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.
What are the 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.
Learn more about the 2024 State of the Voluntary Carbon Market. ->
Strategic considerations for businesses
Adopting the PACM methodology marks a pivotal moment for businesses engaged in carbon markets. To navigate this effectively, companies should:
Develop a robust carbon management strategy: Quantify your existing greenhouse gas footprint, then identify opportunities to reduce and remove emissions to align with the Paris Agreement.
Evaluate and procure carbon credit portfolios: Maximize climate impact and align with future quality standards by conducting a thorough due diligence of the carbon credits you procure and ensure current holdings align with the new standards to maintain compliance.
Monitor regulatory developments: Stay informed about policy changes to adapt strategies and maintain a competitive edge.
Conclusion
More than a decade of work led to the COP29 agreement on Article 6.4. This agreement is a key step towards operationalizing a structured and credible global carbon market. This will impact businesses involved in carbon removals, highlighting the need for high-quality carbon credit projects. The process of finalizing what qualifies within the PACM will have major implications regarding the climate and commercial value of the COP29 agreement.
The operationalization of the PACM has the opportunity to address the primary challenge for scaling the voluntary carbon market today: unlocking more demand. If the PACM increases trust and transparency in the voluntary carbon market (e.g., through robust methodologies), it may drive demand. The next step of defining methodologies for carbon projects traded through the PACM is a crucial test of its ability to raise the quality bar in the voluntary carbon market.
Learn more about the Criteria for High-Quality Carbon Dioxide Removal and align your business with credible, science-based carbon removal projects.
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