COP29 carbon markets standards will enhance integrity and investment

Helen Gray and Hayden Morgan, energy and sustainability law experts at Pinsent Masons, were commenting after nearly 200 nations came together during the summit to approve rules for a global carbon market, a crucial step towards achieving the climate goals under the Paris Agreement.

The decision revolves around Article 6.4 of the Paris Agreement and establishes a mandatory sustainable development tool (SDT). The tool will form the regulatory basis for the operationalisation of the Article 6.4 mechanism, developing a framework for international carbon crediting.

This is expected to direct substantial financial resources to developing countries, potentially saving up to $250 billion annually in climate plan implementation.

“Agreement of Article 6.4 is the starting gun, unleashing the power of global financial markets to support in international efforts to tackle climate change,” said Morgan.

The new rules allow countries to trade carbon credits, allowing for international cooperation to tackle climate change and unlocking financial support for developing countries. This will enable countries meet their climate targets more flexibly and cost effectively. By providing a clear framework for carbon trading, the agreement also aims to boost investor confidence and encourage more countries and companies to participate in the carbon market.

Morgan said: “As countries can now trade with each other, the law of supply and demand should incentivise developers to issue credits on this new global market, which will contribute to national and commercial decarbonisation pathways.”

The new standards aim to ensure that carbon credits are generated through activities that genuinely reduce or avoid greenhouse gas emissions, such as reforestation, protecting carbon sinks, and transitioning from coal to clean energy. This mechanism also sets out rules to ensure robust human rights safeguards.

Agreement of Article 6.4 also creates a global carbon market overseen by a United Nations entity (the UN Supervisory Body). Project developers will be required to register their projects with the body. Additionally, a project must be approved by both the country where it is implemented, and the Supervisory Body, before it can start issuing UN-recognised credits. These credits can be bought by countries, or companies to contribute, sometimes referred to as offsetting, to their decarbonisation targets and goals.

Morgan said: “The mandatory sustainable development tool for use in these credits, and the UN Supervisory Body, establishes a global standard baseline of safeguards for environmental and human rights, which underpin the credibility of each credit, and establishes a high-integrity market.”

The rules also include provisions for calculating the number of credits a project can receive, ensuring transparency and accountability in the carbon market.

Morgan added: “Financial services firms will take this as a signal to develop novel financial instruments, and trading platforms. There is now a platform for firms to innovate tokenised, smart contracts, offering benefits up and down the value chain, from local communities and developers to national and international institutions, all contributing to tackling the effects of climate change, across the globe.”

Despite the progress made at COP29, several challenges remain. Some important aspects of the broader crediting mechanism, Article 6, still require negotiation. These include governance issues and additional safeguards to ensure fair and effective operation of the market.

Gray said: “Whilst some questions remain, this announcement is key in laying the foundations for a largely sought after UN carbon market. The further work required in development and regulation of credit registries as well as measurement, reporting and verification to sit alongside the new standards will be crucial in ensuring the successful implementation of a future UN carbon market in a manner that appropriately protects host communities and project proponents as well as buyers and sellers of credits.”