization, i.e. either for achieving the acquiring party’s NDC or for OIMPs (as per 2/CMA.3 annex 1(d) and (f);
5. The identification of or cross-reference to underlying regulations, frameworks, standards or procedures, including any specific methodologies underpinning the cooperative approach;
6. The identification of the registry the participating Party has, or has access to, for the purpose of tracking and recording internationally transferred mitigation outcomes;
7. Identification of the relevant registry(ies) in the underlying regulations, frameworks, standards or procedures that (1) contain mitigation outcomes or inform their calculation by the participating Party(ies) and (2) transparently track the status of underlying mitigation activities and outcomes as well as participation and transactions by entities, as applicable;
8. The greenhouse gases (GHG) covered by the authorisation; and
9. Where changes to the authorisation are provided for, information on the circumstances in which that change might take place and a description of the process by which the change will take place and avoid any double counting.

Changes to Authorisation of ITMOs

A change to the authorisation of the use of an ITMO may occur where a party that has transferred an ITMO wants to change the purpose the ITMO can be used for (i.e. from being used to achieve an NDC to use towards an OIMP). Such a change could effectively revoke the transfer, given the acquiring party may not want to change the purpose for which it has acquired the ITMO. The Decision on Article 6.2 at COP29 provides that the authorised use of an ITMO may only be changed after the “first transfer” of the ITMO if the initial authorisation of the use of the ITMO specified the circumstances in which such a change could take place and the process that should be employed to manage it. Changes to authorisations must occur in accordance with these specifications contained in the first authorisation in order to take effect. This restriction has been implemented in order to avoid double counting and to create certainty for the acquiring and transferring parties as well as private investors in OIMPs. The Decision ensures the acquiring party and any private investors in OIMPs are provided with certainty and predictability with regard to the ER they have purchased, while the transferring party knows that in certain agreed circumstances (such as if they have oversold ERs and can no longer meet their NDC targets) they can effectively revoke the ITMOs they have sold.

While there is no prescription in the Decision as to what specifications must be included in a first authorisation to manage and conduct the process of changing an authorised use of an ITMO, the Decision does require that parties apply “robust accounting” to ensure that any changes to the authorisation of the use of ITMOs does not lead to double counting.

2. The “First Transfer”

The transfer of an ITMO is an accounting process by which the party that is transferring the ITMO and the party that is acquiring the ITMO officially apply a corresponding adjustment (CA) in their national registries. A CA involves the transferring party removing the effect of the ITMO from their own national climate registry/NDC and the acquiring party applying the effect of the ITMO to their own national climate registry/NDC. This has the effect of increasing the overall measured emission levels in the transferring party and reducing the overall measured emission levels in the acquiring party.  

The Article 6.2 Decision passed at COP29 provided a definition of the “first transfer” of an ITMO. This is now defined as the earlier of either (a) the first international transfer of the mitigation outcome (if that mitigation outcome is authorised to be used for the achievement of an NDC), or (b) the (1) authorisation, (2) issuance, or (3) use or cancellation of the mitigation outcomes, as specified by the first transferring party (if that mitigation is authorised to be used towards OIMPs). Further, if (b) applies, then while the authorising parties may choose when first transfer occurs, parties must apply a consistent definition of “first transfer” for each cooperative approach they engage in. This ensures a degree of flexibility for ITMOs that are to be used towards OIMPs, but greater transparency and certainty when an ITMO is to be used to achieve an NDC.

In either case, a first transfer can only occur when or after the ITMO has been authorised by the transferring party (known as the first transferring party). If an ITMO has been authorised for use as an OIMP, the first transferring party is required to have robust arrangements in place to ensure it is notified of the ITMO’s first transfer, as specified by the first transferring Party in its authorisation, to ensure the relevant CA is properly applied. Further, the first transfer of an ITMO authorised to be used as an OIMP must be recorded no later than 31 December of the year before the submission of the biennial transparency report for the NDC period in which the ITMO occurred (i.e. when the emission reduction actually took place). This deadline for a first transfer to be recorded complements the deadline for “additions and subtractions for an NDC implementation period” (i.e. the application of a CA) in 2/CMA.3 Annex 12, which must occur prior to the initiation of the review of the first biennial transparency report that contains information on the end year or end of the period of the NDC. In accordance with Article 13 of the Paris Agreement, a biennial transparency report (BTR) must be issued for public scrutiny every two years, after which it will undergo a technical expert review progress. BTR’s are required to contain a range of information regarding a party’s compliance with the Paris Agreement. Parties will submit their first BTRs by 31 December 2024.

