Global Leaders Adopt Key Rules and Guidelines for International Carbon Trading in November 2024 to Facilitate the Development of Robust and Transparent Carbon Markets

Introduction

In a significant development for global climate action, international leaders convened at the UN Climate Change Conference (COP29) in Baku, Azerbaijan, in November 2024 and reached a historic agreement on international carbon markets. This landmark decision concluded the rules governing the trading and crediting of mitigation outcomes under Article 6 of the Paris Agreement, marking a crucial step towards achieving the goals of the 2015 Paris Agreement¹.

Key Developments at COP29

• Breakthrough on Article 6: After years of deadlock, countries finally reached a consensus on standards for the creation of carbon credits under Article 6.4 of the Paris Agreement. This breakthrough paves the way for a more regulated voluntary carbon credit trading system, potentially allowing a larger number of entities to participate in emissions reduction efforts².
• Focus on Transparency and Integrity: The new standards adopted at COP29 emphasize transparency and integrity in carbon markets. This includes provisions for validating, verifying, and issuing credits, ensuring that carbon credits represent genuine and verifiable emission reductions³.
• Sustainable Development Tool: A key objective of the new framework is to ensure that carbon market activities contribute to sustainable development goals. A "sustainable development tool" was adopted, requiring participants to assess, demonstrate, and monitor the environmental and human rights impacts of their projects⁴.

Climate Finance Mobilization

COP29 witnessed a significant commitment to increase climate finance for developing countries. A new collective quantified goal on climate finance (NCQG) was established, aiming to triple the annual funding from the previous goal of USD 100 billion to USD 300 billion by 2035. This is part of a larger target to mobilize USD 1.3 trillion per year by 2035 from both public and private sources⁵. This increased financial support is crucial for helping developing countries protect their populations and economies from climate change impacts and for enabling them to transition to cleaner energy sources.

Rules and Guidelines for International Carbon Trading

While specific details are still being finalized, several key aspects of the rules and guidelines for international carbon trading have been established:

• Methodological Guidelines: COP29 saw the approval of methodological guidelines and standards for a centralized carbon market mechanism. These guidelines establish procedures for calculating, monitoring, and verifying emission reductions, ensuring their integrity and boosting confidence in carbon markets⁶.
• Ensuring Integrity: Authorization and Preventing Double Counting: A major step forward was made in streamlining the process for authorizing carbon credits for different uses and deciding whether to allow changes to already issued authorizations. This includes clearer timing and processes for issuing carbon credits and safeguards against double counting, which is essential for maintaining the environmental integrity of the market⁶.
• International Registry for Carbon Credits: An important consensus was reached on providing services under Article 6's international registry. This registry will enable countries to track the history of issuance, transfer, and cancellation of carbon credits, ensuring equitable access to the global carbon market⁶.
• Risk Management: Buffer Pool and Liability Clause: To address the risk of reversals in carbon offset projects (e.g., due to unforeseen events like wildfires), the new framework includes the creation of a buffer pool of carbon credits. This pool acts as a form of insurance to compensate for such reversals. Additionally, a "liability" clause has been introduced for avoidable reversals, further strengthening the accountability mechanisms within the framework⁷.

Facilitating Robust and Transparent Carbon Markets

The rules and guidelines adopted at COP29 are expected to have a profound impact on the development of robust and transparent carbon markets:

• Enhanced Market Integrity: The new standards and guidelines will enhance market integrity by ensuring that carbon credits represent genuine and verifiable emission reductions. This will attract investment and foster trust in the carbon market⁸.
• Increased Market Size: The new UN-sanctioned carbon credit system, the Paris Agreement Crediting Mechanism (PACM), could significantly expand the global carbon credit market, potentially reaching an annual value of $12 billion by 2030⁹. This expansion will create new opportunities for emissions reduction projects and investments in climate action.
• Mobilization of Climate Finance: The operationalization of Article 6.4 is anticipated to mobilize significant climate finance, particularly in developing countries⁸. This will support climate mitigation and adaptation efforts in these countries.
• Global Cooperation: The new framework will foster global cooperation in reducing greenhouse gas emissions and achieving climate targets¹⁰. By enabling countries to work together and leverage their respective strengths, the framework can accelerate global progress towards a low-carbon future.
• Alignment with Science: A crucial aspect of the new framework is the mandate for the UN carbon market to align with the best available science⁵. This ensures that the market mechanisms effectively contribute to genuine emissions reductions and are consistent with the latest scientific understanding of climate change.
• Agile Approach to Rulemaking: The Article 6.4 supervisory body has adopted an "agile" approach to rulemaking, allowing the rules to adapt to evolving developments in climate change science and policy⁴. This flexibility is essential for ensuring the long-term effectiveness of the carbon market in a rapidly changing world.

