Delegates at the UN COP29 in Azerbaijan have agreed on rules for governing the global carbon market, which allows governments and companies to curb emissions by trading carbon credits rather than necessarily cutting them directly.
The breakthrough comes nearly ten years after the idea for a central, UN-managed market was touted under Article 6 of the 2015 Paris Agreement to limit the rise in global temperatures.
The idea of a carbon credit market has been controversial. Activists say they can delay corporate action on emissions, while voluntary schemes have suffered from issues around the integrity of projects.
What are carbon credits?
Carbon credits allow governments or companies to reduce carbon emissions without having to slash them directly by funding initiatives to cut emissions or capture carbon elsewhere.
Carbon credits can be generated, for example, by forest restoration projects that capture carbon from the atmosphere or projects aimed at protecting forests that would otherwise have been destroyed.
One carbon credit usually corresponds to one metric ton of carbon dioxide (CO2) that was either captured from the atmosphere or prevented from being released into the atmosphere.
What is the voluntary carbon offset market?
The voluntary carbon offset market allows companies to buy carbon offset credits even when they are not legally obliged to do so. Companies tend to do this to either preemptively offset future emissions or to compensate for emissions already released into the atmosphere.
Those credits are mostly provided by independent institutions such as Verra and Gold Standard, expected to set standards and verify that developers of projects have indeed captured carbon or kept it from being dumped into the atmosphere.
The voluntary carbon market shrank sharply to US$723 million in 2023 from US$1.9 billion in 2022, according to the non-profit service Ecosystem Marketplace, amid a series of scandals that put into question their business practices and carbon reduction or capture claims.
Why are carbon markets controversial?
The voluntary carbon market has been going through an integrity crisis in recent years, with several developers accused of sourcing and selling credits which failed to avoid emissions or capture carbon. Some carbon credit providers have put projects on hold in response to the accusations.
At the same time, the very existence of carbon markets has been a source of major debate.
Environmentalists say that countries and companies ought to prioritise cutting their own emissions before investing in offsets elsewhere, which can provide an excuse for continuing business as usual.
But exponents of carbon markets say carbon credits help fund climate action in crucial geographies such as the Amazon rainforest and are needed in industries where emissions are particularly difficult to cut - such as steel and cement production.
What are cap-and-trade systems?
Under the cap-and-trade scheme, governments set a legal cap, or limit, for greenhouse gas emissions for a particular sector.
Companies that exceed that limit can buy allowances from others that still have headroom, helping to direct funds towards those that can cut emissions more cheaply.
There were 36 cap-and-trade systems — or trading of carbon emissions allowances — in place in 2023, according to the intergovernmental forum International Carbon Action Partnership (ICAP), with global revenues from the sale of allowances hitting a record US$74 billion last year.
In some cap-and-trade markets, companies exceeding their limits can also buy carbon offset credits from outside projects such as green energy or nature restoration initiatives, for example.
The largest cap-and-trade system is the European Union Emissions Trading System (EU ETS).
What is the Paris Agreement’s Article 6?
The 2015 Paris Agreement requires countries to set ambitious national climate targets, and Article 6 sets out how they can cooperate to reach those goals.
One option is for countries to agree on bilateral deals to trade carbon credits.
COP29 has established new guidelines on how these deals should work, including requirements for separate registry systems to interact with each other and an agreed draft format for countries to report on the transfer of credits.
The first such carbon offset credit was sold this year by a Thai electric bus operator to a Swiss fossil fuel group, after the Thai firm had generated credit by launching a fleet of electric buses.
The Article 6 also aims to create an international market managed by the United Nations. Delegates at the COP29 in Baku agreed on the general rules for that market on Saturday after a decade of negotiations, urging for the speedy implementation of that mechanism.
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