First transfer can also be effected by the process of transferring an authorised ITMO to the Adaptation Fund in order to voluntarily contribute to resources for adaptation and by the process of cancelling an authorised ITMO in order to deliver an overall reduction of global emissions (unless any ITMO subject to these processes had already been first transferred).

The rules regarding the first transfer of an ITMO provide certainty and transparency regarding the moment an ER is to applied to the national registry of the acquiring country rather than the transferring country. Such certainty and transparency should increase confidence in the integrity of the Article 6.2 market, ensuring a price premium for ITMOs that have been acquired for use as OIMPs. The first transfer also acts as the moment the use of the ITMO cannot be changed unilaterally by the transferring party (as explained above). Acquirers of ITMOs (both states and private actors) should therefore look to ensure the first transfer takes place sooner rather than later so that they have greater predictability regarding the permitted use of the ITMO they have bought.

3. Transparency

Transparency is an important element of ensuring trust in the Article 6 mechanism. Without transparency, parties and any private actor purchasers of ITMOs will not have confidence that they are purchasing an effective ITMO that is not subject to double counting. Double counting can be understood as when an ER is applied to offset two (or more) different sets emissions, each equivalent to the value of the ER and thereby creating a situation where the ER only delivers half the impact it is being judged to provide (or counted twice). The Article 6.2 Decision passed at COP29 contained a number of provisions regarding transparency.

Transparency of Information About an Authorisation

Once an authorisation of the use of an ITMO has been submitted by a party, the information the authorisation contains will be uploaded to a centralised accounting and reporting platform (also known as a CARP). This will provide a public repository for each Party’s authorisation statements and will include information on any changes or updates made to their authorisations. This public availability should work to increase transparency and certainty in the market and ensure independent reviews and scrutiny of parties’ efforts towards meeting their NDCs and/or OIMPs.

Reporting Processes

Parties engaging in cooperative approaches under Article 6.2 must produce a number of reports. Prior to, or at the time, a party authorises the use of an ITMO, the party must publish an initial report into that ITMO. This initial report must contain a significant range of comprehensive information relating to the ITMO activity itself, including with regard to the measurement of the ITMO activity’s ER and the metrics and methods by which a CA may be applied for the relevant ITMO (for the full list of data to be included in the initial report see 2/CMA.3 Annex 18-19 and the supplementary list of information set out in Annex I of the COP29 Article 6.2 Decision).

After or at the same time as an initial report has been issued in relation to an ITMO, parties must also provide annual information on the authorisation of ITMOs for use towards achievement of NDCs or OIMPs, as well as on first transfers, transfers, acquisitions, holdings, cancellations, voluntary cancellations, voluntary cancellations of mitigation outcomes or ITMOs towards overall mitigation in global emissions, and use towards NDCs as well as further information specified in 2/CMA.3 Annex 20. This annual information must be provided by no later than 15 April of the year following the date these processes take place.

Parties must also provide what is known as “regular information” in an annex to its biennial transparency reports (BTRs). Regular information comprises a significant range of information regarding a party’s participation in the Article 6.2 cooperative approaches scheme and the full requirement for regular information is set out in 2/CMA.3 Annex 21-24.

The Article 6.2 Decision passed at COP29 specifies the format in which annual information must be up uploaded to the relevant Article 6 database. This format is contained in Annex II to the Article 6.2 Decision. The Article 6 database will then serve as a centralised accounting and reporting platform to enable the generation of summary tables and disaggregated tables using the data that has been inputted into the database to generate analysis of Article 6.2’s progress and impact.

The Article 6.2 Decision passed at COP29 also specified that tables for submitting data required as part of each party’s regular information will be automatically generated and supplied to parties on the centralised accounting and reporting platform, and parties will be encouraged (but not compelled) to use these tables to submit the required information.

