Media attention at this year’s COP centers around relatable issues like the global stocktake showing how far the world lags behind its collective greenhouse gas (GHG) mitigation goal, and the lack of follow-through by rich countries like the US on their financial pledges to help poorer nations. Carbon markets, on the other hand, are not getting much attention because the issues at stake are hard to explain to the general public. This is due in part to the fact that the 2021 COP in Scotland made huge progress on markets, making it seem like that area of the talks is “settled:” after many years of stalemate on the issue, parties at COP26 finally came up with rules for how they can trade mitigation units to get the world more collective “bang for its buck” on fighting climate change. They fleshed out Article 6.2 of the Paris Agreement, which lays out how countries can do this bilaterally, as well as Article 6.4’s global offsetting mechanism similar to (but stricter than) the CDM under the Kyoto Protocol – see our explanation of these in the pre-COP series parts 1 and 2 

Since then, countries have been moving forward with bilateral deals in which one country pays for emission reduction in another country and gets credit for it, while the recipient nation benefits from the foreign investment involved – and the Supervisory Body of the new 6.4 mechanism has been setting up that program’s structure, albeit very slowly since decisions require consensus among disparate country interests. Adding to the impression of progress on markets, countries tend to reveal grand international initiatives at the COP where they will get more publicity: high-profile bilateral deals to trade mitigation units (mostly with rich countries sponsoring green investment in poorer nations) are being announced left and right in Dubai, and the Article 6.4 Supervisory Body settled on recommendations for parties to adopt at the COP just days before it started.

However, things are in fact far from settled: precisely because a general framework for trading carbon now 

, parties are at odds over how to actually carry out the very transactions it is meant to enable. The many cooperative endeavors under Article 6.2, such as Switzerland paying for rice to be grown with fewer GHG emissions in Ghana and claiming the resulting mitigation credit toward its NDC (while Ghana foregoes that amount of mitigation in its NDC tally but gains investment in its agriculture sector), can’t be realized until parties decide what accounting procedures and registry infrastructure will be used. All the high-profile carbon deals being announced mean nothing until parties agree on the nitty-gritty of transactions – and currently they are at odds over those details.

Flying under the radar screen of most COP-watchers is the hidden controversy around the un-sexy details of making carbon markets happen. The decisions from COP26 laid the foundation for tracking Internationally Transferred Mitigation Outcomes (ITMOs, the units parties transact under Article 6) through 

, as well as comprehensive reporting by countries about the 

 of their transactions – the latter includes an initial report describing the country’s approach towards international carbon markets, annual reports on ITMO transactions, and international expert reviews of those reports. COP27 in Egypt further refined important elements of this overall “rulebook,” including the use of registries, establishment of a transparency platform to store information reported by countries, guidelines for the international 

 of that information in relation to Article 6, and outlines for how the above-mentioned initial reports should be structured.

But there is no consensus on the real-life implementation of these elements. Two schools of thought dominate on ITMO registries, for instance. The EU, Japan, New Zealand and an alliance of Latin American and Caribbean countries known as AILAC, favor ‘transactional’ registries that enable the transfer of ITMOs and would be centralized within the UNFCCC. Other parties, including the US, prefer ‘non-transactional’ ITMO registries that simply compile information on transactions that occur in existing registries already in use in voluntary markets. The former group views the latter option as weak and subject to fraud/manipulation given the unregulated nature of voluntary carbon market transactions. Until parties settle on a registry structure, transactions simply can’t take place.

A much bigger conflict rages over the term 

, both in terms of what exactly it means and when/for what it is required. The rules adopted in Scotland lay out that the act of 

 a unit of climate change mitigation is what makes it an ITMO – a party (government) authorizes an issued mitigation unit for use either toward another government’s Paris target or for other purposes. If the ITMO is authorized for use by another country, it requires a corresponding adjustment to the greenhouse gas tally of the “seller” nation. Corresponding adjustments (see our thorough explanation in 

) ensure that mitigation is not “counted” twice, making it seem like the world has reduced more emissions than it really has. The seller country essentially foregoes that amount of climate change mitigation in its accounting toward its Paris target, as the buyer country is using it toward 

The US considers this act of authorizing a mitigation unit the 

 type of authorization needed, whereas others (the EU, the UK, AILAC, New Zealand, Japan and the group of African nations) want to distinguish between authorizing a cooperative approach in the first place, authorizing the actual ITMOs, and authorizing entities other than governments in the case where units are not being used by a country toward its NDC.

The loose/strict divide between the US and most other parties continues when it comes to the 

 of an authorization, with the EU pushing for a list of minimum contents that parties should provide and/or a standard data structure for ITMO authorizations, whereas the US argues for flexibility because the context of authorizations may differ by country. Again, no carbon trading can actually take place until these questions are decided, since there is no such thing as an ITMO until the act that creates it (authorization) is defined in the text of the agreement.

Further along these lines, parties are at odds over whether (and when) it should be allowed to 

 authorization, essentially invalidating an ITMO and thus removing its ability to count toward the target of any party or entity. This would happen if the emission reduction project in which the mitigation occurred was not accounted for correctly, or fraud was involved. Options abound as to 

 such a revocation should be allowed to occur: never, at any time, only if the ITMO has not been transferred to another party yet, etc. The EU - along with other parties such as Ukraine, Singapore and the UK - 

is on record as opposing revocation of carbon credits under Article 6.2.

