With the next annual global climate summit a month away, we assess where developments in international carbon markets stand going into the upcoming round of talks. What progress has been made since last year on trading of emission reduction units among countries, under the UN global market mechanism, and in the voluntary market – and what can we expect for carbon trading at COP28?

By “carbon trading,” we mean anything that involves quantifying amounts of climate change mitigation in tonnes and exchanging ownership or “credit” for it against money or investment.

 of this series looks at government-to-government transactions of mitigation units under Article 6.2 of the Paris Agreement since the last COP, and at the development of a mechanism laid out in Article 6.4 of the Paris Agreement.

 of this series looks at voluntary carbon market transactions: how corporate offsetting has been affected by the UNFCCC process and decisions on Article 6.

The significance of Article 6 of the Paris Agreement

The United Nations Framework Convention on Climate Change (

) is the parent treaty to the Paris Agreement, the international climate accord under which almost all countries of the world (

 to the agreement) have pledged to mitigate climate change in their own way.

Those pledges are called nationally determined contributions (

) to global climate change mitigation, and every Party has one – as per the Paris Agreement’s own rules, those NDCs must be “strengthened,” i.e. made more ambitious going forward, in order to reduce global greenhouse gas output collectively to ensure that average global temperatures don’t rise more than 1.5 degrees Celsius. The annual Conference of the Parties (COP) is where countries negotiate how that is done: this year’s COP will be held in December in the city of Dubai in the United Arab Emirates (UAE).

 is where carbon trading comes in: since reducing greenhouse gases has the same (positive) effect no matter 

 it is done, it makes sense to do more of it where it is cheapest. The Paris Agreement offers options for parties in whose jurisdiction cutting emissions is expensive to pay for that emissions cutting to be done where it is cheaper. Global climate change mitigation is thereby cheaper overall, meaning (hopefully) that more net mitigation can be achieved for the same net cost.

The part of the Paris Agreement governing this 

 reducing emissions) is its Article 6. Carbon market stakeholders track developments around that part of the accord especially closely, as the “rules” laid out in 

 largely determine how carbon transactions work worldwide – in regional/domestic carbon markets or among corporate entities buying carbon credits or offsets in the voluntary market (VCM).

Though Article 6 has been around since the Paris Agreement was decided in 2015, negotiators could not agree on its details for years, leaving carbon trading activity and various domestic and voluntary markets to develop without UN guidance for the better part of the last decade. The 2021 COP in Glasgow finally resulted in more concrete rules under Article 6, such that stakeholders have been looking to align carbon trading activities (including some regional emission trading systems as well as corporate carbon credit trading) around its decisions over the past two years. Last year’s COP in Egypt saw little progress on further details. The challenge (and controversy) is over how to fairly 

 various parties’ role in mitigation: parties must decide how to attribute “credit” for greenhouse gas reductions to the entities whose jurisdiction those reductions happen in, as well as the entities who are paying for those reductions.

The trickiest issue: corresponding adjustments

When one party pays for mitigation in another, and both parties have a self-designated mitigation target under the Paris Agreement, only 

 that mitigation toward its target. Thus, a corresponding adjustment (CA) is the act of foregoing “credit” toward emission reduction goals or “progress” toward a country’s NDC if that amount of mitigation was sold to the buyer country. The country in which the mitigation took place (the “host country”) subtracts the amount of mitigation sold from its GHG inventory and from its tally toward the emission reduction target it pledged under the Paris Agreement – it must forego that amount of mitigation credit so as not to “double count” it at the global level.

How a CA will actually be performed is still being worked out though, confounded by the problem that parties express their Paris targets in different terms: some countries have a quantified emission reduction target from a certain base year, to be achieved in a certain timeframe. In this case the host country would 

 subtract those tonnes of reduction sold to another country from its own emission tally, since the buyer country is applying those toward its own target.

But many parties have NDCs expressed not as numerical GHG targets in tonnes with base and target year timeframes. Some instead have a target quantity of renewables penetration or an acreage amount of reforestation – these do not come with a concrete GHG tonnage estimate and therefore can’t be “foregone” in the accounting toward the NDC.

One priority that sets the upcoming COP apart from those of previous years is that it concludes the two-year “global stocktake” process required by the Paris Agreement. In requiring each party to set its own NDC, and requiring that NDC to be continually strengthened, the accord also established a way for parties to hold themselves accountable. Countries agreed to regularly report on and review their individual efforts and to take stock of their collective progress in a five-year cycle known as the global stocktake. The idea is that governments see what they have achieved so far in implementing their climate plans, identify what still needs to be done to meet their targets, and find opportunities to increase their mitigation ambition.

of NDCs confirmed that the NDCs are collectively 

 enough to limit global temperature rise – in fact even if they are all implemented fully, the planet will still face average temperature increases of 2.7 degrees Celsius by the end of the century. The carbon market implications of this are that nations interested in using cooperative approaches to cut their emissions may seek to do so to an even higher degree than originally foreseen, as they need “every tool in the box” to reach their targets. We expect more announcements by parties to the Paris Agreement regarding plans to apply the cooperative measures Article 6 enshrines.

This is timely, as the “action” around Article 6 is moving from theory to practice – albeit too slowly for most stakeholders. While previous UN meetings were devoted to getting the architecture of cooperation right (so that countries can even engage in cooperative approaches, in the first place) parties are now actually starting to use that architecture and apply those rules with transactions of Internationally Transferable Mitigation Outcomes (“ITMOs” in UN-lingo) - we expect more of that going forward.

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We look at how we got to carbon markets under the UN in the first place with an overview of the Paris Agreement’s Article 6, which details how parties can exchange units of climate change mitigation in order to maximize greenhouse gas reductions at least net cost.

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The pre COP28 series Part 1: The UN and international carbon markets – how did we get here?

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