Explainer: What is a carbon credit?
Countries at the U.N. COP29 climate summit in Azerbaijan will attempt to agree rules for a global system for trading carbon offset credits.
Here’s what you should know:
WHAT ARE CARBON OFFSETS?
Some governments and companies may struggle to reduce their planet-warming greenhouse gas emissions to meet their climate targets. Supporters of carbon offsets see them as a key means to help meet these goals.
These offsets allow one nation or company to offset some of their emissions by paying for actions to cut emissions elsewhere. These actions might include rural solar panel installations or converting a fleet of petrol buses to electric.
WHAT IS ARTICLE 6?
Article 6 of the Paris Agreement helps countries work together to reduce their carbon emissions. It sets out two options for countries and companies to trade offsets, helping them meet the goals they set to reduce planetary-warming gases in their climate action plans, known as nationally determined contributions (NDCs).
One allows two countries to set their own terms for a bilateral carbon trading agreement, this is known as Article 6.2. The second aims to create a central, UN-managed system for countries and companies to begin offsetting their carbon emissions and trading those offsets, known as Article 6.4.
Article 6 is seen an important mechanism for delivering climate finance to developing countries, and a Paris Agreement carbon market, if launched, could continue operating even if the United States under Donald Trump withdraws support for the Paris Agreement.
WHAT’S BEEN DECIDED SO FAR?
At the COP26 climate summit in Glasgow, negotiators reached a breakthrough agreement that established a broad rulebook to regulate trading of carbon credits.
But after two weeks of talks at COP28 in Dubai, countries failed to seal a deal on necessary details to operationalise a central carbon trading system or to clarify rules for nations wanting to make bilateral arrangements.
Some countries like Japan and Indonesia have decided to press ahead with bilateral agreements without those clarifications and are already preparing to trade carbon credits, known as “internationally transferable mitigation outcomes” (ITMOs). The UN says 91 agreements had been made between 56 countries as of October this year. Thailand and Switzerland completed the first sale in January, and the market for bilateral trade agreements is still quite small.
Some buyers are worried there are not adequate rules to stop countries changing the terms of the agreements, or revoking them, and that there is not a robust system to ensure that credits bought and sold are not being counted by both the buying and selling countries.
WHAT WILL BE DECIDED AT COP29?
Officials are keen to secure an early “win” on Article 6 at this year’s climate conference.
Market watchers are hopeful an agreement can be reached to set guardrails for the bilateral agreements and to operationalise the UN-backed centralised marketplace.
Guardrails include checks and balances to provide assurance countries are buying and selling actual emissions reductions. Some countries for example want methods nations use to generate credits to be checked internationally.
Countries will also negotiate whether the UN’s central registry can itself house credits that can be transacted and retired or whether it should operate just for accounting purposes.
An expert group elected under United Nations rules has already hammered out a framework for the multilateral trading system to ensure credits meet basic quality standards. But countries at COP29 can decide to either sign off on this standard, open up further discussions, or reject it.
After COP29, the technical expert group will meet again to agree which methodologies for generating carbon credits through cookstoves projects or reforestation for example can issue credits into the new Paris Aligned system.
If the key points are resolved this year, the system could launch as soon as 2025.
WHAT DOES THIS MEAN FOR THE VOLUNTARY CARBON MARKET?
Some companies that are under no legal obligation to cut their emissions have set voluntary targets, which they can meet partially through buying credits on a voluntary carbon market. In 2022, the voluntary market was valued at about $2 billion worldwide. But the market value plummeted to $723 million last year after being shaken by repeated scandals.
Linking up carbon projects currently in the voluntary market with the Paris Agreement system could boost confidence.
Developers of projects like mangrove restoration to regenerative agriculture can apply to have their credits sold under the UN system, meaning that if approved, they could sell in either that system or on the voluntary market. Experts expect UN-approved credits to carry a higher price tag.
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