Pragmatism vs principle: Carbon markets as a response to the EU’s CBAM

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Key points:

  • The EU’s Carbon Border Adjustment Mechanism (CBAM) is primarily designed to prevent carbon leakage from the EU by putting a price on the environmental damage caused by carbon emissions in countries which export certain products to the EU. However, it also aims to encourage decarbonisation in countries from which the EU sources its imports.
  • The CBAM’s design encourages exporting countries to develop domestic carbon pricing mechanisms as a way to reduce the fees for goods entering the EU, and keep the revenue from carbon pricing within their own borders.
  • Despite the controversy associated with the CBAM, some of the countries which have been most critical have also made the strategic decision to develop domestic carbon markets – in some cases, explicitly in response to the existence of the CBAM. This could enable millions of euros generated by carbon pricing to be retained in their countries. 
  • On this basis, there is some evidence that the CBAM is encouraging other countries to decarbonise. Should domestic carbon prices reach 50% of the EU’s, exporting countries would retain that portion of the revenue. For India, modelling suggests this would be an annual income of EUR 676 million, China would retain EUR 506 million and Brazil would gain EUR 143 million.

Rationale behind the CBAM

The EU’s Carbon Border Adjustment Mechanism (CBAM) imposes a levy on certain imports into the EU based on the level of carbon emissions associated with their production. It has faced criticism from various countries, particularly developing and emerging economies, which view it as a protectionist trade barrier.

The design of the CBAM is rooted in the principle that the polluter should pay for the environmental damage that they cause. Within the EU, this principle is already embodied in the Emissions Trading Scheme (ETS), which caps emissions from business and industry in line with the EU’s climate targets. Industrial installations have allowances to emit certain levels of greenhouse gases, and if they exceed their limit they must buy allowances from other ETS participants that have a surplus. This market establishes a price for carbon emissions within the EU.

Some emissions allowances in the ETS are currently allocated free of charge to certain installations which are deemed to be most at risk of carbon leakage by moving production to other countries with less stringent regulations and consequently higher emissions. The impetus for the CBAM was to reduce this free allocation but still ensure that EU businesses compete on a level playing field for carbon pricing with goods imported into the EU. 

CBAM is currently in a transitional phase which allows both the European Commission and EU importers to learn how the reporting mechanism will work in practice. From the beginning of 2026, EU importers of goods covered by the CBAM will be required to buy CBAM certificates matching the embodied carbon in the goods they import.

How CBAM prices carbon

The certificates will be priced to reflect the cost of allowances (European Emission Allowances – EUAs) in the EU ETS. This ensures that the carbon price on goods imported into the EU is the same as the carbon price of goods produced inside the EU.

At the moment, the CBAM applies to the highest-emitting industrial sectors: cement, aluminium, fertilisers, iron and steel, hydrogen and electricity. The number of sectors covered may be extended to others at risk of carbon leakage once the European Commission has reviewed performance in the transitional Period. The European Commission is also currently considering expanding CBAM’s scope to downstream products used in manufacturing processes.

While the CBAM was primarily designed to address carbon leakage, it is also intended to encourage decarbonisation in other countries. The mechanism is designed to avoid the double pricing of carbon, so if a certain price for embedded carbon in the goods has been paid in the country of production, this will be deducted from the total number of CBAM certificates that need to be presented. 

The total cost of the CBAM for importers is therefore: (embedded emissions × EUA price) – (embedded emissions × carbon price paid in exporting country).

This framework, in theory, provides incentives for exporting countries to establish a domestic carbon pricing regime. The primary reason is that this should limit the impact of the CBAM on exporting countries because the domestic cost of carbon in the exporting country will be deducted from total CBAM costs. Additionally, it would also allow the exporting country to retain the revenues resulting from its own carbon pricing regime rather than allowing these revenues to be collected by the EU.

International reactions to CBAM

The introduction of CBAM has ignited debate about how to align trade and climate goals, and concentrated attention on countries’ reactions to the measure. While the EU frames CBAM as a climate measure, other countries have concentrated on the trade impacts it will have.  