Challenges and Opportunities for Developing Countries

The new framework presents both challenges and opportunities for developing countries. On the one hand, it provides a mechanism for attracting investment and financial support for climate action. The Paris Agreement Crediting Mechanism, for example, enables international cooperation to unlock financial support for developing countries to help them meet their climate targets¹². On the other hand, there are concerns about the capacity of developing countries to effectively participate in the carbon market and to ensure that the benefits are equitably shared¹³. Addressing these challenges will require capacity building, technology transfer, and financial assistance to support developing countries in navigating the complexities of the carbon market.

The Role of Digital Infrastructure

Digital infrastructure is playing an increasingly important role in supporting carbon markets¹⁴. Countries are developing sophisticated digital systems for monitoring, reporting, and verifying emissions reductions, as well as for tracking the issuance, transfer, and cancellation of carbon credits. These systems enhance transparency, efficiency, and trust in the carbon market.

Countries and Organizations Involved

A diverse range of countries and organizations are actively involved in the development and implementation of international carbon markets:

• Countries: Many countries are participating in this initiative, including those with existing emissions trading systems such as the EU, Canada, China, Japan, New Zealand, South Korea, Switzerland, and the United States¹⁴. For example, Switzerland has already established bilateral agreements with Ghana, Thailand, and Vanuatu to support low-carbon projects in those countries¹⁶.
• Organizations: Key organizations involved include the European Commission, the International Carbon Action Partnership (ICAP), the Partnership for Market Readiness (PMR), Verra, and the World Bank¹⁵. The World Bank, for instance, is supporting countries' readiness for Article 6 through capacity building initiatives and pilot projects, such as the Forest Carbon Partnership Facility (FCPF), which helps countries establish efficient systems for carbon-crediting initiatives¹⁹.

Existing International Carbon Trading Initiatives

Several international carbon trading initiatives have paved the way for the new framework adopted at COP29:

• EU Emissions Trading System (EU ETS): A cap-and-trade system that covers emissions from various sectors in the EU¹⁵.
• Bilateral Article 6.2 Deals: Agreements between countries to cooperate on emissions reduction projects¹⁶. A notable example is the agreement between the EU and Switzerland to link their carbon trading systems¹⁵.
• Voluntary Carbon Markets: Markets where non-state actors voluntarily offset their emissions²⁰. The voluntary carbon market (VCM) has evolved significantly in recent years and is now a central part of international climate discussions.
• Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA): A global effort to reduce aviation-related emissions¹⁸.

Comparison with New Rules and Guidelines

The new rules and guidelines adopted at COP29 build upon existing initiatives by providing a more comprehensive and standardized approach to international carbon trading⁶. They also enhance transparency and integrity, aiming to address concerns about the credibility of carbon credits and the environmental effectiveness of previous mechanisms, such as the Clean Development Mechanism (CDM)¹⁰. Furthermore, the inclusion of the sustainable development tool ensures that carbon market activities contribute to broader environmental and social goals, a feature often lacking in earlier initiatives.

Conclusion

The adoption of key rules and guidelines for international carbon trading at COP29 marks a significant milestone in global climate action. This historic agreement has the potential to facilitate the development of robust and transparent carbon markets, mobilize climate finance, and foster international cooperation in achieving the goals of the Paris Agreement. However, the success of this initiative will depend on continued efforts to address the challenges and uncertainties that lie ahead. This includes the need for robust monitoring and verification systems to ensure environmental integrity, the potential for disagreements between countries in interpreting and implementing the rules, and the importance of addressing concerns about equity and ensuring that developing countries benefit from carbon markets. By learning from past experiences and proactively addressing these challenges, the international community can harness the potential of carbon markets to accelerate the transition to a low-carbon and sustainable future.

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