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Carbon Trading Projects Bearing Fruit for Investors

Innovative pilot schemes are attracting interest after failed COP28 negotiations on carbon markets under Article 6 of the Paris Agreement.  

Despite limited progress on carbon trading rules at COP28, experts believe recent trial projects will unlock investment opportunities for private investors.  

Negotiators failed to finalise a framework for trading carbon credits between countries in Dubai, but projects allowed under Article 6.2 of the Paris Agreement are enabling the market to evolve, according to participants in a webinar this week.  

“Article 6.2 was not at all negatively affected by the outcome of the COP28 negotiations – it is filling the gap,” claimed Lisa DeMarco, Senior Partner and CEO of legal services firm Resilient and Director of the Boards of the International Emissions Trading Association (IETA).  

Article 6 of the Paris Agreement allows countries to voluntarily cooperate with each other to achieve the decarbonisation targets outlined in their nationally determined contributions (NDCs).  

Discussions on Article 6.4 were unresolved at COP28, but should eventually create an international carbon crediting mechanism overseen by a supervisory body.  

Article 6.2 creates the basis for trading carbon reductions across countries, known as Internationally Transferable Mitigation Outcomes (ITMOs). 

“Because Article 6.2 really encourages innovation and creativity, we are seeing a number of pilot projects and agreements, as countries try to figure out how they want to engage with 6.2,” said Kelley Hamrick, Senior Policy Advisor at global environmental organisation The Nature Conservancy. “We’re not yet seeing a lot of actual trades, as these pilots are still in the very early stages.” 

Analysis from S&P Global Commodity Insights and the UN Environment Programme estimates there have been around 69 bilateral deals signed under Article 6.2 so far.  

Ghana announced the first global Article 6.2 credit transfer with Switzerland at COP27. The project, which will be implemented by the UN Development Programme, will retrain rice farmers with more sustainable agricultural techniques to reduce the industry’s carbon footprint. It covers nearly 80% of Ghana’s rice production and is projected to save more than one million tonnes of CO2 equivalent by 2030. 

There are growing opportunities for private investors to get involved in the projects underpinning these deals, panellists agreed.  

“What we are seeing is the formation of funds, special interest ventures, and joint ventures to facilitate leveraged finance of infrastructure projects that are necessary for the energy transition,” said DeMarco. 

A recent example of this is the funding of the electrification of buses in Bangkok, financed through an agreement between Thailand and Switzerland under Article 6.2. 

“Institutional investors – and in particular private equity – like a certain and long-term financial return,” she said.  

“Where you are developing shovel-in-the-ground infrastructure funded by the mechanism, you’ve got the best of all worlds. It provides a compliance unit governed by a legal regime, with the certainty and predictability to allow for rates of return on those investments. This is really dynamic and very attractive to a number of investors.” 

South Korea’s Eximbank has also been mandated by the government to identify Article 6.2 projects, according to Sandeep Roy Choudhury, Co-founder of VNV Advisory Services, a social enterprise working with communities on climate change.  

“South Korea knows it will need carbon credits to meet its NDCs, so the government is asking the bank to invest in other countries where South Korea has a memorandum of understanding,” he said.

This would mean, for example, if the South Korean government were to co-invest in the projects, they could use a proportionate portion of those credits towards the country’s NDC with the remainder left for the other co-investor to trade, he explained.

But there is further work to be done to ensure that governments – especially those in the Global South – are setting clear parameters for private sector involvement. 

“This includes rules around claims, use purposes and disclosure requirements,” said Pedro Martins Barata, Associate Vice President for Carbon Markets and Private Sector Decarbonisation at the Environmental Defense Fund. 

Co-evolution of carbon markets 

Lina Barrera, Senior Vice President of International Policy at non-profit organisation Conservation International, noted that a “co-evolution” is beginning to occur between projects established by governments within the Paris Agreement framework and those developed in the private sector.  

Voluntary carbon markets (VCMs) are increasingly aligning with Article 6 projects and initiatives such as Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), she insisted. 

“They are increasingly resembling one another, with the private sector more actively seeking out carbon credits that meet Article 6 rules,” Barrera said. “I expect we will continue to see this alignment and the private sector will benefit as a buyer in both markets.” 

VCMs facilitate the trading of carbon credits that don’t count towards mandatory decarbonisation targets. They have been subject to controversies around quality, credibility and transparency, but panellists welcomed the degree of innovation in the voluntary market, noting that VCMs can serve as a springboard for Article 6.2 and 6.4 projects in the longer term.  

Voluntary markets are estimated to reach a value of at least £8 billion (US$10.1 billion) by 2030. The Article 6.4 Supervisory Body will meet next between 26 February and 1 March. 

“There is still a lot more upfront work required to define the rules under Article 6.4, which is why we’re not seeing as much activity in that arena,” said Hamrick. “Once the rules are set up and defined, however, Article 6.4 projects should be able to also scale really quickly.” 

Article 6.4 is expected to introduce an international carbon crediting mechanism overseen by a supervisory body tasked with developing and supervising the requirements and processes needed to operationalise the mechanism.

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