The principle behind the measure has received widespread criticism outside the EU, focused on two main areas:

  • The impact that CBAM might have on global trade. The BRICS countries have been particularly hostile.1There are currently 11 BRICS countries: Brazil, Russia, India, China, South Africa, Saudi Arabia, Egypt, United Arab Emirates, Ethiopia, Indonesia and Iran. The 2025 Rio de Janeiro Declaration called it “unilateral and discriminatory”, and Russia filed a complaint to the World Trade Organisation on the grounds that CBAM breaches trade agreements.
  • The impacts of the levy on developing countries with limited resources to reduce the carbon intensity of their exports to the EU. This has raised the issue of climate injustice, given that the levy is being introduced by a region where economic development was based on the use of fossil fuels.

However, in tandem with these criticisms, it is also evident that some countries are developing their own domestic carbon pricing mechanisms to reduce exposure to CBAM costs. This is a pragmatic response to the reality of the CBAM’s operation and a recognition that its design means that while a carbon price must be paid, the revenues generated by carbon pricing can be kept in the exporting country rather than paid into the EU as CBAM fees. The countries introducing their own carbon pricing mechanisms include some of the BRICS countries which have also been vocal critics.

Most of these planned carbon markets have been explicitly linked to the CBAM, providing some evidence that the EU’s aim of using the mechanism to encourage decarbonisation elsewhere is at least partially being realised.

Developing domestic carbon trading

An increasing number of countries are developing carbon pricing mechanisms, whether in the form of a tax or an emissions trading scheme. There are at least 80 carbon pricing schemes in place around the world, with others being developed.2Other countries are also considering introducing their own Border Carbon Adjustment mechanism. These include Australia, Canada, Norway, Taiwan and the UK.  This section outlines a number of carbon pricing schemes that have been proposed since the introduction of the CBAM, several of which are linked directly to its introduction.

Brazil

The Brazilian Emissions Trading Scheme (SBCE) became law at the end of 2024 and is scheduled to begin operating around 2030. Although the mechanism will be based on international models of cap-and-trade systems, it will also include provisions to share any benefits more equitably with traditional communities.

As well as reducing emissions, the goal of the trading scheme is to mitigate the barriers to trade that might result from border carbon adjustments such as the CBAM.

Brazil has also proposed establishing the Open Coalition for Carbon Market Integration, aiming to link carbon trading schemes internationally. The coalition would have a shared carbon emissions cap, with explicit provisions to help fund decarbonisation in countries with fewer financial resources. This is intended to support a just transition and address issues of equity associated with the unilateral nature of the CBAM. Brazil’s proposal will be one of the key focuses of discussion at COP30.

China

China led opposition to CBAM at COP29. Despite this, it has taken a strategic decision to expand the scope of its existing carbon market scheme from the power sector to include industries included in the EU CBAM such as cement, steel and aluminium.

India

Given the high level of exports of iron and steel to the EU, India is one of the most exposed countries to the CBAM. It established the Carbon Credit Trading Scheme in 2024 and is expected to begin operating in 2026. It will initially cover nine sectors, including those which are part of the CBAM. 

Despite its opposition to the CBAM, India has also been negotiating with the EU to manage its impact on India’s exporters. Cooperation on the development of India’s carbon pricing to enable exporters  – including small businesses – to reduce the impact of CBAM was explicitly included in the new strategic EU-India agenda announced in September 2025.

Indonesia

The Indonesian Economic Value of Carbon Trading Scheme began operating in 2023. Initially, it only covers the power sector, but it is eventually intended to increase its scope to other sectors, including those currently covered by the CBAM.

Taiwan

Taiwan introduced a carbon tax in January 2025. This scheme allows limited trading of permits from voluntary actions to reduce emissions. However, the government plans to establish an emissions trading scheme by the end of 2026. This shift to an emissions trading scheme is a direct response to the introduction of the CBAM. 

Vietnam

In August 2025 Vietnam expanded its emissions trading to thermal power plants and the iron, steel and cement industries. After an initial phase of operation, the scope of the trading mechanism will be expanded to other sectors between 2027 and 2030. The scheme was developed explicitly to help address the potential costs of the CBAM.

Others

Turkey, Malaysia and Serbia are also putting carbon pricing measures in place as a way of reducing exposure to CBAM costs. Both Turkey and Malaysia have explicitly linked the measures to the implementation of CBAM.3Page 26.

