The Conference of the Parties (COP), the decision-making body responsible for monitoring and reviewing the implementation of the United Nations Framework Convention on Climate Change (UNFCCC), has just wrapped up its meetings in Baku, Azerbaijan (COP29). COP29 adopted a series of decisions expanding the role of carbon markets under the Paris Agreement and made a breakthrough for the establishment of a UN-managed global carbon market.
By way of background, COPs are aimed at fostering a sense of shared responsibility and setting a path for nations to tackle climate change collectively.
The Paris Agreement, the breakthrough accord reached in 2016 following COP21, set goals to hold “the increase in the global average temperature to well below 2°C above pre-industrial levels” and pursue efforts “to limit the temperature increase to 1.5°C above pre-industrial levels.”
The progress made at COP29 regarding carbon markets reflects the global commitment to enhancing cooperative approaches to address climate change while balancing the interests of diverse stakeholders.
Under Article 6 of the Paris Agreement, parties can voluntarily pursue cooperative approaches to reach or even increase their climate targets via several tools:
Article 6.4 establishes the UN-managed carbon crediting mechanism known as the Paris Agreement Crediting Mechanism (the PACM), which is open to public and private participants. The units generated by the PACM are known as A6.4ERs.
Explained in simple terms, the PACM is a high-integrity global carbon market that will allow a participant (which can be a state or a company) in one country to reduce emissions, have these emission reductions credited as A6.4ERs, and trade them internationally to another participant in another country.
The main idea of the PACM is the creation of an international certification system for carbon units with the legitimacy of being developed through the UN’s multilateral system. This will create a channel for private-sector and ordinary nonparty stakeholders to engage in Paris Agreement activities.
This mechanism has been dormant for years due to the absence of underlying regulations, which have faced years of negotiation deadlock. COP26, held in Glasgow in 2021, agreed to the rules, modalities, and procedures (RMPs) for the PACM in Decision 3/CMA.3.
The development of concrete guidance under the PACM has been left to the SBM, the Supervisory Body under the Article 6.4 mechanism.
COP29 endorsed the important standards for operationalizing the PACM framework that the SBM has developed.
The Standard for Methodologies sets out the requirements for the development and assessment of Article 6.4 mechanism methodologies. It elaborates on and further develops the recommendations for application of the requirements set out in Chapter V.B (Methodologies) of the RMPs.
The methodologies are intended to provide the basis for claim and assessment of creditable emission reductions or removals and to apply to all activities under the PACM.
Compared with previous experience under the Kyoto Protocol’s Clean Development Mechanism (CDM) (and also to voluntary carbon markets), the requirements established by the Standard for Methodologies are viewed as more stringent, particularly with respect to the baseline for crediting and additionality requirements.
Baseline-Setting
From the outset, the baseline must be below the business-as-usual projection, that is, benchmarks or scenarios for emissions prior to or in the absence of the implementation of the emission reduction activity. This will need to be demonstrated in the project design document and at each renewal of the crediting period.
The baseline is also subject to downward adjustment over time (as the “mechanism methodologies shall encourage ambition over time”), which reduces the supply of units being offered by an activity over time.
The Standard for Methodologies allows a choice of approaches for the baseline-setting based on
The downward adjustment applies to all three approaches.
Cumulative Additionality
Additionality is a key concept for voluntary carbon markets. Explained in simple terms, additionality requires that credits only be issued for activities that would not happen in the absence of the incentives of the carbon crediting mechanism. This usually focuses on the financial aspect of additionality.
The Standard for Methodologies establishes the cumulative requirements to additionality, which go beyond previous experiences. To exhibit additionality, activity must demonstrate the following:
The SBM may apply simplified approaches for demonstration of additionality for projects implemented in any least-developed country.
The RMPs established a more technologically neutral approach to removal activities than that of the Kyoto Protocol’s CDM. As such, the Standard for Removals applies to potentially all carbon removal activities, i.e., not only afforestation but also carbon capture and storage and other emission reduction activities can qualify to generate A6.4ERs under the PACM.
