Introduction

On November 11, 2024, during COP29 in Baku, Azerbaijan, delegates unanimously approved a crediting methodology for Article 6.4 of the Paris Agreement. On November 23, 2024, the host country announced the full adoption and operationalization of this agreement. This decision is a momentous step toward operationalizing a global voluntary carbon market governed by the United Nations (UN). However, the implications for carbon credit buyers today are still unsettled. 

What is Article 6.4 of the Paris Agreement?

Article 6.4, known as the Paris Agreement Crediting Mechanism (PACM), was designed to enable countries to generate and trade carbon credits from emission reduction projects as a means to meet the goals of their Nationally Determined Contributions (NDCs). The PACM is overseen by a centralized UN body, known as the Article 6.4 Supervisory Body, which is responsible for approving methodologies, registering projects, managing the registry, and ensuring environmental integrity—similar to how the UN’s Clean Development Mechanism operated under the Kyoto Protocol. 

What decisions were made on Article 6.4 at COP29?

Prior to the commencement of COP29, the Article 6.4 Supervisory Body convened in Baku to lay the groundwork for early endorsement of Article 6.4 on November 12, 2024. Following two weeks of technical discussions at COP29, a consensus was reached on the rules, modalities, and procedures for the trade and accreditation of credits via the PACM.

It is important to note that the final agreement at COP29 did not establish methodology standards or frameworks for the quality of credits traded on the PACM. A standardized methodology is necessary to ensure the quality and transparency of the market and in turn to drive demand. The Article 6.4 Supervisory Body President acknowledged the critical role of quality standards and dedicated a section of the final proposal, published after the conclusion of COP29, to request that the Supervisory Body expedite its efforts to “further standards, tools and guidelines relating to baselines, downward adjustment, standardized baselines, suppressed demand, additionality, and leakage, as well as non-permanence and reversals including aspects of post-crediting period monitoring, reversal risk assessments, and remediation measure.” This proposal was unanimously agreed upon by the negotiators on November 23, 2024.

Implications for the voluntary carbon market

The approval of the PACM adds an important new layer to the voluntary carbon market. The PACM introduces a potential "quality floor" for carbon projects within the voluntary carbon market, aiming to enhance the credibility and integrity of carbon credits. Credits issued under the PACM are unlikely to universally meet the standards of quality-oriented buyers. However, the PACM will raise the floor for accepted credit quality and, hopefully, increase confidence in the market as a whole. 

Key decisions remain that will determine the impact of the PACM. Decisions on which methodologies are permitted are particularly critical. Like the Clean Development Mechanism, the PACM may include project types like renewable energy that have been broadly rejected in the voluntary carbon market due to widely-recognized non-additionality. If credit types like renewable energy are permitted, the PACM market could be dominated by low-cost, low-quality credits. 

The approved PACM includes provisions for carbon removals, unlike the version proposed ahead of COP28 in 2023. This decision means that the PACM can serve as an important foundational element of the carbon removal market. Still, removals will likely make up a small portion of the overall transacted volume, reflecting trends in the broader voluntary carbon market.

The PACM is expected to channel significant financial resources to developing nations and reduce costs of implementing NDCs by an estimated $250 billion. However, given that the global voluntary carbon market currently transacts less than $2 billion annually, achieving such a scale would require substantial growth. The Clean Development Mechanism also faced challenges in delivering its proposed financial and environmental benefits.

In sum, while adoption of the PACM may boost total transacted volumes of carbon credits and will raise the quality floor of the voluntary carbon market, it will also likely have limited near-term impact on the high-quality carbon removals market. The PACM is a dynamic mechanism, though, and will continue to define the voluntary carbon market going forward.