Identifying, Notifying and Correcting Inconsistencies.

The cooperative approaches mechanism under Article 6.2 effectively relies on a system of accounting in which ERs activities that are based in one cooperating country are, by the process of applying a corresponding adjustment (CA), applied to offset the emissions generated in another cooperating country. In order to ensure this system works as intended, it is crucial that there are no inconsistencies between the information contained in each cooperating country’s own carbon registry or ledger. Therefore, the Article 6.2 Decision agreed at COP29 set out that the UNFCCC Secretariat will conduct automated consistency checks on the data provided by each party in their annual report. The results of the checks will be made publicly available on the centralised accounting and reporting platform. Information submitted by parties participating in the same cooperative approach will be marked as consistent, inconsistent or not available (should the required information not be available).

The automated consistency checks will feed into the Article 6 technical expert review (Article 6 TER) carried out by each party’s own domestic Article 6 technical expert review team. Each Article 6 TER will contain a review of the consistency of the information available for each cooperative approach as well as recommendations on how to improve consistency and address specific identified inconsistencies that had been identified in the annual and regular information submitted by each party. Information on the status of a party’s Article 6 TER process will be listed for public display on the Article 6 centralised accounting and reporting platform, which will ensure transparency and provide information on the significance and persistence of any identified inconsistencies.

Once an inconsistency has been identified in a cooperative approach, participating parties shall make reasonable effort to resolve the inconsistency and demonstrate their resolution as soon as possible. Parties must continue to make these efforts until consistency is achieved and verified by the automated consistency check. Where a party’s submitted data contains a significant and/or persistent inconsistency (as defined by the experts conducting a party’s Article 6 TER) the inconsistency will be, amongst other measures, explicitly notified to the CMA for inclusion in their annual report to the UNFCCC secretariat which will in turn provide a public notice of the inconsistency to the parties involved. The Article 6.2 Decision passed at COP29 also requests parties not to use ITMOs that are identified as inconsistent to achieve their NDCs as such an inconsistency would impact on a party’s adjusted emissions balance and possibly lead to double counting.

4. The Registry

One particularly hard fought element of the Article 6 negotiations at COP29 was with regard to the nature of the registry/registries that will contain information on the issued ITMOs. Parties were divided as to whether a registry operated by the UNFCCC Secretariat should simply operate as repositories of information of whether they should possess the ability to enable the transfer of ITMOs and provide a service equivalent to that of a national registry to parties who did not have one. The latter option was particularly attractive to countries that would struggle to launch their own national registries in the near future but still wanted to engage in the Article 6.2 market.

The Decision passed at COP29 tried to split the difference between opposing camps. It first established that parties’ own national registries may be voluntarily connected to the UNFCCC’s registry. This would enable the UNFCCC registry to perform as a “pull and view” registry, providing registry users with access to data and information on ITMOs and the history of both ITMOs and other emission reductions registered at the domestic level in accordance with Article 6.4 (for more information on these Article 6.4 ERs (known as A6.4ERs/PACM ERs) see below). The Decision then requested the UNFCCC Secretariat to provide an additional service to all parties that request it. This additional service will enable parties to generate, certificate and issue emission reductions using the UNFCCC registry that it has authorised or intends to authorise as ITMOs in order to take part in the Article 6.2 cooperative approach. The Secretariat’s own registry service will interoperate with the UNFCCC registry in an equivalent way to a party’s own domestic registry, thereby essentially providing a registry service to parties who do not have the capacity or desire to create their own.

The provision of registry services by the UNFCCC Secretariat is not designed to be a long term solution, as the Secretariat is also requested to provide parties with capacity building assistance so that they can implement their own national registries for the generation, certification and issuance of emission reduction credits (which could then be authorised in order to become ITMOs and be traded in accordance with the provisions of Article 6.2).

