COP29: catalysing global carbon markets
Key takeaways
COP29 saw final agreement on Article 6 of the Paris Agreement and a new $300bn a year target to go to developing countries in climate finance by 2035.
While imperfect and unclear in places, international agreement on Article 6 will be a major catalyst for carbon markets from here.
Ratings have a clear role to play in scaling this new market sustainably, breaking from the carbon markets of the past that lacked the tools and metrics to understand risk.
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Contents
- What was agreed at COP29 in Baku?
- The devil’s in the detail: what do the outcomes on Article 6 actually mean?
- What does this mean for carbon markets?
- How is BeZero helping to develop scalable and sustainable carbon markets?
- Other announcements at COP29 of note
What was agreed at COP29 in Baku?
The New Collective Quantified Goal (NCQG) of $300bn a year of climate finance to be delivered by developed countries to developing countries by 2035.
The structure and principles of both the bilateral Article 6.2 mechanism and the multilateral Article 6.4 mechanism, now commonly referred to as Paris Agreement Crediting Mechanism (PACM).
Non-market approaches under Article 6.8.
The NCQG agreed to mobilise $300 billion per year by 2035, aspiring to $1.3 trillion across all sources
The final agreement committed developed countries to mobilise ‘at least’ USD 300 billion per year by 2035 from public sources, with a goal of USD 1.3 trillion per year by 2035 from both public and private sources. While this target was substantially lower than that called for by developing countries throughout the negotiations, it is three times higher than the previous target (though the increase is not as substantial once inflation through to 2035 is accounted for). Since the decision was gavelled on Saturday evening, commentators and developing countries have criticised the final figure as too low.
As the priority agenda item at COP29, the NCQG was a contentious topic throughout the conference. At one point the text included references to mobilising finance via private sources, including the voluntary carbon market. However, the final text agreed upon was slimmed down and just recognises that private and public capital are necessary to reach the level of finance necessary to effectively tackle climate change.
Negotiators finally reached agreement on Article 6 mechanisms
After nine years of ongoing negotiations on Article 6, progress was made on cooperative approaches under Article 6.2, multilateral trading under Article 6.4’s Paris Agreement Crediting Mechanism (PACM), and Article 6.8 non-market approaches. This marks the first real progress on Article 6 since COP26 in Glasgow in 2021 when the first agreement was reached.
Article 6.2 passed with crucial outcomes on authorisation, registries, reporting sequencing and identifying inconsistencies. This paves the way for confidence in bilateral approaches, unlocking greater certainty for investors and enabling more climate finance for projects.
The PACM received the first positive news of COP29 when the CMA agreed on a short decision to accept the work of the Supervisory Body (SBM) on standards for methodologies and removals. The CMA made it clear that the SBM was still under its jurisdiction; we explored this initial outcome in our insight last week.
Article 6.8 of the Paris Agreement addresses non-market approaches (NMA) to cooperative action, promoting mitigation and adaptation. The conclusion text was agreed midway through the conference and highlights the importance of joint approaches to biodiversity conservation and sustainable development. The agreement recognises the NMA Platform which was operationalised before COP29 and allows Parties to register the details and scope of their NMAs. While activities under NMAs do not generate transferable units, this is a necessary step for facilitating other forms of climate finance and knowledge sharing.
The devil’s in the detail: what do the outcomes on Article 6 actually mean?
While headlines over the weekend declared the Article 6 mechanisms operational, there is still work to be done to reach the stage where there is an active market. We explore the details of the decisions and their implications below.
Article 6.2 - final details to be operationalised were agreed
While Article 6.2 has already had a flurry of activity with 96 Bilateral Agreements agreed between 60 countries and the first transfer of an ITMO between Thailand and Switzerland, there were still a remaining number of elements yet to be agreed.