What these new markets mean for countries’ exposure to the CBAM

Modelling of the impact of CBAM with and without domestic carbon pricing highlights the economic gains that stand to be made from this pragmatic response to the CBAM’s implementation. As an example, if the domestic carbon price is set at 50% of the EU’s EUA price, then border fees are roughly halved and the revenues from the carbon pricing mechanism remain in the exporting country. If domestic carbon prices are set at an equivalent level to EUA prices, then CBAM costs are effectively removed.

Figure 1 illustrates the impacts on some countries that have specifically linked the development of domestic carbon markets to the introduction of the CBAM.

Figure 1

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    There are currently 11 BRICS countries: Brazil, Russia, India, China, South Africa, Saudi Arabia, Egypt, United Arab Emirates, Ethiopia, Indonesia and Iran.
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    Other countries are also considering introducing their own Border Carbon Adjustment mechanism. These include Australia, Canada, Norway, Taiwan and the UK.
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Carbon Border Adjustment Mechanisms require coordinated global action

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Key points:

  • A Carbon Border Adjustment Mechanism (CBAM) charges a tariff on imports based on their emissions. Paired with a domestic carbon price, it aims to prevent carbon leakage – companies moving their emitting activities to other countries – and lead to an overall reduction in emissions. 
  • In 2023, the EU started its CBAM – the first to be implemented globally. This was met with a strong reaction from other countries, such as China, South Africa, India and Brazil, which criticised the mechanism for placing an unfair burden on developing countries and for breaking WTO rules. 
  • The EU CBAM will likely only reduce emissions slightly on top of the EU emissions trading system currently in place. An EU carbon price of USD 88 on all emissions reduces emissions by 21%, and the introduction of the CBAM only adds another 1.3 percentage points. 
  • Modelling suggests that the EU CBAM could cost developing countries USD 10.2 billion, with some countries, like Zimbabwe and India, most exposed.
  • The introduction of the EU CBAM has led to the announcement of more climate and international trade measures worldwide as countries try to limit their exposure to it. Thus far, this has resulted in an uncoordinated and confusing policy landscape. 
  • To ensure that climate and trade policies work to reduce global emissions, they should be aligned with UNFCCC principles and should provide exemptions to avoid placing additional burdens on developing countries.

A Carbon Border Adjustment Mechanism is a carbon tariff on import

A Carbon Border Adjustment Mechanism (CBAM) is a policy that charges a carbon price on certain types of imports based on the amount of carbon emissions associated with their production. 

When paired with domestic carbon pricing, it aims to “level the playing field”: A CBAM aims to ensure that when a carbon price is put in place, the higher prices for carbon-intensive domestic goods do not lead to more imports of cheap, carbon-intensive goods from countries where carbon taxes are not in place. It aims to prevent ‘carbon leakage’, where carbon-intensive activities are moved to another location with less regulation on emissions, instead of being reduced, resulting in no overall decrease in emissions.

In the absence of domestic carbon pricing, a CBAM functions as a border tariff targeting carbon-intensive production and is not likely to contribute to further emissions reductions. 

EU CBAM has sparked discussions on climate and trade

In 2023, the European Union started implementing the EU CBAM, the first to be implemented globally. It is designed to ensure EU policies limiting emissions in specific sectors are not undermined by the import of carbon-intensive goods from outside the EU. The European Union writes that the CBAM also aims to “contribute to the promotion of decarbonisation in third countries.”

This has led to a wide range of reactions from different countries, including the development of new CBAMs and other trade policies, as well as harsh criticism. 

At COP28 in Dubai, countries expressed their concerns over the EU CBAM. There was an attempt by the BASIC group of countries – made up of Brazil, South Africa, India and China – to introduce “unilateral trade measures related to climate change” as a point on the COP agenda, which “could have resulted in an impasse in the climate talks.” The proposal received support from 134 countries, including key developing country negotiating blocs and the G77, but was not included in the final agenda. However, according to E3G developing countries’ sentiment towards CBAM and similar initiatives was included in the COP28 final text: “Unilateral measures should not lead to unjustifiable or arbitrary discrimination or restriction in international trade.”

Throughout 2024 and in the lead-up to COP29, discussions on trade measures and climate policy have ramped up. In June 2024, the BRICS group of countries1The BRICS group of countries is made up of Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia and the United Arab Emirates. released a statement condemning the introduction of trade policies “under the pretext of environmental concerns,” such as “unilateral and discriminatory” CBAMs. This statement was also included in the declaration for the BRICS Summit in October 2024.

