Failure to agree
Going into the negotiations, parties were at odds over what seemed like mere technical details about transacting carbon units amongst countries under Article 6.2. As we explained in our “who wants what” analysis during the first week of the talks, these details are in fact critical because they set the logistics for how countries transact such units going forward – negotiations over them were reported to have been “toxic” at some points and short on compromise text.
The main line of conflict appears to have been ideological: the EU and some Latin American and Asian countries want institutions and procedures standardized and prescribed centrally under the UN to ensure integrity, while the US favored leaving it up to countries to define e.g. elements of transactions, accrediting of institutions involved, and timing of reports or other transparency measures on a case-by-case basis. While the former group had pushed for registries, for instance, to be ‘transactional’ (enabling the transfer of mitigation units and centralized within the UNFCCC), the US wants ‘non-transactional’ ones that simply compile information on transactions that occur in existing registries already in use in voluntary markets. Similarly, the EU and others pushed for a set of procedural benchmarks or criteria that must be met for a party to authorize mitigation units for international transfer – the US finds this too inflexible given that authorization contexts vary by country. The COP28 result can be seen as a “win” for the US side: with no further guidance adopted, the Article 6 framework decided at COP26 remains all countries have to go on when it comes to undertaking actual transactions – the logistical void parties face when setting up cooperative measures is precisely what this COP was supposed to fill.
Things were more straightforward in the discussions about Article 6.4, as its Supervisory Body had already agreed on wider methodological guidance from a year’s worth of meetings culminating in recommendations for parties to adopt at the COP. In the end, however, the global mechanism discussions shook out the same as for 6.2: no text was adopted at all, not even a compromise text “welcoming” rather than “adopting” the recommendations. Many members of the Supervisory Body are also among their country’s negotiators at the COP, making the rejection of text even more stunning: they rejected the outcome of their own efforts at multiple international meetings of the Board over the course of 2023.
What it means for global carbon trading
Article 6.2
Though frustrating for the parties that seek a UN framework for bilateral transactions, the results of the Article 6.2 negotiations are less influential for global carbon markets. As explained above, parties will simply proceed with bilateral arrangements in which they set their own definitions of e.g. what constitutes authorization, which registries they may use, whether and when authorizations can be revoked, etc. Absence of UN-level accountability in this regard suits many parties just fine, particularly the US with its Energy Transition Accelerator program that is essentially a private sector offsetting program doubling as carbon finance. Without further specifications on international transactions involving country governments, the ETA is still “Article 6 compliant.”
Uncertainty, however, could be a deterrent for some: given that next year’s negotiations might actually produce some guidance and further “rules” for countries, governments may be reluctant to engage in ITMO transactions knowing that the infrastructures they set up or the processes they follow will not be the ones decided at future COPs – would this render their deals with other countries retroactively invalid, and what would that mean for their targets under the Paris Agreement?
Article 6.4
The consequences of failure to adopt any text on the Article 6.4 mechanism are more dire. A weak text would have at least contained language that “kicks the can down the road,” i.e. declares that subsidiary bodies will discuss further in hopes of setting up a better basis for decision at the next COP. In a way, the Article 6.4 Supervisory Body is itself a result of this tactic, having been established to provide the very recommendations parties argued over at this COP and then did not adopt. As it stands, the parties gave the Supervisory Body no new instructions to enable further operationalization of the Article 6.4 mechanism. There is no formal mandate for it to develop a work program – this means assessment of methodologies, revision of standards and procedures, creation of tools and guidelines for generating mitigation credits and selling/buying them are all at a standstill. Many stakeholders had banked on crediting under the mechanism to begin in 2025, based on expected adoption of the recommendations at this COP – but with the entire process now “frozen” for at least a year, the prospect of tradable units beginning to change hands before at least 2026 is unlikely…with doubts arising as to whether the mechanism can become operational at all.
The role of greenhouse gas removal activities in particular was contentious at the COP, with some parties opposed to adding these to the list of activities that can generate tradable mitigation units under the mechanism. Such practices are controversial because they involve inherently reversible natural processes such as afforestation (tree planting) or “no till” agricultural soil management practices. With no COP decision on the Supervisory Body’s (intentionally very general) recommendations, project developers pursuing such activities will continue in the voluntary markets where there are no global UN-sanctioned standards.
Voluntary markets
Indeed the lack of progress on the UN mechanism renders the voluntary carbon market (VCM) the “only game in town” for many stakeholders in the carbon offsetting/mitigation space – especially “nature-based” removals projects. Participants in the VCM were hoping for COP28 results that give direction to international project-based crediting, as the entire concept of offsetting – as well as specific offset projects – is receiving negative media attention with one “scandal” after another in the news. A crediting mechanism run by the UN would lend some credence not only to the concept of generating mitigation units that can be purchased to fulfill climate change mitigation goals, but to whichever project types/methodologies that mechanism allows. It is precisely for this reason that removals are so contentious: the UN’s previous offsetting mechanism, the CDM under the now-expired Kyoto Protocol, did not include removal type projects as they were deemed too hard to quantify and too at risk for reversal through e.g. forest fires.
Enhancing the role of emission trading systems
By failing to agree on any of the options under Article 6, parties have paused the momentum on international carbon trading, making the role of national and regional emissions trading systems more important. The EU Emission Trading System, North America’s carbon markets (known as the WCI and RGGI), China’s intensity-based ETS, and others remain the only functioning games in town when it comes to market-based carbon pricing policies.
The entire point of creating a market for climate change mitigation units is that parties can afford to take on more ambitious mitigation targets if they get more ‘bang for their buck’ by achieving emission reduction through the trading such markets enable. Without global carbon trading, the job of facilitating increased mitigation ambition is done to a larger extent by national or regional level carbon markets. Emission permit prices are currently highest in the EU ETS at EUR 70 per tonne, but China, North America, South Korea, New Zealand and other countries and regions also have ETS in which prices incentivise decarbonization of the economy or at least the power sector. Many developing countries are setting up emission trading systems, including Türkiye and Brazil – Indonesian coal-fired power plants are subject to an ETS as of this year.
Fossil fuel transition
The part of COP28 that garnered the most media attention was its language on fossil fuels: parties fought over whether to adopt wording about phasing out or phasing down fossil fuels, with oil-rich nations like Saudi Arabia and Russia vehemently opposing such wording. In the end, the final text called on parties to take actions including “transitioning away from fossil fuels in energy systems” – deemed historic in that it is the first time such a transition is enshrined in an adopted final text.
In combination with the expectation that parties will set more ambitious mitigation targets in the coming round as Per the Paris Agreement’s timeline (they must come up with a new set of targets by 2025), the transition away from fossil fuels will, for many parties, translate into tightening of existing climate policies. For those with emission trading systems, this means steeper downward cap trajectories. For those without emission trading systems, it may mean adopting an ETS to help achieve the necessary reductions.
