Carbon trading is a practice in which carbon credits – representing the removal of atmospheric CO2, such as through tree-planting initiatives or carbon capture – are bought and sold. At its most effective, it allows countries, companies and other parties to optimize their resources and accelerate climate action. It is estimated that carbon trading could cut the cost of countries meeting their decarbonization targets – 'nationally determined contributions', or NDCs – in half. That equates to approximately $250bn a year in 2030.
What is Article 6?
Future carbon trading will be based on Article 6 of the Paris Agreement. This raises current carbon markets – in large part developed by private actors on an ad hoc basis – into the arena of international governance. Most importantly, it allows nations to cooperate, buying and selling Internationally Transferred Mitigation Outcomes (ITMOs), to help fulfil decarbonization targets set out in their nationally determined contributions (NDCs) to reduce greenhouse gas emissions. For example, if one country is struggling to meet its NDCs, it would, under Article 6, have the option of 'buying' emissions reductions from a country that might have already exceeded its own targets.
Article 6.2 creates the basis for an international carbon market by allowing bilateral trade of ITMOs between countries. Meanwhile, Article 6.4 – which is intended as a replacement for the Kyoto Protocol's Clean Development Mechanism – establishes a central mechanism for multilateral carbon trading under the supervision of a UN entity.
First steps under Article 6
After years of discussion, Article 6 was finalized and adopted at COP26 in Glasgow in 2021 in a leap forward for carbon trading. This means that it is now possible for countries to form bilateral deals to buy ITMOs under Article 6.2.
Switzerland was the first country to take advantage of Article 6. It has confirmed it will purchase ITMOs from Ghana and Vanuatu. The proceeds will go towards sustainability projects, including the training of thousands of Ghanaian rice farmers in sustainable agriculture, and the extension of affordable electricity generated by renewables in Vanuatu – a demonstration of how ITMO sales can provide climate finance for developing nations.
At COP27 in Egypt, the Japanese government launched the Paris Agreement Article 6 Implementation Partnership, which aims to develop 'high integrity' carbon markets. Japan has a wealth of experience in international carbon trading, having previously struck many bilateral deals under its own Joint Crediting Mechanism, including with Ethiopia, Kenya, the Maldives and the Philippines. The new partnership's work will include developing methodologies, conducting training for Article 6 reporting, and sharing best practices. At the time of the announcement, 40 countries and 23 institutions had pledged to participate.
The devil is in the detail
Although simple enough in principle, Article 6 is among the more contentious aspects of international climate cooperation. The basic rules were finalized in 2021, but some important details – particularly regarding implementation – were back on the table at COP27.
There are many issues still to resolve, including the thorny question of how to ensure that carbon credits effectively represent the removal of atmospheric CO2. For instance, there are concerns around whether Article 6 is worded sufficiently strongly enough to prevent 'double counting' – a long-running issue in carbon trading. There are also worries that the carbon market established by Article 6.4 might not contribute as much to decarbonization as hoped, particularly given the mixed record of the Clean Development Mechanism it is intended to replace. Commentators also drew attention to the alleged lack of transparency around carbon trading rules.
COP27 saw some progress for carbon trading, such as with Japan's launch of the Implementation Partnership, but talks regarding Article 6 at the conference were slow and inconclusive. There were failures to reach consensus over issues such as the extent to which records of national carbon trades may be open to external scrutiny.
Therefore, key decisions have been pushed back to COP28, leaving many concerns unaddressed. In particular, the complexity of Article 6.4 means some questions (such as how to measure emissions reductions) remain unanswered, delaying multilateral trading further.
Article 6 presents a tremendous opportunity to help put climate targets back within reach, while providing finance for developing economies. Policymakers must come to COP28 determined to seize this opportunity at last.