The following table sets out what was agreed on the key elements needed for 6.2 to be fully operationalised:
| Element | What was agreed? |
|---|---|
| Authorisation | Parties must carry out authorisation of three components - the cooperative approach (i.e. an agreement for one country to transfer emissions reductions from one country to another to count towards their NDC), use of the ITMO (i.e. is it being used towards the country’s NDC or is it for Other International Mitigation Purposes) and the authorised entities (i.e. the buyer). The content required to be included in a Letter of Authorisation (LoA), as described in the decision text for 6.2, is also applicable to PACM. There will likely be a proliferation of varying structures of LoAs in the initial operationalisation of 6.2 given the lack of agreement on a standardised template. This will make it more challenging for the market to navigate LoAs and what they should expect to see. However, this could start to change with the publication of a voluntary standardised template by the UN Secretariat and adoption in the market of standardised templates that have already been suggested by organisations such as the Multilateral Investment Guarantee Agency (MIGA). Cooperative approaches, where applicable, will have a unique identifier obtained from the Centralised Accounting and Reporting Platform. |
| Registries | A dual approach to registries was agreed - with the creation of (1) an international registry with a tracking and accounting function and (2) the offer of registry services to parties to enable the party to issue Mitigation Outcomes as units. However, the exact details of how this will work and how the interoperability between registries, including the PACM registry, will be enabled is yet to be worked out. The decision text sets out that the UN providing registry services is not an endorsement of the quality or environmental integrity of Mitigation Outcomes. This highlights the need for ratings, both for transacting parties to assess risks and as a tool to show the market that units being transacted are of sufficient integrity. |
| First Transfer | The Parties can choose how they define ‘first transfer’. In other words countries will need to agree as of their cooperative agreements what the first transfer of units under this agreement should look like. The ‘first transfer’ for Mitigation Outcomes for Other International Mitigation Purposes (OIMP) - CORSIA for example - have further requirements such as robust processes for tracking the ITMO and time restrictions for when the ‘first transfer’ must be recorded (i.e. no later than 31 December prior to the submission of the Biennial Transparency Report, for the NDC period in which the Mitigation Outcome occurred). |
| Cancellation | Authorisations can be cancelled up until the transfer of the units. However, in most circumstances, this can not take place after the first transfer, unless otherwise specified in the agreement. While a better outcome than cancellation being allowed carte blanche by host countries, the possibility of cancellation up until first transfer still creates uncertainties for investors prior to this point. The need for agreement on what could trigger a cancellation post the transfer at least offers some clarity to buyers. |
| Initial Report | Parties are requested to provide an initial report containing details relevant to the additionality, carbon accounting and non-permanence of the Mitigation Outcome. The Initial Report will allow increased transparency in Article 6 carbon markets by providing key underlying project-level information. This is very important for enabling services such as ratings to interrogate the outcome underlying claims made through Article 6. |
| Agreed electronic format | The agreed electronic format remains in draft format but can be used voluntarily by Parties - the AEF is a template to follow to submit information to the Centralised Accounting and Reporting Platform. Information in the draft agreed electronic format includes details on the authorisation, the activity and holdings (i.e. metric used and number/vintage of ITMOs). This will provide a standardised way to digest and track information relevant to the ITMO. |
| Process for identifying and addressing inconsistencies | A process has been put in place to identify and address’ inconsistencies’ i.e. missing or inaccurate information. A comprehensive definition of what is considered an ‘inconsistency’ has not been included. Parties are requested to address ‘inconsistencies’ and submit updated initial reports, however, there are no consequences to failing to do this or for using the ITMO. While, there are no penalties for failing to address inconsistencies, the text sets out requirements for all details pertaining to inconsistencies to be made publicly available. This will enable participants in Article 6.2 to be aware of ITMOs which have been identified as having ‘inconsistent’ information. This is another area where ratings can help drive higher standards in the market, with the assessment of information risk capturing the accuracy of reporting. |
While there still remains a lack of clarity on some aspects, for example how interoperability between registries will work in practice, this provides a much-needed basis for Article 6.2 markets to build on. The decisions made on authorisation and registries, as set out in the above table, also have a direct impact on PACM.