5. Next Steps for Article 6.2

The core elements of the Article 6.2 mechanism have now been agreed upon and operationalised. However, there are areas of then mechanism that require further work at the UN level. To this end, the COP 29 Decisions regarding Article 6.2 have tasked the UNFCCC Secretariat with completing a number of tasks prior to COP30/CMA7 in 2025. Specifically, the Secretariat must:

1. Develop and publish a voluntary standardised template for parties to use for the authorisation of ITMOs. Although the Secretariat will now produce this template, similar templates already exist, including one published by the World Bank’s MIGA – see the MIGA template Letter of Authorisation for ITMOs under Article 6.2 that was published in November 2024;
2. Prepare a technical paper on how to improve upon and develop electronic information submissions by parties of their annual information to and design and implement capacity-building programmes to assist parties in their use of the required electronic format for the submission of annual information;
3. Provide the additional registry services so that parties without national registries may engage in the Article 6.2 market. These additional registry services must be provided within the same timeline as the development and implementation of the international registry so as not to disadvantage countries who plan to use them;
4. Organise a dialogue at the level of the Subsidiary Body for Implementation and to be held at each meeting of that Subsidiary Body to allow participating parties to exchange information and experience on their own cooperative approaches; and
5. Update the current version of the Article 6.2 reference manual for the accounting, reporting and review of cooperative approaches, which is a comprehensive guide to the Article 6.2 system current as of August 2024.

There are further elements of Article 6.2 that have not been dealt with at the UN level. One is the definition of “cooperative approaches”. By refraining from defining cooperative approaches, parties have allowed a level of flexibility to the development of how parties arrange for the transfer of ITMOs between themselves. For example, it leaves open the door for the development of unilateral authorisations. Such unilateral authorisations would only require one party rather than two providing the authorisation required for an ER to become an ITMO and could be employed where a country is selling the ITMO directly to the CORSIA market or the VCM (which is international). Whether and how unilateral authorisations will occur in practice remains to be seen, however this flexibility should enable parties to develop ways of working that suit their needs while not impacting on the quality of the traded ERs or the transparency of the system of applying CAs.

Another issue that has not been dealt with at the UN level is the continuing absence of any direct rules regarding the revocation of authorisations for an ITMOs. Although the rules around changes to the authorised use of an ITMO have become clearer, currently the possibility of a revocation is not explicitly provided for in the Article 6.2 framework. This leaves open the question of whether parties may unilaterally revoke an authorisation for a cooperative approach that has been agreed with another party. This may lead to a party that has paid for the acquisition of ITMO being left unable to apply the equivalent ER towards the achievement of its NDCs. It could also lead to a party that considers it has legitimately agreed to transfer an ITMO to another party receiving none of the funds it was promised when it invested in generating to the ER domestically. Private sector providers and brokers of insurance are coming to market in this sector to deal with issues such as revocation; examples include Kita, Howden and CFC. Private parties purchasing Article 6 credits as other international mitigation purposes (OIMPs), i.e. in the VCM or CORSIA market, may also structure their transactions to avail themselves of the protection provided by investment treaties in order to gain some recourse against unilateral revocations and other sovereign risks in Article 6 carbon markets.

One further issue that has not been spelt out at UN level is the relationship between the public and private sector within the state to state Article 6.2 trading scheme. It is likely that while the state will certify, issue and authorise emission reductions for sale and transfer as ITMOs, there is a space in the market for private sector companies to invest in and produce emission reduction generating activities. Whether such activities could be sold directly to States via the Article 6.2 market is yet to be seen, but as a first step it seems likely that host states will be willing to pay domestic ER activity providers for the ER activities they will in turn be able to sell as ITMOs on the Article 6.2 market. Indeed as early as December last year a private sector emission reduction project in Rwanda developed and implemented by DelAgua was authorised by its host state as being available for transfer as an ITMO under Article 6.2 of the Paris Agreement. Further opportunities for the private sector to involve itself in the Article 6.2 market should reveal themselves in due course.

Despite the abovementioned issues, demand for Article 6.2 ITMOs already exists, with Norway, Singapore and Switzerland all preparing to engage in cooperative approaches and purchase ITMOs. Norway has prepared to commit over USD 740 million to purchase ITMOs from Benin, Jordan, Senegal and Zambia. Singapore has committed to buying 30% of all the ITMOs that are produced via its ER implementation agreements for use to achieve its NDCs. Currently Singapore has signed implementation agreements with Ghana and Papua New Guinea and is currently negotiating with Bhutan, Vietnam and Paraguay. In early 2024 Switzerland and Thailand became the first countries to engage in cooperative approaches, with the Swiss based KliK Foundation purchasing ITMOs from an ER project in Thailand. The purchased ITMOs will be used by the KliK Foundation to meet its compensation obligation under the Swiss C02 Act. Now that ITMOs have been recognised as a valid means for countries the reach their NDCs it is likely that demand for ITMOs will increase. To this end, it will be instructive to review the NDCs published by states leading up to COP30 in Brazil in 2025 and understand what emphasis they place on ITMOs for achieving their targets.

