Under the new carbon markets framework agreed in Baku, countries face no real repercussions if they fail to abide by the rules.
At the COP29 climate talks in Azerbaijan this November, governments approved a new package of rules that will govern carbon markets. Proponents celebrated the breakthrough, which came after almost a decade of talks, and said they will mobilise billions of dollars for new climate projects.
The new rules, however, risk undermining efforts to rein in emissions rather than advancing them. Despite some countries fighting tooth and nail to bring transparency and quality requirements to the framework, they ended with limited gains to show for their pains.
On the one hand, the final text requires countries to publish information when they formally approve Internationally Traded Mitigation Outcomes (ITMOs), the units used for emissions trading between nations. Importantly, any inconsistencies identified in countries' cooperative approaches will be made public.
On the other hand, the leniency of the framework means that countries' submission of information detailing the formal approval of carbon credits or trade deals related to the voluntary carbon market or credits purchased by airlines under the UN's CORSIA scheme may not come until years after issuance.
"The flaws of Article 6 have, unfortunately, not been fixed," says Isa Mulder, policy expert on global carbon markets at Carbon Market Watch, referring to the part of the 2015 Paris Agreement that relates to carbon markets. "It seems countries were more willing to adopt insufficient rules, and deal with the consequences later, rather than prevent those consequences in the first place."
Under the new framework, countries face no real repercussions if they fail to abide by the rules. In theory, any "inconsistencies" or non-compliance of carbon credit deals need to be addressed. But with neither a deadline to act nor clear penalties, countries have little incentive not to game the system. This is a real-world problem that requires oversight, as revealed by recent investigations into early transactions under Article 6.2, which governs carbon credits traded between countries.
"Offering marginal improvements to transparency provisions, the package does not shine enough light on an already opaque system where countries won't be required to provide information about their deals well ahead of actual trades," says Jonathan Crook, policy lead on global carbon markets at Carbon Market Watch. "Even worse, the last opportunity to strengthen the critically weak review process was largely missed. Countries remain free to trade carbon credits that are of low quality, or even fail to comply with Article 6.2 rules, without any real oversight."
Sorely lacking
While talks at COP29 mostly focused on the complex negotiations on Article 6.2, day one of the conference saw the early and controversial approval of measures related to Article 6.4. This clause relates to the creation of a global carbon market that is overseen by the Article 6.4 Supervisory Body (SBM) and enables countries, companies, and even individuals to buy UN-recognised carbon credits.
In Azerbaijan, parties agreed the SBM's rules on carbon removal projects and methodological requirements. This enshrined certain key principles such as a required "downward adjustment" to reduce the volume of credits issued over time and likely excluded projects that lock-in dependence on fossil fuel infrastructure. At the same time, however, the rules relating to projects that remove carbon from the atmosphere and requirements ensuring their benefits are permanent were left sorely lacking.
Many were also deeply disappointed that their arguments that projects previously approved under the Clean Development Mechanism (CDM) ought to be reassessed before being allowed to transition to the Article 6.4 mechanism were ultimately rejected. This was despite the large body of evidence on the shortcomings of the CDM. This means that old potentially problematic projects continue to have an easy path towards issuing credits under the Article 6.4 mechanism, for emission reductions achieved between 2021 and 2025, without additional verification other than the somewhat symbolic approval by their host country.
Starting early next year, the SBM will resume its work, in particular to clarify rules related to the risk that carbon credit schemes' benefits are non-permanent. On this front, it was important that the Article 6.4 decision in Baku clarified that future work must be guided by "best available science". One possible starting point for this could be the recent Nature Communications study confirming that a carbon storage period of less than 1,000 years is insufficient for neutralising emissions.
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"Much lies in the hands of the Supervisory Body now," says Federica Dossi, policy expert on global carbon markets at Carbon Market Watch. "To show that it is ready to learn from past mistakes, it will have to take tough decisions next year and ensure that Article 6.4 credits will be markedly better than the units that old CDM projects will generate. If they are not, they will have to compete in a low-trust, low-integrity market where prices are likely to be at rock bottom and interest will be low. Such a system would be a distraction, and a waste of 10 years' worth of carbon market negotiations."
In short, the Article 6 outcome at COP29 has created a system that is so complex and reliant on external stakeholders to spot major shortcomings that it will be difficult to use as a basis for high-integrity actions. Going forward, it will be up to those who choose to engage in these systems to ensure that this does not sink global climate action. In the absence of better top-down regulation, the integrity of individual actors and active scrutiny from third parties will be make-or-break features of these markets.
A version of this article was originally published at Carbon Market Watch.
Khaled Diab is the communications director at Carbon Market Watch.