Article 6.4 - digesting the dots on PACM
The first agreement on the PACM came at the beginning of the conference when the CMA endorsed the standards on methodologies and on removals that the SBM had published at the pre-COP meeting in Baku in late October. These standards lay down the framework for developing PACM-aligned methodologies, work on which will now begin in earnest. The second agreement was to further develop the rules and modalities of the mechanism and agree on the key areas the SBM should focus on in 2025.
The agreed text includes references to ensuring the SBM has enough technical support to deliver its work on key areas including baselines, additionality, leakage, permanence and reversal risk. Emissions reductions can be authorised for use towards achievement of a Party’s NDC or other international mitigation purposes (OIMP). Other mitigation contribution units can be issued which are not authorised for corresponding adjustments and remain part of the project host country’s carbon inventory, although the host Party is able to change this status at a later date. The content of the authorisation statement is aligned with the requirements set out in the decision on Article 6.2.
The decision also notes that the Share of Proceeds (SoP) for the Adaptation Fund, a percentage of generated Article 6.4 emissions reductions units (A6.4ERs), must be authorised units rather than mitigation contribution units. However, it was also decided that least developed countries and small island developing states are exempt from the SoP levy.
On registries, the text acknowledged that participating Parties can voluntarily connect their registries to the one designed for the central mechanism. This will enable transfer of A6.4ERs and for users to view and pull data on holdings and history of the units. The registry will also be interoperable with the international registry for Article 6.2. The PACM will accept afforestation and reforestation Clean Development Mechanism (CDM) requests, so long as these are submitted and approved before 31 December 2025 and the project observes the specifications of the methodology on removals. This is alongside several other CDM-era methodologies currently under review for transition, as discussed in our pre-COP insight.
What’s next for the PACM?
The key objectives of the SBM in 2025 will be to approve and develop methodologies and to implement the international registry as soon as possible. It is likely that the first A6.4ERs will be issued from activities transferred from the CDM, rather than newly developed methodologies. The Methodological Expert Panel (MEP) will support the SBM to review existing CDM methodologies to align with the standards under Article 6.4.
The standard on methodologies approved prior to COP serves as the overarching requirement that PACM methodologies must adhere to. The SBM will facilitate bottom-up methodology generation, allowing submission of methodologies to the MEP, VCM standards bodies will have the opportunity to submit their methodologies for consideration. While this eventually provides a new market for VCM project developers to be able to go through the PACM to accredit projects for Article 6, there remains a question of whether there is a role for existing VCM standards and registries.
The decision text provides a mandate for the SBM to develop other areas over the next year, including whether a time limit should be established from emissions reduction issuance to the point a letter of authorisation can be submitted. While outstanding areas remain to be agreed, some commentators have predicted that a fully operational market will be underway by 2026.
What does this mean for carbon markets?
COP29 should prove a significant catalyst for carbon markets, with agreement on Article 6 giving much needed clarity on the direction of travel, along with a number of big announcements made at the conference. We see three key areas this will impact:
Catalysing demand: agreement by all countries to the Article 6 text sends an important signal to the market. The key question now is whether this galvanises further demand. To date, Japan is the only top 10 emitting country that has said it will use Article 6 as part of its decarbonisation strategy. Post COP29, focus will be on other big emitting countries to see how they look to reflect this agreement on Article 6 into their strategies. For example, will this lead to those implementing carbon border adjustment mechanisms (CBAMs) to recognise Article 6 credits as a domestic carbon price? And will countries look to Article 6 credits as a source of supply for their compliance carbon markets?
Setting the supply-side up for success: agreement on Article 6 creates a big incentive for those countries looking to supply credits through this mechanism to set up the regulatory frameworks and infrastructure required to deliver robust credits to the market. This includes ensuring a clear and legally sound process domestically for the authorisation of projects, robust reporting of NDCs and the corresponding adjustment of credits and enabling developers to deliver high integrity credits to the market.