What was Agreed at COP29 with regard to Article 6.4?

There were two decisions on Article 6.4, one made at the beginning of the COP, another made at the closing plenary alongside the adoption of the Article 6.2 decision. The key agreements contained in these Decisions are explored below:

1. Adoption of standards in relation to emission removals and methodologies

On the opening day of COP29, the Presidency passed a short Decision regarding Article 6.4. This Decision approved two important standards. The first standard concerned methodologies for the Article 6.4 mechanism. This standard sets out the basis for establishing creditable emission reductions or removals. It also sets out the rules for assessing whether emission reduction activities satisfy additionality requirements (additionality being the attribute a carbon removal or reduction activity possesses when it results in less carbon being emitted than would have otherwise emitted without the activity existing), whether they follow all relevant rules, modalities and procedures as well as follow the guidance that has been produced by the SBM.

The second standard concerned emission removals. This standard sets out agreed requirements for emission removal activities with regard to monitoring and reporting (both pre and post the crediting period), accounting for removals, methodologies that are applicable for a renewed crediting period, how to address reversals (these being instances when carbon that has been removed from the atmosphere by a carbon removal project is then later re-emitted, thereby reducing or nullifying the effect of the initial removal) how to avoid leakage (this being the process by which carbon emission reduction policies in one country cause an increase in carbon emission in a second country) and how to ensure removal activities do not cause native environmental and social impacts and respect human and indigenous rights. This standard, while crucial for the operationalising of the Article 6.4 carbon market, is not the only high-quality standard in existence. In November 2024 the EU also published a new regulation establishing a certification framework for permanent carbon removals, carbon farming and carbon storage. Private standards include the Puro Standard issued by Puro Earth, which was first published in 2019.

2. Authorisation of Article 6.4 Emission Reductions

On the final night of COP29, the Presidency passed a second, longer Decision regarding the PACM. The bulk of this Decision set out new or reaffirmed rules regarding the authorisation of PACM emission reductions (A6.4ERs). The authorisation of an A6.4ER is carried out by the country hosting the activity that is generating the A6.4ER. Once a host Party has issued a statement of authorisation to the SBM, the relevant PACM registry administrator will assign the relevant ER activity authorised status. Once an activity has authorised status, then the ER generated by that activity can be counted towards the host Party’s NDC and therefore become a fully-fledged A6.4ER.

The Decision passed at COP29 clarified a number of points regarding the content of the statement of authorisation issued by the host Party to the SBM. It specifically, must contain (or not) an authorisation of the A6.4ER to be used in full or in part for use towards achievement of the authorising party’s NDC or for OIMPs.

If a Party hosts an activity that generates an ER but for whatever reasons does not choose to authorise the ER as an A6.4ER when it is created, the ER is known as a mitigation contribution unit (MCU). This latest Decision provides for a process by which that MCU can be authorised to become a full A6.4ER at a later stage. In order for an MCU to become a full A6.4ER, and therefore contribute towards an NDC or OIMPs, the host party must issue a statement of authorisation within a certain (yet to be determined) timeframe. Although this process has not yet been fully operationalised, the Decision requires that the subsequent authorisation of an A6.4ER does not transfer the relevant ER in or out of the mechanism registry in which it is held, ensures any corresponding adjustments are applied by the host Party from the date the A6.4ER was originally issued (rather than authorised) and the share of proceeds (SoP) for the A6.4ER is paid to the Adaptation fund as required. The SoP is a 5% levy imposed by the UNFCCC on issued A6.4ERs. Least Developed Country (LDC) and Small Island Developing State (SIDS) parties have been exempted from paying this 5% SoP levy in order to reduce the administrative and financial burden of establishing A6.4ER generating projects in the countries that require the greatest levels of climate finance.

