Work is progressing on the new carbon markets established by the UN Framework Convention on Climate Change (UNFCCC), under Article 6 of the Paris climate agreement, but the first UN emissions-reduction credits are unlikely to start trading before early 2025 and could ultimately converge towards the voluntary carbon market (VCM).
A meeting of officials convened by the UNFCCC secretariat in Bonn last month saw some progress on Article 6.4, which will regulate an internationally governed crediting mechanism enabling CO2-cutting projects to generate emissions-reduction credits. The meeting was the first gathering of the Supervisory Body of the Article 6.4 mechanism, which focused its attention on the methodologies it will accept for emissions reduction, and on the concept of carbon removals.
The body also reached agreement on more basic issues such as issuance fee levels and calculations, including exemptions for more vulnerable countries, or the processes for implementing the mandated "Share of Proceeds" from Article 6.4 emissions reductions to be ploughed into climate change mitigation activities. It pledged to focus on capacity-building programmes for host countries at its next meeting in September.
Observers do not expect the first emissions-reduction credits under Article 6.4 — the so-called A6.4 ERs — to be traded before early 2025, although the secretariat says it hopes that a "fully functional and transparent mechanism" will be operational "much" earlier. Once this mechanism — effectively a successor to the Kyoto protocol's clean development mechanism (CDM) — is established, it is likely to run parallel to the VCM, and could ultimately converge with it. As clarity emerges on methodologies and infrastructure, the spotlight will intensify on the relationship between the booming VCM and the UN carbon markets.
A link with the VCM has existed since the UN's Cop 26 climate conference in November 2021. It was agreed that "internationally transferred mitigation outcomes" (ITMOs) — emission reductions that can be traded between countries under Article 6.2 — can be used towards nationally determined contributions (NDCs) and international purposes, such as the UN Carbon Offsetting and Reduction Scheme for International Aviation (Corsia). They can also be used for "other purposes", commonly understood to refer to the VCM.
Interchangeable standards?
VCM and Article 6.4 projects could become almost interchangeable in the future, depending on the criteria that will be decided upon at Cop 27 or Cop 28, Perspectives Research researcher Ximena Samaniego says.This is because article 6.4 emissions reductions are likely to fall under standards that could be compared with strict VCM standards, such as the carbon registry Gold Standard.
But future project developers having the choice between the VCM and the UN carbon markets might prefer to opt for the latter to be on the "safe" side, although much will depend on the rules set for Article 6.4 — how much stricter they will be versus VCM credits — and on the costs, Samaniego suggests. If projects under Article 6.4 turn out to be too expensive, then they may lose out to the VCM, however much "safer" the former may appear to be.
It is unlikely that the VCM will be coerced to migrate to the UNFCCC platforms. Karsten Karschunke of the climate action projects unit of Germany's federal environment agency UBA points out that the VCM has been ploughing ahead for years now, setting and developing its standards, while there was little advancement on the UNFCCC side before Cop 26.
Two Supervisory Body working groups will present draft recommendations on methodologies and removals at the September meeting. A further meeting is scheduled on 3-5 November in Sharm el-Sheikh ahead of Cop 27. The recommendations could then be adopted at Cop 27, although Cop 28 next year seems likelier. Reviewing existing methodologies is a major piece of work and will take time, non-government organisation Carbon Markets Watch (CMW) policy officer Gilles Dufrasne says.
Disagreements already emerged at Bonn, with several delegates rejecting ocean fertilisation — which was included in the UNFCCC's "concept note" on removals — as a valid removal technology. Agreeing on removals might be easier than on methodologies, research fellow at the Wuppertal Institute for Climate, Environment and Energy Nicolas Kreibich says. The main contentious issue with removals is whether, and to what extent, emissions avoidance can be included. Avoidance is an issue for the Article 6.4 Supervisory Body, but more so for the higher-level Subsidiary Body for Scientific and Technological Advice (SBSTA) that oversees technical negotiations for the UN climate conferences.
CMW strongly opposes including avoidance, which it says is a no-go for many countries anyway, as the concept is "too unspecific". UBA's Karschunke notes that avoidance is a problematic concept also viewed as such by the EU — but that the issue is on the SBSTA agenda for further discussion.
CMW also criticised the fact that the issue of a grievance mechanism — which is set out in Article 6's rules — was not on the supervisory body's agenda. The grievance mechanism should be established before the Article 6.4 mechanism starts operating, CMW's Dufrasne says, otherwise stakeholders could be excluded from participation if they cannot appeal against decisions by the supervisory body, while at the same time methodologies are being approved and projects registered.
Articles of faith
SBSTA is scheduled to look into the issue of avoidance during the first week of Cop 27, not just for Article 6.4 but also for Article 6.2. The latter, as an overarching accounting framework, has technically been in operation since the "rulebook" for Article 6 and "guidance" on Article 6.2 were agreed at Cop 26. Activities so far have been at pilot scale only.
Switzerland has become the first country to sign an agreement for ITMO purchase. Once these ITMOs — from Peru — are issued, they will be represented in Switzerland's domestic emissions trading registry. The Swiss federal office for the environment said that if an official Article 6 registry is passed at Cop 27, Switzerland also expects to reflect its activities in this registry.
A key challenge for the host country under Article 6.2 is to avoid "overselling", as countries need to meet their own reduction targets under their NDC to the Paris deal, the Wuppertal Institute's Kreibich says.
Articles 6.2 and 6.4 both necessitate recording, tracking and reporting infrastructure. The UNFCCC secretariat says that it could be developing at least four infrastructure elements — a mechanism registry for activities under Article 6.4, and for activities under Article 6.2 a database, an international registry, and a centralised accounting and reporting platform.
A decision must be made on the extent to which the UNFCCC should and could take over at least some registry elements from the CDM, which was dogged by concerns around the environmental integrity of the credits it produced. The CDM executive board has offered its collaboration on infrastructure, which would include making CDM elements such as procedures, standards and methodologies available. The UNFCCC secretariat says that while it is "clear" that parties "do not want to reinvent the wheel", they also recognise the need for a "new and improved tool".