Unlocking capital for projects: scaling carbon markets to enable them to make a meaningful contribution to decarbonisation requires significant capital investment in projects. Agreement on the Article 6 framework will help to unlock more capital as it gives investors greater confidence on the structure the market will take. The need to provide specific guidance for the terms under which credits can be cancelled offers some clarity for buyers and investors.
How is BeZero helping to develop scalable and sustainable carbon markets?
This agreement at COP29 enables carbon markets to move from planning to implementation. We must use all the information, data and tools available to ensure the development of scalable and sustainable markets. BeZero is playing a number of roles in helping to achieve this:
Ratings: BeZero is actively rating Article 6 projects to help both buyers and sellers understand the project activity underlying credits and the risks associated. Ratings have seen rapid adoption in the voluntary carbon market in the last few years, driving more efficient pricing, higher integrity retirements and better risk tools and risk management practices. Countries using Article 6 markets can leverage ratings to build more robust strategies.
Article 6 dynamics: we continue to explore additional tools and information we can provide in order to help countries navigate Article 6 markets. This includes analysing host country ongoing performance against their NDCs and the implications this has for projects and their authorisation to be used through Article 6. We discuss this in more detail in To Baku and beyond: scaling Article 6 carbon markets with integrity. As highlighted in the sections above, the agreed text for Article 6 leaves a clear need for independent third party risk assessments to help market participants navigate Article 6 and to drive standards in the market higher.
BeZero Carbon Markets platform: anyone looking for essential carbon market data can access headline ratings for the 480 live ex-post project ratings freely available via our public platform, as well as project reference data for around 20,000 projects, ratings methodologies, CORSIA eligibility, CCP status and regular insights and research. Beyond this, paying customers can dig into in-depth project analysis and geospatial data, beyond carbon dashboards, and use interactive tools to understand issuance risk, see corporate retirement data and benchmark project types across the market. Access to our platform is available for free for supply-side governments as a tool to assist their capacity building efforts in order to deliver high-integrity supply to the market. Reach out to the team for more details.
Other announcements at COP29 of note
The outcome of negotiations is only one element of COP, with countries and institutions often taking the opportunity to make announcements along the themes of the conference. This year was no exception, with several carbon market related announcements throughout the event:
The UK Government released their principles on voluntary carbon and nature market integrity, including using high-integrity credits and disclosing planned use of credits in sustainability reporting.
The International Organization of Securities Commissions (IOSCO) published their final report on VCMs. The document included 21 principles for good practice in using the VCM and recognised the need for assessment of underlying project information for completing due diligence. The report recognised the role that carbon credit ratings agencies can play in facilitating that.
The ASEAN Common Carbon Framework was announced, a collaboration between ASEAN states for a consistent carbon market framework in the region.
Cooperative approaches under Article 6.2 saw further progress, with several new MoUs signed and announcements on progression to implementation agreements meaning that projects can now be designed and implemented.
The Singapore Government signed a memorandum of understanding with Zambia and also completed an implementation agreement with Peru.
Both Sweden and Norway inked several agreements with countries including Zambia, Benin, and Nepal.
The Global Green Growth Institute (GGGI) announced their Carbon Transaction Facility (CTF) prior to COP, which is a series of trust funds to develop projects under Article 6 with GGGI partner countries. During COP29, Norway announced the Norwegian Article 6 Climate Action (NACA) Fund, pledging up to USD 100 million via the CTF, an unprecedented commitment.
The Multilateral Investment Guarantee Agency (MIGA), guaranteed by the World Bank, released their Letter of Authorisation (LoA) template. This will enable greater standardisation across authorised ITMOs under Article 6.2.
In compliance markets, the Brazilian emissions trading scheme finally passed both chambers, its operation may still be a year or two away and the rules for use of credits in the scheme are yet to be determined. It was reported prior to the start of COP29 that the hosts of COP30 wanted to have this concluded before the end of the conference.
In addition, Japan made the announcement that further regulatory developments were in progress for their own compliance scheme under the GX League, the implementation phase will begin in 2026.