COP29: Progress for the international carbon market

More than just a positive sign: COP29 heralds a turning point for international carbon markets

The Climate Change Conference in Baku (COP29) ended on November 22, 2024. While the previous year’s conference addressed phasing out fossil fuels, the question of concrete framework conditions for global CO₂ compensation finally had to be put on the agenda. A closer look at the final documents shows: COP29 has delivered and can become an important milestone for global climate protection.

The first major success of the conference was the launch of a climate impact financing process. In Baku, it was decided that countries with very high greenhouse gas emissions should make USD 300 billion available each year until 2035. These funds are intended to help poorer countries with low emissions to cope better with the effects of climate change.

Even more important for emissions trading is the second major breakthrough of the 2024 Climate Change Conference. It paves the way for a better operationalization of Article 6 of the Paris Agreement and the breakthrough of Carbon Credits as globally tradable certificates for CO₂ offsetting. COP29 was the first time ever that a legal framework for sustainable CO₂ emissions markets was created. These relate in particular to Articles 6.2 and 6.4 of the Paris Agreement.

Strengthening intergovernmental emissions trading

Article 6.2 regulates intergovernmental cooperation to achieve national climate targets, so-called Nationally Determined Contributions (NDCs). The regulation that has now been introduced gives countries the opportunity to trade their emissions with each other through international credits. This trade takes place in the form of Internationally Transferred Mitigation Outcomes (ITMOs). The ITMO mechanism does not function like a normal trade transaction, but as a bilateral or multilateral mechanism between governments.

ITMOs can help rich countries with high CO₂ emissions to meet their national climate targets (NDCs). In return, this mechanism gives poorer countries with a negative carbon footprint the opportunity to obtain financial resources to strengthen their economic performance without having to plunder their natural resources.

In practice, it could look like this: A country in the southern hemisphere has large areas of rainforest and hardly any industry that emits climate-damaging CO₂. For the climate balance, this means that the state removes more greenhouse gases from the atmosphere than it emits. This surplus of emission reductions can be sold to another country that produces too many emissions. The bottom line is that Article 6.2 can help to make climate protection measures financially fairer between poorer and richer nations.

A new mechanism for the international carbon market

One of the most important decisions of COP29 concerns the introduction of a mechanism for certifying emission reduction projects, which will avoid double counting of emission reductions in future. This mechanism is called Corresponding Adjustment (CA). With Corresponding Adjustments, the successes of a project will in future be deducted from the national carbon budget (NDC) of the host country in which the project takes place. These CAs apply both to intergovernmentally traded Carbon Credits under Article 6.2 and to certificates covered by Article 6.4.

Article 6.4 of the Paris Agreement regulates how countries and companies can trade certified emission reductions with each other. The Article aims to provide economic incentives for a transparent and reliable reduction of greenhouse gases and to promote sustainable developments in the economy and society. At COP29, this Article has now been extensively specified for the first time.

What does that look like in practice? Suppose a company invests in a wind farm in state A to reduce its CO₂ emissions. This wind farm saves 1 million tons of CO₂ per year in state A, which were previously generated using fossil fuels. If state A does not require this reduction in the greenhouse gas balance, it can issue a Letter of Authorization (LoA) to the company operating the wind farm for the project. This authorizes the company as project operator to sell these emission reductions in the form of certificates in order to finance the project, among other things. Conversely, the emission reductions are deducted from the national greenhouse gas balance of state A.

Supervisory Body at the UN

COP29 has also initiated the creation of the central Supervisory Body to ensure compliance with the regulations. It is set up by the United Nations Framework Convention on Climate Change (UNFCCC) and consists of 12 members. This international committee has the task of further refining the operationalization of certificate trading in the coming years. One important task is to drive forward the development of quality standards in order to give buyers of the new certificates greater certainty on the carbon market.

Another positive aspect is that UN certificate trading under the umbrella of the Supervisory Body will include a social component in the future: with Overall Mitigation in Global Emissions (OMGE), a certain percentage of traded emission reductions is dedicated to the general public.

Outlook and further developments

The first certificates for the new methodologies, which can be used to plan the frameworks for future projects, are expected to come onto the market in the second half of 2025. From then on, project development for certificates in accordance with Article 6.4 or the transfer of existing projects will be able to be implemented.

In this context, certificate trading will differentiate into three categories over the next few years:

●     UN-authorized 6.4 Carbon Credits with CA for companies and countries

●     6.2 ITMOs for purely state certificates

●     Non-authorized Mitigation Contribution Units (MCUs) and the Voluntary Carbon Market (VCM)

The future of certificate trading lies in these three types of Carbon Credits. We expect that the new authorized credits, which are provided with a LoA in the background, will be in great demand among environmentally conscious customers.

Conclusions

COP29 has given a strong new impetus to the global Carbon Credits trade. It is now becoming clear that Article 6 of the Paris Agreement is heading in the direction of a functioning, sustainable certificate trade. As a result of the reforms that solve the problem of double counting, there is a justified expectation that these new credits will be recognized as mandatory payments outside the European Union (EU). With Article 6, the UN will establish a new market for Carbon Credit trading that gives companies and international players more security than the current system.

A further positive development is emerging in the EU, as the legal framework for the use of Carbon Credits is also being rapidly developed here. We will address this topic in detail when the time comes.