Positive Net Change in Carbon Stock
The definition for removals considers only positive net changes in the carbon stock, meaning emission avoidance would not qualify. Only an emission reduction or a positive change in the carbon stock between two periods of time would qualify.
Another major innovation is that the Standard for Removals moves away from the concept of temporary credits for removal activities and instead uses a risk evaluation and buffer pool approach, including with respect to emission reduction activities that may have a significant risk of reversal.
Risk Evaluation; Buffer for Reversals
The details for risk evaluations are yet to be further developed by the SBM but, in general, the risk evaluation will determine how many units need to be deposited in the buffer pool (the Reversal Risk Buffer Pool Account) and canceled in case of reversal.
The SBM will establish the Reversal Risk Buffer Pool Account in the PACM registry to serve to remediate avoidable and unavoidable reversals in full through cancellation of an equivalent amount of units. In simple terms, the activity participant will be liable for replenishing the buffer in the case of a reversal. It may do so by transferring units from other accounts under its name in the same project or acquire units in the market. The SBM also continues to investigate other approaches for increasing resilience of the buffer.
Avoidable vs. Unavoidable Reversals
The Standard for Removals differentiates between avoidable and unavoidable reversals, recognizing that certain reversals are out of the control of an activity participant, including due to the factors of climate change itself. The activity participant should conduct a risk analysis that takes into account unavoidable reversals (and deposit respective units into the buffer discussed above).
In addition to the standards that made headlines at COP29, the SBM adopted two other important instruments earlier this year, the Sustainable Development Tool and the procedure for appeals.
The Sustainable Development Tool creates a safeguard ratification system, which is a set of mandatory requirements before issuance of an emission reduction unit.
The SD Tool is divided into three key sections:
PACM participants are required to identify, evaluate, avoid, minimize, and mitigate potential risk associated with their activities. They also need to monitor their activities against specific indicators developed through the environmental and social safeguards.
The Appeals Procedure is an administrative tool that allows for appeals against a decision of the SBM or for the submission of grievances by those affected by an activity (including by affected individuals, communities, or businesses). It creates a framework of responsibility for both governing bodies and participants. The outcome may lead to, among other things, suspension or cancellation of A6.4ERs units.
COP29 made history by adopting new international standards. While the PACM offers much potential for global carbon market growth, to become fully operational it will need to have its own methodologies, registry, and third-party auditors, known as the “designated operational entities.”
Once established, the PACM will interact (and potentially integrate) with compliance carbon markets (such as the EU’s Emissions Trading System (the EU ETS)) and voluntary carbon markets. The EU has just given the final green light to a regulation establishing the first EU-level certification framework for permanent carbon removals, carbon farming, and carbon storage in products (CRCF). This voluntary framework will facilitate and encourage high-quality carbon removal in the EU as a complement to sustained emission reductions.
By 2026, the EU will assess the possibility of including permanent carbon removals in the EU ETS. It remains to be seen whether the EU will look into potentially integrating A6.4ERs from the PACM into its system, including the CRCF and, at a later stage, the EU ETS, allowing European companies to offset some emissions through global projects.
In the United States, the Carbon Dioxide Removal Investment Act has been just introduced into the US Senate, which proposes a new tax credit to incentivize the US carbon removal industry. The act appears to be tech-neutral (with the main criteria being durability and a net-negative lifecycle assessment for carbon removal projects), which potentially allows the generation of verified carbon credits. Jointly with PACM developments, it may present an opportunity for carbon removal projects in the United States.
The PACM also appears to be in line with the key principles for building high-integrity voluntary carbon markets expressed in the Voluntary Carbon Markets Joint Policy Statement and Principles issued by the United States earlier this year (on which we previously wrote).
Incorporating A6.4ERs into voluntary carbon markets would enhance credibility and integrity of voluntary carbon markets. To maximize their project value, voluntary carbon market participants may want to bring their credits in line with the international carbon credits. That being said, not all projects operating in the voluntary carbon markets will be eligible for the PACM due to more stringent requirements such as cumulative additionality. Further, the flexibility and cost efficiency offered by voluntary carbon markets may remain critical for certain market participants.
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