Amid the ongoing discussions about its climate finance agreement (see page 28), COP29 marked a significant achievement for carbon markets. Advocates are optimistic that this accord will substantially boost initiatives aimed at combating climate change, whether by removing carbon from the air or preventing its emission entirely.
“When operational, these carbon markets will enable countries to implement their climate strategies more quickly and affordably, thus lowering emissions,” stated UN climate chief Simon Stiell. “While we still have considerable work ahead to halve emissions this decade, the progress made in carbon markets at COP29 will help us get back on track.”
Article 6 of the Paris Agreement has been a divisive issue in climate negotiations for nearly a decade. The concept of countries voluntarily collaborating using carbon credits to achieve climate goals was introduced in 2015, but the arduous task of finalizing the practical implementation mechanisms has proven challenging.
Nevertheless, on the first day of COP29, a significant breakthrough was announced, focusing on the operationalization of one of its key components, Article 6.4. This agreement includes the adoption of standards for methodologies that quantify the emissions reductions or removals from carbon credit projects, ensuring that these projects follow approaches that yield verifiable results.
This was quickly followed by an agreement on Article 6.2, which enables the transfer of carbon credits between countries. For example, Norway might obtain carbon credits from a project in Kenya, which would then count towards Norway’s climate target goals—referred to as the Nationally Determined Contribution submitted to the UN.
Africa stands to benefit immensely. The continent has significant potential to expand projects focused on carbon removal, particularly through tree planting and initiatives that mitigate emissions by protecting carbon-absorbing ecosystems.
The African Carbon Markets Initiative estimates that Africa could generate $120 billion annually by 2050 from carbon credit sales. However, despite overcoming the Article 6 hurdle, challenges remain to translate this potential into concrete action.
‘Fundamental transformation’
With an international framework now in place to regulate carbon credit standards, Leslie foresees a transition toward a compliance-driven market. For instance, companies might be incentivized to purchase credits to minimize their exposure to carbon taxes implemented in various jurisdictions.
Leslie suggests that the Article 6 agreement sends a “huge demand signal,” likely to trigger a surge in credit purchases, similar to how buyers of physical commodities secure supply contracts well in advance.
He believes this presents a “once-in-a-generation opportunity” for countries like Madagascar. Despite recent challenges with widespread deforestation, he points out that Madagascar is among the most cost-effective locations globally to initiate reforestation projects, making it appealing for investments from carbon credit developers.
A silver bullet?
While nearly all carbon market developers and investors welcome the Article 6 agreement, there is cautious optimism regarding an immediate market explosion.
Nick Marshall, co-founder and head of carbon at TASC, an Africa-focused carbon project developer, acknowledges that the Article 6 agreement is a “fantastic signal” that will eventually stimulate demand for credits. He notes that the aviation sector has largely steered clear of the voluntary carbon market up to this point.
However, with frameworks and mechanisms now established, he feels “quite optimistic” about airlines being encouraged to buy credits from proactive nations like Zambia, which has made progress in setting up frameworks for carbon credit sales.
Storm Patel, TASC’s commercial director, indicates that the company could potentially triple its project scale in Zambia “if there was established policy certainty and clear guidelines and offtakers through these 6.2 mechanisms.”
Nonetheless, Marshall cautions that the Article 6 agreement will not usher in immediate changes “overnight.”
He notes that there is “still a long way” to implement the Article 6.4 mechanism. While this agreement outlines requirements for carbon credit methodologies, the actual process for approving methodologies that meet these requirements is still forthcoming. The timeline for the establishment of a “Paris Agreement Crediting Mechanism,” enabling emissions reductions to be credited for sales to companies in other countries, remains unclear.
Johnson Penn, CEO of EcoLinks, which aims to develop carbon credit projects in countries like Rwanda and Ghana, also believes the Article 6 agreement is not a “silver bullet” for the carbon market. Although he considers the agreement’s finalization in Baku to be “very good,” he emphasizes that further efforts are needed before Africa can capitalize on a surge in demand.
Penn notes that preparations for bilateral agreements on carbon credit transfers were already in progress prior to COP29. While he remains “cautiously optimistic” about the potential positive effects of the deal, he admits that it is still unclear whether or when a wave of Article 6.2 agreements will materialize.
Easier in Asia
During COP29, Singapore announced several Article 6.2 agreements, including one with Zambia. However, Penn observes that only a limited number of countries have shown a strong interest in purchasing credits through this mechanism. In his view, the narrative in the carbon markets thus far has been “more talk than action.” For instance, South Korea, where EcoLinks is based, has signed multiple memoranda of understanding with other governments regarding carbon credit purchases, yet has been slow to translate these MoUs into solid agreements.
Penn warns that African governments need to take proactive measures to ensure they benefit from upcoming market developments. He asserts that “larger projects” are considerably more feasible in Southeast Asian markets compared to most African nations.
He cites Rwanda as an exemplary case in Africa for creating a “very supportive” environment for securing credit deals. However, due to its small size and high population density, the country lacks the capacity for extensive carbon removal projects.
Conversely, in Ghana, Penn highlights that acquiring letters of authorization for carbon projects has presented challenges, characterized by “lengthy and unnecessary procedures.” His message to governments is to prioritize competitiveness to draw in investment.
“If you hope for the carbon markets to scale as quickly as desired, it is essential to have efficient processes in place for when you establish all the enabling mechanisms for growth in this market,” advises Penn.
