Countries are increasingly engaging in the carbon market mechanisms established under Article 6 of the Paris climate agreement. But two years after its rulebook was agreed, the number of buyer countries remains limited, developing nations hosting emissions-saving projects have reservations about participating, and disagreements rumble on over some underpinning standards, writes Victoria Hatherick
The Article 6 rulebook was eventually finalised at the UN Cop 29 climate conference in Baku, Azerbaijan, in 2024, nine years after negotiations began.
But the promised centralised UN-regulated carbon market under Article 6.4 — the Paris agreement crediting mechanism (Pacm) — has not yet materialised, with its registry expected to launch in the fourth quarter of this year.
And only seven countries have so far traded so-called internationally traded mitigation outcomes (Itmos) under the Article 6.2 mechanism, according to UN Environment Programme (Unep) data, a system which allows countries to exchange emissions savings bilaterally to be counted towards their nationally determined contributions (NDCs) to the Paris Agreement.
There are so far 10 buyer countries under Article 6.2, Unep data show. Japan has signed 32 agreements under the mechanism, followed by Singapore at 28, Switzerland at 20, South Korea at 14 and Norway at nine.
Norway recently indicated its intention to deepen its engagement with Article 6 going forward.
"At the next Cop we want to contribute to building infrastructure, including registries," deputy director-general of the Norwegian climate ministry's climate change department Guri Storaas told delegates at the Nordic Climate Finance Summit in Oslo earlier this month. The country also expects to sign more Article 6 agreements, she said.
Article 6 is a "priority" for Norway because of its role in reducing the risk of Norway not meeting its climate targets solely through collaboration with the EU, and its cost effectiveness, Storaas said.
And Norway "wants to make it work", she said, which is why the country is deliberately positioning itself as an early mover under the mechanism. It has set aside a 15bn Norwegian krone ($1.6bn) "buying envelope" for Article 6 credits.
Norway's bilateral agreement signed last year with Switzerland on carbon removals also sends an important signal that Article 6 is not just relevant for developing countries, Storaas said.
Switzerland signed a similar agreement in May with Sweden, which itself has a further six bilateral agreements.
Sweden is hoping to sign another Article 6 agreement by the end of the month, fund manager for the Swedish Article 6 climate co-operation fund at the Global Green Growth Institute Ash Sharma told delegates at the summit in Oslo.
Singapore this month advanced its tender for at least 12mn Itmos, following a first tender for 2.17mn Itmos last year.
Project host countries are higher in number. A total of 55 have signed bilateral agreements under Article 6.2 across the Americas, Africa, Europe, Australasia and Asia. Kenya and Ghana have signed the most, at five each, followed by Zambia, Senegal, Mongolia and Indonesia with four each, according to Unep data.
And 58 countries are listed by Unep as having approved activities under Pacm, led by Brazil with 92 activities, followed by Chile with 30 and Vietnam with 23.
Hurdles to participation
But project host countries must strike a delicate balance between trading emissions savings to raise climate finance without damaging their ability to meet their own NDCs, a factor that has been limiting some countries' engagement with Article 6.
Kenya did a "good job standing up for its needs to meet its NDC" in the case of clean cookstove developer Koko, Sharma said at the Oslo conference. The company shut down earlier this year after failing to obtain a letter of authorisation from the Kenyan government to sell credits generated by its projects internationally, a result of the government's uncertainty about its capacity to retain sufficient emissions reductions to meet its targets.
Countries also need people engaging with the mechanism full time, and not many have the capacity to do so, Charlotte Streck of consultancy Climate Focus said at an online event this week. It is therefore important for like-minded groups to come together to avoid being overwhelmed by complexity, she said.
Private sector on the sidelines
Private-sector interest in Article 6 has been dampened by the perceived complexities of the mechanism, the head of special funds at international financial institution the Nordic Environment Finance Corporation (Nefco), Dennis Hamro-Drotz, told delegates at the conference in Oslo. They are engaging a bit later than governments, he said.
Nordic companies are more likely to participate by exporting their technology solutions first, before becoming credit offtakers later, Hamro-Drotz said. Nefco is "looking at re-engaging in carbon markets", he added, having been involved in the Paris Agreement's predecessor the Kyoto Protocol.
Governments also stepped up first under the Kyoto Protocol, Sharma said, but linking that framework's so-called certified emission reduction credits with the EU emissions trading system brought lots of other actors into the market. "I am sure we will see this again," he said.
The European Commission in July proposed using up to 260mn international credits underpinned by Article 6.4 standards over 2036-40 to count towards its 2040 climate target.
But the commission as it stands will not review whether there are sufficient high-integrity credits available to justify the approach until 2033. This is "way too late" to provide the necessary demand signals to the market, International Emissions Trading Association international policy director Andrea Bonzanni told Argus.
Underpinning standards edge forward
In the meantime, parties to the Paris deal continue to disagree on the standards themselves. So far only three methodologies governing project activities under Pacm have been adopted, relating to flaring or use of landfill gas, N2O abatement from nitric acid production, and electricity generation from renewable sources connected to an electricity system.
Experts tasked to work on the methodologies indicated last week that they are sticking to their controversial decision to require clean cooking activities to contribute some of the credits they generate to a buffer for reversals, a debate that has held up agreement on clean cooking standards.
Scant progress on getting Pacm up and running has also left many in the wider carbon credit market in limbo. Demand in the voluntary carbon market has seen a marked shift lately to credits linked with compliance mechanisms, after a series of environmental integrity concerns in recent years undermined confidence in purely voluntary approaches.
But developers hoping to set up projects that will issue credits remain constricted by a lack of clarity on which standards they should adhere to, and uncertainty as to whether countries will give them the approval they need to sell generated units internationally.
The Article 6.4 supervisory body will meet in Germany in the first week of October, where it is scheduled to discuss a range of issues including methodologies. But debate on the mechanism's approach to certain activities is likely to spill over once again into the UN climate conference, with Cop 31 to be held in Antalya, Turkey in November.
