Torn between countries demanding that Article 6 carbon markets be available with virtually no restrictions and countries insisting on upholding transparency, human rights, and climate ambition, negotiators at COP28 failed to break the deadlock. With all the unresolved problematic issues, the fact that they reached no deal was better than agreeing to a bad one that would torpedo the Paris Agreement.

Two weeks of intensive talks at COP28 in Dubai that followed months of detailed preparatory negotiations failed to clinch a deal on Article 6 carbon markets. The lack of a breakthrough leaves the nascent UN carbon markets in a continued state of uncertainty and shakiness, but avoids the adoption of inadequate rules that would have chained down climate ambition, enabled questionable trading and facilitated greenwashing. This outcome came against the backdrop of a disappointing climate conference during which fossil fuel and corporate interests were overrepresented and, despite the accelerating pace of the climate emergency,  ambition was severely lacking.

A landmark agreement at COP26 in Glasgow in 2021 put in place the broad brushstroke principles that would govern two types of carbon markets: Article 6.2, which involves bilateral or multilateral emissions trading agreements between countries, and Article 6.4, which envisions the creation of a global carbon market overseen by a United Nations entity known simply as the Supervisory Body.

Battle for the soul of carbon markets

At issue was the aim and roles of carbon markets, and what they could be reasonably expected to achieve. Article 6 negotiations ended in total disagreement as countries failed to align their views on these fundamental issues. The vision of unrestrained markets that some countries have, encouraged by the heavy private sector presence, did not convince the more cautious nations that stood their ground to defend safeguards and regulations.

“The absence of a deal on Article 6 avoids replicating the errors of the voluntary carbon market and sending the wrong signal to companies and countries seeking to sidestep their climate responsibilities.” said Gilles Dufrasne, Policy Lead on global carbon markets at Carbon Market Watch. “Trading carbon credits requires strong environmental and human rights guardrails, as has been shown by the numerous scandals related to the voluntary carbon market that broke out over the past 12 months. The text on the table just didn’t provide this. It would have risked reproducing the mistakes of voluntary carbon markets, and by rejecting it, negotiators made the best out of a bad situation.”

Although this outcome avoids the worst, it does not improve the situation, which is further worsened by all the numerous free-wheeling voluntary carbon market announcements that were made throughout the two weeks of the COP. Without the anchor of regulated UN carbon markets to set a high bar for quality, oversight and transparency, the largely rudderless voluntary carbon markets are in danger of drifting even further away from their climate goals. Scrutinising the impacts of such deals on people and the planet will continue to be crucial over the next year, and for as long as countries fail to establish robust rules that transform the current Wild West system into an effective climate tool.

Confidentiality disagreements

Among the contentious issues discussed in Dubai were the arrangements for countries to report on their existing and future trades under Article 6.2. The final draft text on the table failed to impose any limits on the amount of information that countries could have designated as “confidential”. In addition to the right to complete secrecy, the proposed deal would have further reduced the review of countries’ deals to a “box-ticking” exercise, i.e. countries could have ignored certain Article 6 rules without facing any real consequences.

“The minimalist and no-frills framework that was on the table would have allowed countries to largely define their own reporting rules, to trade carbon credits flagged as having flaws, and to revoke authorisation for previously approved carbon credits without any limits, which could have led to double-counting. The proposed text also further enshrined and legitimised loose secrecy clauses,” said Jonathan Crook, policy expert on global carbon markets at Carbon Market Watch. “At the same time, failure to agree on Article 6.2 should not be celebrated, since countries and companies are increasingly engaging in bilateral trades in the absence of a complete framework. This risks undermining transparency and may make negotiations next year even more difficult, given the absence of clear direction.”

The failure to forge new rules leaves existing bilateral deals in a transparency limbo. Countries such as Switzerland, Japan, Singapore, and others, which are seeking to purchase carbon credits under Article 6 to meet their climate targets, now face the difficult task of having to anticipate future rules that might affect their current trades. Moreover, the climate benefits of the first-ever trade of carbon credits – between Switzerland and Thailand – are already being thrown into doubt, a clear sign of the risks that lurk behind a “free” market model. To avoid reputational damage and minimise the risk of future liability, countries must, at the very least, demonstrate exemplary levels of transparency in their existing initiatives.

This also highlights the paramount importance of countries focusing their attention on decarbonisation at home while providing separate climate finance to developing countries, under their existing international obligations.

No standard bearer

For Article 6.4, COP28 was meant to provide clarity on three important topics: authorisation of units, the interconnection between the 6.2 and 6.4 registries, and the eligibility of emissions avoidance and conservation enhancement. In addition, this year was the second try for the Article 6.4 Supervisory Body, the body overseeing the work on the development of the Article 6.4 mechanism, to get two major elements of the mechanism operational and adopted: guidance on methodologies and guidance on carbon removals.

However, those proved too contentious. While some countries were worried about insufficient safeguards and the many holes left in the removals text, others seemed to want to bring down the ambition of the methodological guidance. With these playing off against each other, no agreement was reached.

“The rejection of the 6.4 text is bittersweet,” said Isa Mulder, policy expert on global carbon markets at CMW. “While elements such as the methodological requirements were moving in the right direction, it fell short on delivering an ambitious carbon crediting mechanism, mainly regarding robust rules around carbon removals.”

The lack of agreement means that the operationalisation of the Article 6.4 market will likely be delayed by at least another year, as the guidance on methodologies was an essential requirement for the mechanism to take off. COP29 will be the first opportunity for the text to be revisited.

“Under these conditions, ‘no outcome’ is better than a bad decision,” concludes Mulder. “Given the repeated failures of the voluntary carbon market, we desperately need Article 6.4 to raise the bar. But this will have to wait for another year. Hopefully, COP29 can deliver the goods.”