COP26: 4 Reasons Carbon Markets Rules under Article 6 (Finally) May be Agreed in Glasgow

The SEC Centre in Glasgow Credit: CC0/PublicDomainPictures.net

Interest in carbon markets is currently booming and with increased activity comes increased attention and, of course, familiar criticism. A high-integrity carbon market can help companies and countries increase their ambition on the pathway to net zero by mid century.

If designed well, the carbon market can channel public and crucial private sector investment from developed to developing countries and to the most urgent areas for climate action — like tropical forest protection.

A few key changes since countries met at COP25 in Madrid mean we are in a better position to get agreement on Article 6 at COP26 in Glasgow.

Global urgency and opportunity

The recent UN report shows us that the current climate targets are not good enough. The planet is currently on a path toward 2.7 degrees Celsius rather than 2 or even 1.5 degrees of warming. But if we use all the tools in the box, we can still get there.

Many of the current Nationally Determined Contributions (NDCs) under the Paris Agreement include the use of international cooperation through carbon markets. Modeling shows that carbon markets can translate into cost savings of $250 billion per year by 2030 and can nearly double climate ambition at no additional cost.

But for the international carbon market to successfully contribute to global climate action, it needs:

1. Strong rules for transparency and accountability.
2. Work on the supply side. Carbon credits must represent real and meaningful emission reductions and removals. They must also drive real transformational change and benefit local and Indigenous people and communities.
3. Work on the demand side and robust accounting rules to provide companies and countries with a legitimate avenue to make immediate and meaningful progress on their climate change commitments and to complement, rather than replace, emission reductions taking place within borders and supply chains.

Right now, a big risk facing the international carbon market is a lack of clarity. Governments and companies  need broad and trusted guidance about the role of international carbon markets in near and medium term decarbonization on the road to net zero.

Hope for a COP26 Article 6 deal

Article 6, the provision in the Paris Agreement for international cooperation through carbon markets, was the last article to be agreed in Paris. The rulebook for Article 6 has not yet been agreed. As the other major rules were agreed at COP24, carbon markets are once again last, despite a massive push at COP25 in Madrid.

At COP26 in Glasgow, negotiators will once again attempt to complete the rules for Article 6.

Fortunately, there are new reasons to be hopeful about a deal in Glasgow. Here’s how the landscape has changed.

1. Negotiators were able to sort out many of the technical details related to Article 6 in Madrid.

If we can bank this progress from COP25, negotiators can focus on the handful of sticky issues that require political attention. These include:

1. 1. Double counting
   2. Whether and to what extent credits and projects from the Kyoto Protocol can be used toward Paris commitments
   3. How to operationalize adaptation funding
   4. How to determine the baselines and additionality for crediting
   5. How to ensure that carbon credits contribute to overall mitigation in global emissions.

2. The U.S. has rejoined the Paris Agreement.

While the U.S. continued to engage at a technical level throughout the Trump era, they were basically a no show at the political level. President Biden and his team have made climate change a priority issue, and are pushing hard for a strong COP outcome.

3. The UN has been doing its homework.

The Executive Board of the Clean Development Mechanism have cleaned house and there is now a much greater degree of clarity on the volume of credits left over from the Kyoto Protocol. Negotiators can now address this issue with a lot more certainty about the environmental impacts of any potential transition of these credits and projects to the Paris Agreement.

4. The UN agency in charge of aviation has taken important decisions about its own market-based mechanism.

At COP25 some countries were loath to take decisions under Article 6 that might impact the eligibility of carbon credits under the International Civil Aviation Organization’s (ICAO) Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). In 2020, the ICAO Council decided which credits will be eligible for CORSIA.

5. The voluntary carbon market is booming.

In the absence of agreed Article 6 rules, companies and countries have moved ahead. In 2021, growth in the voluntary carbon market has been astronomical, reaching record-breaking volume and value. A new report from Ecosystem Marketplace says the voluntary carbon market is on track to hit $1 billion in transactions this year.

Carbon markets have sped ahead even in the absence of Article 6 guidance. But there’s no substitute to rules, guardrails, transparency and accountability agreed in a multilateral process, and countries cannot justify squandering another COP. Countries have to dig deep and find the political will to finally resolve these issues in Glasgow and unlock the potential of Article 6.