3. The Registry

Article 6.4 envisages that parties will have access to both a national registry, which will contain information on A6.4ERs hosted/bought by that party, as well as an international PACM registry run by the UNFCCC Secretariat. Parties will be able to voluntarily connect their national registry to the PACM registry. This connection would provide parties with the ability to “pull and view” data stored on the PACM registry, including on parties’ domestic level holdings of A6.4ERs and the history of each A6.4ER contained on the registry. The PACM registry will also be connected to the Article 6.2 registry as described above and therefore enable parties to access and review information regarding both domestic A6.4ERs and ITMOs while avoiding double counting.

4. Transition of CDM Activities

While the Clean Development Mechanism (CDM) carbon market (established in 1997 and operationalised in 2006 under the Kyoto Protocol) finished on 31 December 2020, many of the emission reduction activities that were registered to the CDM continue to operate and generate ERs. So as not to lose the benefits of these ERs, the Decision passed at COP29 allows for afforestation and reforestation project activities and programmes of activities that had been registered under the CDM to transition to the PACM and be registered and authorised as A6.4ERs.

In order for this transfer to occur, a request must be made to the UNFCCC Secretariat and to the designated national authority of the CDM activity host party by or on behalf of the CDM activity participants or the coordinating/managing entity of the CDM activity. The deadline for a request to be made is 31 December 2025. The request must also be approved by the designated national authority of the host party, and this approval be provided to the SBM by the same deadline of 31 December 2025. Finally, the transferred CDM activity must comply with all the relevant existing and future standards, rules, modalities and procedures established by and/or applicable to Article 6.4 and the PACM in order for the ER’s generated by the transferred activity to be able to be authorised as A6.4ERs.

5. Next Steps for Article 6.4

Core elements of the PACM have now been agreed upon and operationalised and this year, both pre and post COP, the SBM has published a number of new standards, procedures, tools, guidelines, information notes and forms. However, many wider elements of the mechanism are still to be established. To this end, the COP 29 Decisions regarding Article 6.4 have tasked the SBM with a number of further duties prior to COP30/CMA7 in 2025.

The Decision passed on the opening day set out that the SBM would now “expeditiously elaborate” the standards that had been approved while striving to ensure “regulatory stability”. The SBM will also provide an annual written report to the CMA on its work developing Article 6.4 standards. The first of these reports will be delivered at CMA7/COP30 in 2025.

The Decision passed on the final day set out that the SBM would now:

1. Expedite, alongside the UNFCCC Secretariat, the establishment of the PACM registry and all relevant procedures required for its operation. The work of the SBM will include the development of further standards, tools and guidelines relating to baselines, downward adjustment, standardized baselines, suppressed demand, additionality, and leakage, as well as non-permanence and reversals including aspects of post-crediting period monitoring, reversal risk assessments, and remediation measures;
2. Accelerate the revision of the baseline and monitoring methodologies in use for the CDM with a view for applying them with revisions as appropriate to activities established under Article 6.4;
3. Ensure continuous development and improvements of the PACM while striving to provide regulatory stability by avoiding frequent substantive revisions to its adopted standards, tools and procedures;
4. Consider and determine whether there should be a time limit after which mitigation contribution 6.4 ERs could not be authorised and become full A6.4ERs (Such a time limit would be calculated from the date the mitigation contribution 6.4 ER was issued); and
5. Provide an oral report to the CMA every year on its work implementing the PACM during the calendar year (The first of these oral reports is likely to be delivered at CMA7/COP30 in 2025).

The UNFCCC Secretariat has also been charged by the Decisions on Article 6.4 made at COP29 to:

1. Develop a template document for the authorisation statement required to be issued by host parties before their A6.4ERs may be counted towards fulfilling their NDCs; and
2. Implement the PACM registry so that it may be available for use by all registry users participating in the PACM.

