Article 6.4 promises a new dawn for carbon markets, but how will it work in practice?

The world of carbon markets has been buzzing with the recent approval of Article 6.4 of the Paris Agreement. It’s been hailed as a game-changer, a pivotal moment for international climate cooperation, and a key to unlocking the financial flows needed to tackle the climate crisis. But amidst the excitement, a crucial question lingers: what does it actually mean in practice?

Article 6.4 aims to establish a centralised, UN-backed system for carbon crediting. It is designed to accelerate climate action and ensure environmental integrity. But unlike Article 6.2, which focuses on bilateral agreements between countries, Article 6.4 offers a more standardised, top-down approach.

However, while the overall framework is in place, several key questions remain about how Article 6.4 will work on the ground. These five open questions will be crucial in determining its success and impact.

Methodologies: Which solutions will be in? 

One of the most critical next steps for Article 6.4 is the development of methodologies for generating carbon credits. These methodologies are essentially the rulebooks that define how projects can demonstrate emission reductions and qualify for credits. The Article 6.4 Supervisory Body will play a key role in reviewing and approving these methodologies through a top-down process, drawing on expertise and best practices.

First will be existing Clean Development Mechanism (CDM) methodologies. Many of these are now outdated and will require significant updates to be approved for Article 6.4. But it is expected that many of these will be part of the Article 6.4 market next year. 

However, this raises an issue for nature-based solutions. The only nature-based solution CDM methodology is an ARR one that is very outdated and will require significant improvements before it is adopted by the Article 6.4 Supervisory Body. With protecting and restoring nature an urgent priority in achieving the Paris Agreement goal, it’s important not only that the existing CDM ARR methodology becomes operational under Article 6.4, but also other nature-based solution methodologies are adopted include ARR, REDD, and others. 

But there’s also a bottom-up element. Anyone can submit their own methodologies for consideration, be they current voluntary carbon market standards bodies, project developers, NGOs, or other stakeholders. This raises two key questions: will voluntary carbon market standards, like Verra and Gold Standard, submit their methodologies to the Article 6.4 Supervisory Body? And how will their decision affect the interaction of the voluntary and Article 6.4 carbon markets? 

The Article 6.4 and voluntary carbon markets: Competition, convergence, or coexistence?

This brings us to another major uncertainty: the future relationship between Article 6.4 and the existing voluntary carbon market. 

Will Article 6.4 compete with the voluntary market, potentially with one market winning out? Will the two markets run in parallel, each catering to different types of buyers and projects? Or could they eventually converge, with voluntary standards aligning their methodologies with the Article 6.4 framework?

There are arguments for each scenario. Some believe that Article 6.4 credits, with their UN seal of approval, will command a premium. This could lead to a decline in demand for voluntary credits.

Others argue that the voluntary market will continue alongside an Article 6.4 market. After all, it already has established infrastructure, a diverse range of methodologies (especially in areas like nature-based solutions), and a track record of innovation. It may take time for Article 6.4 to catch up in these areas, leaving space for the voluntary market to continue serving specific niches and buyer needs.

The possibility of convergence is also intriguing. Voluntary standards could choose to submit their methodologies to the Article 6.4 process, effectively integrating themselves into the UN framework. This could create a more unified and streamlined market, simplifying things for buyers and boosting overall market integrity. However, this would also require these standards to cede some of their autonomy, a decision that they will likely weigh carefully.

The use and users of Article 6.4 credits

Beyond methodologies and market dynamics, there are questions about how Article 6.4 credits will actually be used. While countries can use them to meet their Nationally Determined Contributions (NDCs), their potential role in compliance markets, such as CORSIA (the Carbon Offsetting and Reduction Scheme for International Aviation) or national emissions trading systems, remains to be seen. This could have a significant impact on demand and market prices.

Furthermore, the strategic decisions of host countries regarding the export of credits will be crucial. If a corresponding adjustment is applied, countries will need to balance the economic benefits of selling credits with the need to achieve their own domestic climate targets. This could lead to complex negotiations and potentially limit the supply of credits available for international trade.

The role of the ICVCM: Influence or integration?

The Integrity Council for the Voluntary Carbon Market (ICVCM), which aims to set high-integrity standards for the voluntary market, is another player to watch. While the ICVCM has no formal role in Article 6.4, it’s widely expected that the Supervisory Body will draw on its work and expertise. This raises the possibility of whether the ICVCM’s mantle will ultimately be taken over by the Article 6.4 Supervisory Body or whether the two will provide similar roles for separate Article 6.4 and voluntary markets.

What’s next for Article 6.4? Embracing uncertainty

Article 6.4 represents a significant step towards a more robust and internationally coordinated approach to carbon crediting. It has the potential to drive substantial investment in climate action and accelerate progress towards the goal of the Paris Agreement.

However, it’s important to acknowledge the significant uncertainties that remain. The success of Article 6.4 will depend on how these open questions are addressed in the coming years. This requires transparency, stakeholder engagement, and a willingness to adapt and learn as the market evolves.

For now, it’s clear that we’re entering a new era for carbon markets. While the destination is clear – a more effective and high-integrity system for driving climate action – the road ahead is still being paved. The key is to embrace this uncertainty, engage in constructive dialogue, and work collaboratively to ensure carbon credits deliver their maximum potential.

Photo by Matthew TenBruggencate on Unsplash