COP29 may have ended in acrimony over its climate finance deal (see page 28), but the summit did produce a significant achievement on carbon markets. Supporters hope the deal will provide a major boost for projects that seek to combat climate change by removing carbon from the atmosphere, or avoid it being released in the first place.
“When operational, these carbon markets will help countries implement their climate plans faster and cheaper, driving down emissions,” said UN climate chief Simon Stiell. “We are a long way from halving emissions this decade, but wins on carbon markets here at COP29 will help us get back in that race.”
Article 6 of the Paris Agreement had been a major sticking point throughout almost a decade of climate change negotiations. The principle that countries should be able to voluntarily cooperate on using carbon credits to help meet climate targets was agreed in 2015. Finalising mechanisms for how this should work in practice has proven to be a painstaking process, however.
But COP29 was able to announce a breakthrough on the very first day of the summit, with an agreement on operationalising one of the key clauses, Article 6.4. This provides for the adoption of standards for the methodologies used to calculate the emissions reductions or removals due to a carbon credit project. The aim is to ensure that projects use methodologies that provide verifiable results.
This was followed up with a deal on Article 6.2, which allows the transfer of carbon credits between countries. For example, Norway might purchase carbon credits from a project in Kenya; the credits could then count towards Norway’s goals in the climate targets – known as the Nationally Determined Contribution – that it submits to the UN.
Africa could be a major beneficiary. The continent has considerable potential to scale up projects that remove carbon, particularly through planting trees, alongside schemes that prevent emissions by conserving habitats that sequester carbon.
The African Carbon Markets Initiative estimates that Africa could be earning $120bn a year by 2050 through carbon credit sales. Yet while the Article 6 obstacle has been overcome, challenges remain in converting potential into progress.
‘Fundamental transformation’
The deal is a “complete game changer,” says Luke Leslie, CEO of carbon markets investor Key Carbon. He tells African Business the agreement paves the way for a fundamental transformation in the voluntary carbon market. At present, this market is based purely on voluntary credit purchases by corporations. Demand has been volatile, partly because various scandals have undermined confidence.
With an international regime for regulating carbon credit standards now coming into place, Leslie expects that the market will shift to be compliance-led. This could mean, for example, that companies will be incentivised to purchase credits in order to lower their exposure to the carbon taxes that are being implemented in various jurisdictions.
Leslie believes the Article 6 deal provides a “huge demand signal” that will prompt an upsurge in credit purchases. In part this is because companies want to secure credit supply several years in advance – much like buyers of hard commodities looking to contract supply ahead of time.
This, he says, could be a “once in a generation opportunity” for a country like Madagascar. The island nation has seen rampant deforestation in recent years. But the upside is that Madagascar is one of the cheapest places in the world to launch a reforestation project, Leslie points out. It should therefore be well placed to attract investment from carbon credit project developers.
A silver bullet?
Although almost all developers and investors in the carbon markets have welcomed the Article 6 deal, many are cautious about predicting an immediate boom in the market.
Nick Marshall, co-founder and head of carbon at TASC, an Africa-focused carbon project developer, agrees that the Article 6 deal is a “fantastic signal” that will eventually help stimulate demand for credits. He highlights the fact that the aviation sector has largely shied away from the voluntary carbon market until now.
But, with mechanisms and frameworks in place, he is “quite optimistic” that airlines could be encouraged to purchase credits from a country such as Zambia, which is been proactive in creating frameworks for carbon credit sales.
Storm Patel, TASC’s commercial director, adds that the company could double or triple the scale of its projects in Zambia “if there was all of this policy certainty in place and clear guidelines and offtakers through these 6.2 mechanisms”.
Yet Marshall cautions that the Article 6 deal will not change much “from one day to the next”.
He notes that there is “still a way to go to get the Article 6.4 mechanism up and running”. Indeed, the Article 6.4 agreement covers the requirements for carbon credit methodologies, but the work of actually approving methodologies that meet these requirements is yet to begin. The timeframe remains uncertain for a “Paris Agreement Crediting Mechanism”, which is designed to allow emissions reductions to be credited so they can be sold to companies in other countries, becoming fully operational.
Johnson Penn is CEO of EcoLinks, a company seeking to develop carbon credit projects in countries including Rwanda and Ghana. He also says that the Article 6 agreement is not a “silver bullet” for the carbon market. While it is “very good” that an agreement was finalised in Baku, he emphasises that more work is needed before Africa can reap the benefits of an upsurge in demand.
In fact, Penn notes that bilateral agreements on carbon credit transfers were already in the works before COP29. While he is “cautiously optimistic” that the deal will have a positive effect, he says it is not yet clear if or when a wave of Article 6.2 deals might materialise.
Easier in Asia
Singapore did announce several Article 6.2 deals during COP29, including one with Zambia, but Penn notes that only a handful of other countries have publicly expressed enthusiasm about purchasing credits through this mechanism. The story so far in the carbon markets has been “much more talk than action,” he believes. South Korea, for example, where EcoLinks is based, has signed several memoranda of understanding with other governments on carbon credit purchases, but has been slow to convert these MoUs into concrete deals.
And Penn warns that African government have work to do to ensure that they benefit from a future boom in the market. At present, Penn says it is “much easier to do bigger projects” in markets such as southeast Asia than in most African countries.
He highlights Rwanda as standing out in Africa, in that it offers a “very supportive” environment for securing credit deals. Due to its small size and high population density, however, the country has limited potential for large-scale carbon removal projects.
In Ghana, by contrast, Penn laments that securing letters of authorisation for carbon projects has proven to be arduous, filled with “very lengthy and unnecessary processes”. His message to governments is that they need to focus on competitiveness in order to secure investment.
“If you want the carbon markets to scale as rapidly as you may be hoping, you want to have very efficient processes in place for when you have all the enabling mechanisms for scaling in this market,” says Penn.