Due to the extent of the work still to be carried out by the SBM and Secretariat, it seems unlikely that the PACM will begin operating as intended before COP30 in 2025. The SBM itself has limited capacity as it is currently made up of only 12 staff members. This is compounded by the fact that as of the end of COP29 there was a USD 3.1 million shortfall in funding for the PACM which should reduce the capacity of the SBM in the year before 2025. As it stands it is unlikely that we will see any A6.4ERs being registered as contributing to parties’ efforts to achieve their NDCs before 2026. However, meetings of the SBM are scheduled for February, May, July and October 2025 before COP30 in November 2025. It is therefore likely that we will receive further updates and new work from the SBM throughout the year, culminating in the first formal written and oral reports on its work at COP30.

 

Part 3 (Implications for the VCM)

 

What are the Implications of COP29 for the Voluntary Carbon Market?

Significant steps were made at COP29 regarding the development of the Article 6 carbon markets. The clarity that the Decisions made at COP29 has provided is likely to drive increased demand for A6.4ERs and ITMOs at the state level. However, what effect the Article 6 developments that took place at COP29 will have on the VCM, which to date has represented the bulk of the volume of ER credits traded, remains unclear. However, for corporates who have purchased credits on the VCM and producers of credits that have been sold on the VCM, it is important to understand the relationship between the VCM and the Article 6 carbon markets and how the Decisions agreed at COP29 may affect the VCM in the near future. This Part 3 will attempt to provide guidance with regard to how the COP29 Article 6 Decisions will impact on the VCM.

1. Article 6 credits and the voluntary carbon market

As set out above, when A6.4ERs are authorised, they can be used either for achieving the host party’s NDC or OIMPs. OIMPs include the use of the A6.4ERs as ITMOs, on the VCM and or on other recognised carbon markets such as CORSIA. When an A6.4ER is authorised for use as an ITMO and a corresponding adjustment is made so that the ER is judged to apply to the acquiring party’s emissions, then that ITMO may also be used for either the acquiring party’s NDC or for OIMPs. As explained above, certainty regarding the use of the ITMO is a key element in its authorisation and for the protections for purchasers of ITMOs provided by the first transfer. Therefore, A6.4ERs, whether used domestically or authorised and transferred as ITMOs under Article 6.2, may be purchased by corporates on the VCM if they have been authorised for that purpose.

Ever since the basic structure of the Article 6 carbon markets was agreed at COP26, users of the VCM have wrestled with the potential impact of Article 6 ER credits on the VCM, including in relation to how those credits would practically be integrated (if at all) within the VCM and what price premium the new Article 6 ER credits would attract. In our work with buyers, developers and traders across the market, we have seen this dynamic play out in bespoke contractual terms which anticipate changes in law and regulation, changes in market dynamics and the sharing of upside and downside risk in relation to Article 6. We know that a price premium currently exists for ITMOs in comparison to ERs that have not be authorised under the Article 6 processes.  We also now know that A6.4ERs will be available for purchase on the VCM (as explained above) and can expect that such VCM credits will also command a price premium.

2. VCM standards and methodologies and the Article 6 carbon markets

Currently, private standard setting bodies will not be able to authorise ERs for use in the Article 6 carbon markets (as that function is reserved for host countries). However, that does not mean companies engaged in creating standards and methodologies for the existing VCM have no part to play in the creation and of Article 6 authorised ERs. Existing standard setting bodies such as Verra, Gold Standard, Puro Earth and Climate Action Reserve (known as carbon standards) have pre-established systems of ER crediting that employ their own unique standards and methodologies. Despite this, there is no reason why an ER credit that has been approved by a carbon standard may not also be authorised as an A6.4ER or an ITMO (carbon standards  such as Puro Earth have already provided guidance on how to achieve this). However, there is no guarantee that an ER meeting a carbon standard’s requirements for authorisation will automatically reach the requirements necessary for authorisation as an A6.4ER or ITMO. Despite this, if the current price premium for Article 6 authorised ER credits persists on the VCM it is likely that existing carbon standards will conform more closely to the official Article 6 requirement so that the privately reviewed and credited ERs will be more likely to qualify as an Article 6 ER if subsequent authorisation is applied for. Greater uniformity between privately credited ERs and Article 6 ERs should mean the former trade at less of a discount and ERs that have been approved by carbon standards are seen to have greater integrity.