The ‘agreed electronic format’ (AEF) is the central element for reporting on ITMOs. Essentially a big data table into which countries report on all ITMO actions, it will form the basis for determining how many corresponding adjustments countries will apply. COP26 finalized a 

 AEF, but UNFCCC technical workshops in April and June 2023 aimed at turning that draft into a workable format revealed lack of agreement on what actions parties think should be required. Some find it necessary to log/trace every single action including authorization, transfer to another party, revocation of authorization (if that exists), use toward the target of another country, use toward other purposes, cancellation, transfer to a non-party entity, etc. Others wish to require fewer actions to be logged, still others favor punting decisions on the format of the AEF to an expert body which will make recommendations to be adopted at a later date…

…and all of these options in turn depend on the definition and timing requirements of 

, since whatever constitutes authorization is one of the main things parties must log in the AEF. Thus, agreement on authorization described above is a prerequisite for creating the AEF, without which in turn no carbon market transactions can be undertaken.

Parties also disagree on the sequencing and timing of the various review processes decided in Egypt last year. 

According to a study on the Dubai negotiations funded by the EU Parliament

, some parties (including the EU and AILAC) want the required external review of the initial report of parties’ ITMO information to be completed 

 that information is submitted. Other parties, including the US, Japan and China argue that holding back submissions to the AEF (assuming it exists) until reviews have been completed slows down the process of transactions and reduces transparency.

Wheeling and dealing: international diplomacy in action

 was published on the third day of the COP – it reflects the state of play going into what will likely be protracted back-and-forth among parties all week. Such drafts – typically created by impartial expert panels – compile all the known preferences of parties as expressed in prior technical meetings. This forms the basis for negotiation, with the “goal” being to whittle down the number of options until the higher-level diplomats who enter the COP in its final days have only a few to choose from. Reducing the number of options happens either because some party convinced another of the benefits of its preferred option, or because a consensus option was found – but often negotiations result in 

 options being put on the table as parties attempt to come up with wording everyone involved can approve of.

Moreover, since the COP follows a format in which “nothing is decided until everything is decided” - meaning one final text is adopted at the end rather than allowing adoption of only individual portions for which agreement could be found - negotiations typically involve diplomatic “horse trading.” Parties might concede on an option in one area of the talks (e.g. loss and damage, or climate finance) if other parties adopt their preferred option on another priority issue. Whether the US ends up adopting text requiring transactional rather than its preferred non-transactional registries under Article 6, for instance, may depend on whether proponents of transactional registries opt for the US preferred position on, e.g. an element of the loss and damage text.

Fault lines among parties around the new mechanism governed by Article 6.4 of the Paris Agreement (see 

 of our pre-COP series), on the other hand, are less complex. The mechanism’s Supervisory Body has spent the past two years distilling options and finalized recommendations for the parties to decide on just ahead of the COP in late November 2023. The lack of consensus around various nitty-gritty options like the mechanism’s registry and definitions of authorization parallel the discussions in the 6.2 negotiating track, and it is still up to the COP parties to decide those. The Supervisory Board itself is made of representatives (many of them former negotiators) from various parties with different interests, such that its work over the past year has resembled COP negotiating sessions in trying to come up with options all parties would be willing to adopt. A working text for 

One issue where parties have the strongest views is whether “emission avoidance” (such as avoided deforestation or REDD activities) should be allowed to generate credits under the mechanism. The EU and UK are on record as opposing emission avoidance, whereas the Philippines have declared it a negotiating priority and the Coalition for Rainforest Nations considers it a red line issue according to

 a tally of positions gathered by information provider CarbonBrief.

Among other issues related to Article 6.4 in need of COP decisions is closure of the Clean Development Mechanism (CDM): with the new Article 6.4 mechanism becoming operational, parties will consider how and when to end the issuance of CDM credits known as CERs, the CDM accreditation system and the operation of the CDM Executive Board.

While Article 6 is not the highlight of this COP, international cooperation is at the very core of the Paris Agreement – so nailing down how that cooperation, in the form of markets set up by Article 6, can take place is critical to the success of a global approach to climate change mitigation. Whether to make use of the market option, however, will always be up to the parties: countries differ in the extent to which their Paris Agreement targets are purely domestic or hinge on access to mitigation options/finance from outside their borders. The global stocktake at the center of this COP, which assesses how on track countries are to meeting the collective target, will shed some light on the appetite for markets going forward. It reveals how much tighter the “next generation” of commitments (countries’ next round of mitigation pledges or NDCs, due by 2025) will need to be in order to achieve the collective target. Given the too-slow speed of decarbonization shown by the first stocktake, increased use of the market mechanisms Article 6 provides for looks likely.

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When it comes to carbon markets, various parties and negotiating coalitions have different interests. Within the specific portion of the Paris Agreement related to carbon trading (its Article 6), negotiators at COP28 are haggling over what seems like technicalities related to accounting and bureaucratic infrastructure – but these are actually key factors determining whether and how carbon market transactions can even occur. We explain the crucial aspects of Article 6 that the world’s climate diplomats are currently trying to agree on, why they matter, and who wants what.

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Carbon markets: who wants what at COP28?

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