We have already looked at various decarbonisation strategies that pave the way to climate neutrality. Among other things, Article 6 of the Paris Agreement established carbon credits as a useful means of offsetting emissions. Article 6 has recently been expanded: Article 6.4 of the Paris Agreement, which was finalised at the 29th Conference of the Parties (COP29), offers a promising framework for a global carbon market. This new mechanism opens up new business models and investment opportunities for companies. At the same time, it also harbours risks that need to be carefully weighed up. The increasing demand for carbon emissions in the coming years emphasises the importance of careful consideration of regulatory requirements.
Why the Need for Article 6.4?
The Clean Development Mechanism (CDM), established under the Kyoto Protocol, was a pioneering effort to promote sustainable development and reduce greenhouse gas emissions. However, it was criticized in various points, including:
- Lack of Environmental Integrity: Critics have raised concerns regarding the “additionality” of CDM projects, questioning whether these projects are leading to real, measurable, and long-term emission reductions beyond what would have occurred without the CDM
- Limited Scope: The geographical distribution of CDM projects has been skewed, with a majority concentrated in a few countries, leading to debates over the equitable allocation of resources and benefits among developing nations
- Complexity and Bureaucracy: The CDM’s complex rules and procedures hindered its effectiveness and discouraged participation
The new system under Article 6.4 aims to address these issues by establishing a more robust, transparent, and efficient framework for carbon markets.
Following two record years with high demand, the voluntary carbon offset market had a significant set back in 2023. Global economic conditions, regulatory uncertainty, oversupply of credits, shift towards higher quality credits and increased scrutiny and negative media coverage all present challenges for the voluntary carbon markets.
(Ecosystem Marketplace. (May 30, 2024). Annual value of voluntary carbon offset market transactions worldwide from pre-2005 to 2023 (in million U.S. dollars) [Graph]. In Statista. Retrieved November 28, 2024, from https://www.statista.com/statistics/501698/voluntary-carbon-offset-market-transaction-value-worldwide/)
When Will the New Carbon Credits Be Available?
The exact timeline for the availability of new carbon credits under Article 6.4 is still being determined. However, it is expected that the market will gradually develop over the coming years as countries finalize their domestic regulations and establish the necessary infrastructure.
The Implications for Existing Carbon Credits
The impact of the new carbon credit system on existing credits, such as those issued by Verra, is still unclear. Rules are in place for CDM activities to adapt to the new Article 6.4 mechanism, and project participants had to apply until the end of 2023. Hence for buyers and holders of existing CDM credits there is now an element of uncertainty as the acceptance under article 6.4 is key for future use of CDM credits.
Carbon credit issuing organizations such as Verra and Gold Standard will likely have to adapt their approved methodologies for projects generating carbon credits.
Comparison: Article 6.4 vs. CDM
The Significance for companies purchasing carbon credits
Article 6.4: A new generation of carbon credits
A new generation of Carbon Credits:Article 6.4 certainly has the ambition to provide a new generation of carbon credits which are not tarnished by speculations about the actual additionality of the offsets. Should this be successful, it is likely that these credits will gain in demand. Other organizations issuing carbon credits, such as Verra, have also been faced with criticism much like CDM. Should Article 6.4 prove to address issues undermining the credibility of other carbon credits, e.g. by implementing stricter and stringent acceptance rules by its registry, this is likely to be the more attractive carbon offset in the future if other registries do not change accordingly.
Avoid loss of value of CERs
Holders of CDM Certified emission reductions (CERs = CDM carbon credits), should make sure that their carbon credits will be transferred under Article 6.4. CERs not allowed to be transferred will decrease in value and might not be accepted by customers and other stakeholders.
Wide range of application for the new carbon credits
Article 6.4 credits are to be used by countries, businesses and also individuals aiming to offset carbon emissions. Countries will be able to use the credits to meet their so-called National determined contributions (NDCs) to the Paris Agreement, which determine the effort each country aims to do to reduce national emissions and adapt to the impacts of climate change.
The credits are meant to be a means to allow financing to flow from countries willing to offset to those countries which are implementing carbon offset/capture projects (usually developing world), thereby removing the need for the bureaucratic bilateral agreements between countries which serve the same purpose today.
A fundamental difference
The fact that countries will be able to use Article 6.4 credits (which is not the case with other voluntary carbon credits) implies a fundamental difference on demand which will translate into higher pricing.
Conclusion & Outlook
The voluntary carbon market has struggled with credibility issues and an unclear regulatory landscape throughout its existence. Policy and regulatory frameworks have been fragmented, operationalisation of comprehensive environmental integrity has been slow, legal clarity on carbon emissions has been lacking, and approaches to delivering market infrastructure have been fragmented and diverse. Article 6.4 is an important step towards a more effective and transparent global carbon market. Companies committed to climate protection should follow developments closely and adapt to the new framework conditions at an early stage.
If Article 6.4 is able to address these issues and restore the credibility of voluntary carbon emissions, the finalisation of Article 6.4 of the Paris Agreement at COP 29 could usher in a new era of carbon offsetting.
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