DevExplains: What’s next for global carbon credit markets

The landmark Paris climate accords paved the way for the creation of a global carbon market, where credits for reducing or avoiding greenhouse gas emissions can be bought and sold. Now, six years later, the “rulebook” for establishing that market is finally taking shape.

It’s a highly technical agreement but could be an important one for the developing world, which barely contributes to global greenhouse gas emissions yet is bearing the brunt of climate change.

Agreement in action

Africa could be a prime beneficiary. It is home to vast tracts of forests and other natural ecosystems that are key to absorbing greenhouse emissions — and an effort to pay the continent to preserve those ecosystems is moving forward.

In return for conserving their environments, African countries would get carbon credits that other governments and companies, often in higher-income countries, could then buy. The move allows Africa to tap into the global carbon market and use the profits to shift to renewable energy to fuel its growing economies, while also financing efforts to adapt to climate change, which is wreaking economic havoc throughout the continent.

Last year, Gabon became the first African country to receive payment for cutting carbon emissions as part of an agreement with the Norwegian government, which sets targets for Gabon to meet. The country plans on creating 187 million carbon credits by preserving its forests — which represent 88% of its territory — and will release a record 90 million credits onto the voluntary carbon market where Gabon’s Environment Minister Lee White said they could sell for $25 to $35 per token. Still, similar tokens are on sale for about $16 each, and some have warned that Gabon’s large offering could further lower this price.

Another problem: According to the United Nations Development Programme, while African ecosystems store large amounts of carbon, the continent lacks the skills and technologies to calculate how to monetize its forest- and land-restoration projects, and other climate-mitigation initiatives.

Creating a global carbon market

Participants at the 26th United Nations Climate Change Conference, or COP 26, agreed on an “Article 6 Rulebook” to govern how global carbon markets would function. That agreement was hashed out after six years of political negotiations, and resolved contentious issues such as double-counting and limiting the use of pre-2020 credits from the U.N.'s Clean Development Mechanism, or CDM.

Article 6 was designed as a source of climate finance for low- and middle-income nations. Five percent of the “share of proceeds” from carbon markets linked to Article 6.4 will go to the Global Adaptation Fund to help low- and middle-income countries finance their efforts to adapt to the impacts of climate change.

In February, Patricia Espinosa, then the executive secretary to the U.N. Framework Convention on Climate Change, said Article 6 rules will “provide the groundwork to help unlock resources on support for developing nations.”  

“This is important for developing and especially least developed countries and small island states. After all, many do not currently have the means or resources necessary to energize an economy-wide transition towards a low-emissions future,” she said. “It’s about leveling the playing field so that emissions can be traded with environmental integrity.”

What is Article 6?

Article 6 of the Paris Agreement allows countries to transfer carbon credits — technically known as internationally transferred mitigation options, or ITMOs — earned from the reduction of greenhouse gas emissions to help other countries meet their own climate targets.

The International Emission Trading Association also estimates that Article 6 could halve the cost of implementing national climate action plans and save an estimated $250 billion annually by 2030.

Article 6.2 provides a framework for countries that are parties to the agreement to transfer these credits to other countries, which can then use them to achieve their Nationally Determined Contributions, or NDCs. Article 6.4 details the mechanics of the multilateral carbon credit market, which would be overseen by a "Supervisory Body."

Jonathan Crook, a policy expert on global carbon markets at Carbon Market Watch, explained that Article 6.4 provides for wider participation than Article 6.2 because private companies can eventually participate in the market set out by Article 6.4.

The road to COP 27

Since the agreement in Glasgow, negotiators have been ironing out the finer details of how the carbon markets will function. The supervisory body under Article 6.4 was established and met for the first time in July. The body will prepare recommendations, including on its own rules of procedures, activities involving emission removals, and methodological requirements for consideration and adoption at COP 27.

Negotiators at COP 27 will also discuss whether avoided emissions — whereby a project makes assumptions about how its existence could lead to lower future emissions — will qualify for credits under Article 6. Other questions in play include the scope of information that must be disclosed in relation to ITMOs, and how fee structures will work, including registration and issuance fee levels, calculations and exemptions.

Crook said the discussions around Article 6 will “be less of a political issue than it has been in the previous COPs” because “many parties are keen to get things up and running.”

According to Crook, ITMOs could happen soon as countries like Japan and Switzerland are already quite advanced on Article 6.2.

“But there are still a few unanswered questions,” he said. “The overall market infrastructure for trading as well as the processes for reporting information about ITMO trades need to be finalized.”

He added that trading under Article 6.4 could happen as early as 2024, but it will largely depend on how much progress the supervisory body makes.

Carbon Market Watch warned that “rapid implementation should not be an end in and of itself” and what’s most important is that environmental integrity, human rights, and transparency are upheld in the process.

“Better to get the rules right from the outset, rather than rush and make errors that would do more harm than good,” Crook wrote in a briefing — adding that the involvement and supervision of civil society organizations and local stakeholders is essential.

Key to this, he noted, will be establishing an independent grievance process that is mandated under Article 6.4.

“What's really important is that this is obviously done in a robust way,” Crook said, “and that it's done before any projects are registered or credits are issued.”