A global carbon market trading mechanism is on the horizon, thanks to Article 6.4 of the Paris Agreement. The to-be-established Paris Agreement Crediting Mechanism allows both governments and companies to trade UN-approved carbon credits to count toward their climate targets.

Stakeholders anticipate Article 6.4 to be the saving grace of carbon credit markets, yet it is proving to be a complex task. After 10 years of negotiations, progress on implementing those Article 6 provisions now involves more technical conversations surrounding eligible emission reductions and building the necessary infrastructure to facilitate trade between private and public entities.

How it works

Article 6.4 is one of two global carbon trading mechanisms outlined under Article 6 of the Paris Agreement. When put in place, it will allow both governments and companies to trade emission reduction credits. This international carbon credit trading system will be overseen by a UN-appointed Supervisory Body, which is in charge of developing and supervising the processes required to effectively implement Article 6.4. These include establishing approved methodologies, registering activities, accrediting independent verification bodies, and maintaining the registry.

Before applying to the Supervisory Body for credit issuances, project developers need to seek approval for these credits from the host country. Once completed, the units could then be transacted with governments, companies and individuals. This is similar to the Kyoto Protocol’s Clean Development Mechanism, except Article 6.4 is expected to achieve an overall reduction in global emissions by preventing double counting. Once an offset is transferred to a buyer, it is canceled to stop the seller from using the same credit for its own compliance.

Establishing PACM would connect today’s fragmented carbon markets by streamlining transfers of UN-recognized credits and linking compliance and voluntary systems. Making registries and accounting rules interoperable, such that units are fungible across jurisdictions, would boost liquidity and provide a clear use case for carbon credits in an unregulated space.

Progress thus far

For Article 6.4 to go live, it needs fleshed-out eligibility standards, registry and architecture and corresponding adjustments. Negotiations at COP29 in Baku concluded that the Supervisory Body still has a lot of work to do beyond the drafted standards. Hence, meetings held at Bonn ahead of COP30 prepared the technical groundwork for Article 6.4.

Standards for what credits will be eligible for inclusion are among the most contentious issues at the COP. So far, the Supervisory Body has focused on mitigating risks of over-crediting, non-additionality, reversals and leakage. However, standards around reversals and non-permanence have faced some backlash for being not robust enough.

Building an operational system and implementing corresponding adjustments are still in progress.

Progress at COP30

Expected progress on Article 6 at Belem is linked to Brazil’s efforts in carbon markets. Between building a compliance carbon market, hosting carbon credit projects for voluntary trade and proposing global integration of carbon markets by forming a coalition at COP30 – Brazil signals that it has skin in the game.

While Brazil is likely to advocate strongly for establishing PACM, agreeing on eligibility standards may take some back-and-forth. Markets with robust compliance systems such as the EU have historically pushed for strict standards, while economies with large abatement potential and no established carbon markets, such as Indonesia, tend to prioritize operationalizing Article 6 over robust standards.

Unlike agreeing on Article 6.4 standards, creating a functioning infrastructure for PACM sits outside of negotiations at Belem. The Article 6.4 registry is meant to track the creation, transfer and purpose of registered credits, while being linked to other carbon markets. The UNFCCC secretariat is tasked with creating the registry, the main function of which is the interoperability between national and regional carbon markets.

Lastly, progress on establishing the framework for granting corresponding adjustments is also independent of negotiations at COP and sits within the participants’ power entirely. The likely delays to parties’ submissions of their cooperative approaches to the UNFCCC will further push back the PACM implementation.