Delegates at the ongoing UN Climate Change Conference (COP29) achieved an important breakthrough on the first day of the event in Baku, Azerbaijan, reaching consensus on standards for the creation of carbon credits under Article 6.4 of the Paris Agreement, key for advancing the establishment and growth of a global carbon market. The consensus will help develop and approve methodologies for cutting carbon usage, establish a market-based system for carbon credits, register activities, and accredit third-party verification bodies.

COP29 President Mukhtar Babayev said:

“This will be a game-changing tool to direct resources to the developing world. Following years of stalemate, the breakthroughs in Baku have now begun. But there is much more to deliver.”

Demand for carbon offset projects and related credits is expected to increase significantly over the next several years, as companies and businesses increasingly launch net zero ambitions, and turn to offsets as a bridge to their own absolute emissions reduction efforts, or to balance difficult to avoid emissions. The unregulated and rapidly growing market faces a series of challenges, however, with market participants unable to differentiate between high- and low-quality projects with insufficient or inconsistent data to assess the effectiveness of the projects. Progress towards setting rules enabling the establishment of a global carbon market has been uneven, as countries express concern about the integrity of the rules. Prior attempts to agree on the carbon markets regulations, including at COP28 in 2023, did not succeed over the perceived weakness of the proposals.

The consensus agreed to in Baku will also be a key element in final approval of Article 6 of the 2016 Paris Agreement, which will establish an international carbon credit market. Finalizing Article 6 negotiations could reduce the cost of implementing national climate plans by $250 billion per year by enabling cooperation across borders, according to UN officials, who added that Tuesday’s agreement is “an essential step in achieving that goal and establishes strong momentum for continued progress over the coming two weeks of negotiations.”

Carbon markets-focused specialists welcomed the decision, and the impact it will have on advancing the market and enabling capital flows into climate finance.

Guy Turner, Head of MSCI Carbon Markets, said:

“The decisions on Article 6.4 are significant as they signal a commitment to move forward and get capital moving. Details still need to be worked out, but it indicates a pragmatic approach and learning by doing rather than circular theoretical discussions.”

In a statement following the announcement, the International Emissions Trading Association (IETA) said that approving the standards was a vital step in securing a future with less carbon, adding:

“This COP has a declared focus on finance, and the unlocking of billions in climate finance directed towards those countries that need it the most can only be welcomed. The new standards will give market participants the certainty they need to proceed to develop projects around the world that will generate millions of tons of mitigation outcomes that put the world on a path towards meeting its goal to keep global temperature increases to below 1.5 degrees Celsius.”