Convergence increasingly likely as regulated and voluntary carbon markets develop standards to boost credibility and transparency.
COP28 could mark a step toward a closer relationship between voluntary carbon markets (VCMs) and compliance markets, depending on Article 6 negotiations on issues such as eligibility on new activities.
Speaking during a webinar, Pedro Martins Barata, Associate Vice President, Carbon Markets and Private Sector Decarbonisation at the Environmental Defense Fund (EDF), noted that “understanding the interplay” between VCM industry guidelines and what emerges from Article 6.4 negotiations in Dubai is vital.
Article 6.4 of the Paris Agreement deals with the establishment of mechanisms that contribute to climate mitigation and sustainable development through collaborative efforts to achieve nationally determined contributions (NDCs), including via exchange of carbon credits.
“Similarities between the solutions proposed in Article 6.4 and ongoing conversations in the ICVCM indicate an intriguing convergence,” said Barata, who is also Co-chair of the Expert Panel at the ICVCM.
“These are the main triggers for observation at this COP, reflecting the ongoing evolution and potential synergy between these diverse elements.”
Article 6.4 aims to facilitate various approaches, such as emissions trading systems and non-market approaches, to help countries reach their emission reduction targets more effectively. The details and rules for operationalising Article 6.4 have been under discussion within the United Nations Framework Convention on Climate Change (UNFCCC) process.
“Period of transition”
Following substantial progress on firming up Article 6 rules during COP26 in Glasgow, numerous nations have begun engaging in or considering bilateral transactions involving internationally transferred mitigation outcomes as outlined in Article 6.2 of the Paris Agreement.
Yet more efforts are needed during COP28 to complete the technical and administrative framework needed to fully implement the Article 6.4 mechanism. This could establish a foundation for a global carbon market.
“We’ve come a long way since COP21,” said Alexia Kelly, Managing Director, Carbon Policy and Markets Initiative at the High Tide Foundation, and former Article 6 negotiator for the US State Department.
“There’s a lot riding on the outcome of this set of discussions in Dubai and where those discussions go from here.”
Lina Barrera, Senior Vice President of International Policy, Conservation International, echoed these sentiments, noting that carbon markets are in a “period of transition”.
According to Barrera, evolution is being driven by the EU’s expansion of its Emissions Trading System (ETS2), the establishment of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), and the wider adoption of carbon pricing.
“We’re going from what has been a largely voluntary market around the world to significant growth in regulated markets,” she said.
To tackle ongoing controversies around the quality, credibility and transparency of VCMs, the demand side-focused Voluntary Carbon Market Integrity Initiative (VCMI) published its Claims Codes of Practice in July for companies.
Within the guidance, VCMI said companies must select carbon credits which meet “stringent quality thresholds” in line with the supply side-focused Integrity Council for Voluntary Carbon Markets’ (ICVCM) Core Carbon Principles (CCPs).
This follows a joint commitment in June to ensure investors in VCMs can invest confidently in high-integrity credits as part of their climate strategies.
“New guidance and standards are emerging to guarantee integrity,” said Barrera, adding the requirements for both regulated and voluntary markets are “increasingly resembling and informing one another”.
Regarding Article 6.4, Barrera noted that there are a couple of critical points to consider ahead of COP28.
“Countries need to agree on eligible methodologies and their determination,” she said, adding that eligibility of carbon removal activities like direct air capture (DAC) and ecosystem restoration will be crucial.
“Approving these methodologies is essential for projects to start registering early next year and for the market under Article 6.4 to begin functioning effectively – this is one of the most significant developments we’ll be closely monitoring.”
Trial and error
VCMs continue to be used by corporates and investors to offset CO2 emissions, despite coming under heavy scrutiny due to press investigations identifying lack of transparency, miscalculations, and inconsistencies in credit quality.
These markets operate separately from compliance carbon markets, such as Europe’s cap-and-trade system, which are mandated by governments to regulate emissions from certain sectors.
In 2022, VCMs mobilised a mere US$1.2 billion of climate finance globally while accounting for less than 0.8% of emissions. In contrast, compliance markets mobilised US$938 billion in the same year, highlighting their effectiveness in rallying finance.
EDF’s Barata, however, highlighted the complimentary characteristics and roles of VCMs and compliance markets for mobilising finance to meet the goals of the Paris Agreement.
“We all want the widest possible use of compliance markets. However, that’s not the reality in many jurisdictions, and we cannot simply wait until major revisions effectively expand compliance markets because that may never happen,” he said, adding that action is “necessary now – this decade”.
Barata noted that while the size of the VCM currently sits at around US$2 billion, it can be significantly scaled up and provide early action in new areas where compliance markets are not expanding quickly enough.
“The carbon market has always been a place for experimentation and trial and error,” he told onlookers, adding that compliance markets must not become the sole “playground” for developing new methodologies for new types of activities, such as carbon removal, ahead of their adoption in compliance markets.
“There haven’t been scalable solutions implemented by compliance markets in these areas, particularly in ensuring benefits for indigenous peoples and local communities.”
Toby Janson-Smith, Chief Programme Development and Innovation Officer at third-party carbon credit verification firm Verra, shared a similar view, labelling VCMs as an “experimental sandbox” for innovation.
“A lot of what’s developed in the voluntary carbon market can be proven, refined, and then added as on-ramps into regulation when it’s ready for that.”