OIMPs also include the use of Article 6 ERs in the CORSIA market. Currently, as within the VCM, CORSIA has approved a number of carbon standards as eligible to credit ERs for use on the CORSIA market. The ICAO that runs CORSIA has approved six private standard setting bodies as eligible to credit ERs for use on the CORSIA market, the American Carbon Registry, Architecture for REDDD+ Transactions, Climate Action Reserve, Global Carbon Council, Gold Standard, and Verra. As explained above, while an ER credit that has been issued by a carbon standard may be subsequently authorised as an A6.4ER or ITMO, there is no guarantee that the privately credited ER will meet the required standard for that to occur. This means that the CORSIA market, like the VCM, will likely contain both privately credited and Article 6 authorised ERs at the same time. It remains to be seen whether Article 6 authorised ERs will command the same price premium on the CORSIA market as on the VCM.

Carbon standards have also begun to engage in the Article 6.2 process as well. In one example the Government of Singapore has worked with Gold Standard and Verra to launch an Article 6.2 Protocol which will be finalised and implemented in 2025. This protocol will set out a standardised procedure for private standard setting organisations and government to work together to implement the cooperative approaches they plan to engage in under Article 6.2 and minimise the risks of inconsistencies in the data between transferring and acquiring parties.

3. How will the Article 6 carbon markets affect the VCM?

The VCM will continue to operate both in parallel with the Article 6 carbon markets and, given A6.4ERs and ITMOs will trade on the VCM, in conjunction with it. Given the very recent operationalising of the Article 6 carbon markets, it remains to be seen whether and to what extent the Article 6 carbon markets will affect the VCM. However, recently participation in the VCM has been hampered by doubts regarding the quality and integrity of existing ERs and the difficulty of attracting investments in ER projects that may only generate returns once they have become mature and able to provide a required ER offset. Participants in the VCM anticipate that once private companies are able to purchase and trade ERs that have been authorised as A6.4ERs or ITMOs, the level of transparency and stamp of integrity that this authorisation should provide will over time restore market confidence in the quality and integrity of VCM credits in general.

Recognition and approval of methodologies developed by Verra and other VCM carbon standards for use in the Article 6 carbon markets will also be an area to watch against the backdrop of an increased focus on quality and integrity in the VCM, led by the Integrity Council on the Voluntary Carbon Market (ICVCM). Carbon standards such as Verra will look to have their existing methodologies recognised by the Article 6.4 Supervisory Body and, as referred to above, develop new VCM methodologies with the requirements of the Article 6.4 Supervisory Body in mind. In this context questions have been raised about the capacity of the 12-person Article 6.4 Supervisory Body to cope with this workload. It is likely therefore that greater levels of  cooperation between the VCM carbon standards and the Article 6.4 Supervisory Body can only help it perform the work it has to carry out.

If ER credits authorised under Article 6 as a means for countries to offset their national emissions become more internationally accepted, it is likely that companies and their customers will increasingly see ERs purchased on the VCM as a legitimate means for corporates to offset their emissions. This in turn will increase investor confidence in the sector and lead to the expansion of the supply of quality ER projects. However, given States’ needs to achieve their NDCs, and the anticipation that A6.4ERs and ITMOs will play a large role in that process, increased State demand for a limited supply of A6.4ERs and ITMOs may increase the price premium on Article 6 authorised ERs and price out private actors from purchasing these credits. However, if this does occur, the increased prices should spark greater investment in GHG mitigation activities which lead to supply of emission reductions, stimulating the VCM and Article 6 markets in the long run.

One ongoing issue that has hampered demand for ERs on the VCM is the voluntary nature of corporate engagement with the market. Although the effects of the operationalising of the Article 6 carbon market is yet to be fully understood, one under-appreciated possibility is that if the Article 6 markets operate as intended and inspires greater confidence and integrity in the VCM, States may in turn feel greater confidence to introduce domestic regulation to compel or encourage companies to purchase ERs to offset their emissions. One thing is for certain, companies interested and/or already engaged in the VCM will need to keep up to date with developments regarding Article 6 over the next few years to ensure they stay ahead and understand its impacts on their businesses.

Please reach out for further information or if you have any queries regarding the contents of this article. Your key contact for carbon markets is Alex Blomfield.