Additionally, the BASIC group, chaired this year by China, is again pushing to have trade agreements on the agenda at COP as a separate agenda item, potentially resulting in disputes over trade stalling climate negotiations.

Application of the EU CBAM is ramping up

The EU CBAM was introduced as a component of the European Green Deal, a package of policy initiatives aiming to help the EU reach climate neutrality by 2050. As part of this package, the EU has implemented an emissions trading scheme (ETS), which is a cap-and-trade system to reduce emissions by putting a price on carbon. The ETS allocates a specific amount of emissions allowances to different participants in different industries, including electricity producers, heavy industry and intra-EU aviation. Over time, the cap is lowered and the amount of GHGs these industries are allowed to emit is reduced.

Currently, some ETS participants receive free emissions allowances as they are considered exposed to external trade. The allocation of free allowances means these businesses do not have an incentive to reduce their emissions and can even profit from selling their emissions allowances, if, for example, production levels fall. 

The implementation of the EU CBAM is “aligned with the phase-out of free allowances” under the EU ETS, as both moves reduce opportunities for ‘free’ emissions and therefore“support the decarbonisation of EU industry.” It will take until 2034 for the EU CBAM to be fully phased in and for the free allowances to be fully phased out.

The CBAM entered its ‘transitional phase’ on October 1 2023, which will end at the end of 2025. During this time, importers of affected goods are required to report on emissions but nothing will need to be paid for embedded emissions, which refers to the carbon emissions generated in the production of goods. 

From the start of 2026, the ‘definite period’ will begin and importers will have to purchase and “surrender” certificates corresponding to the carbon emissions embedded in imported goods impacted by the mechanism. This will start off as a small obligation, with businesses only needing to purchase certificates equivalent to 2.5% of their emissions in 2026, and will gradually be ratcheted up to cover 100% of emissions in 2034.

At first, the CBAM will apply to imports “whose production is carbon intensive and at most significant risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen.” When the CBAM is fully phased-in, this will account for over 50% of emissions in sectors covered by the ETS. It is also expected that the number of industries included in the CBAM will expand following further assessment to include, for example, ceramics and paper industries. 

The complexity of global trade interlinkages and national policies means that the understanding of what exactly the CBAM would mean is varied and impacts are not always well understood. While a resolution adopted by the European Parliament “stresses that Least Developed Countries and Small Island Developing States should be given special treatment” as the CBAM could potentially impact their development, current CBAM regulation does not provide exemptions from the mechanism for any developing countries.

The EU CBAM is projected to only slightly reduce emissions

The EU CBAM is anticipated to slightly reduce emissions when implemented in alignment with a domestic carbon price. 

A 2021 study conducted by UNCTAD estimated that a carbon price set at USD 88 per tonne of carbon would result in CO2 emissions being reduced in the EU by 704 million tonnes. A CBAM implemented on top of this would reduce emissions outside the EU by 59 million tonnes, but would increase emissions in the EU by 13 million tonnes – a net reduction in emissions of just 45 million tonnes. Therefore, a CBAM results only in a slightly improved overall emissions reduction – equivalent to 6% of the emissions reductions from the carbon pricing mechanisms itself. While an EU carbon price of USD 88 reduces global emissions by 21%, the introduction of the CBAM only adds another 1.3 percentage points.

However, at the same carbon price, a CBAM would reduce carbon leakage by more than half (55%), from 15.1% when only carbon pricing is used to 6.9% when a CBAM is in place. 

Other studies have shown similarly modest reductions in emissions:

  • The Asian Development Bank (ADB) calculated that implementing both the ETS and CBAM with a 100 euro carbon price would reduce global carbon emissions by 1.26%, with the CBAM contributing approximately 0.2% of these emissions reductions, and this would be accompanied by a 0.4% reduction in global exports to the EU. 
  • The African Climate Foundation and the London School of Economics (LSE) calculated that, with a carbon price of 87 euros covering all products, a CBAM would only result in a 0.002% additional reduction in global carbon emissions. This suggests that a CBAM encourages a shift in carbon-intensive production between countries more than it encourages an overall reduction in emissions.
  • The European Commission estimated in 2021 that its initial proposed CBAM design would reduce emissions from affected EU industries by 1% by 2030, while global emissions from these industries would be cut by 0.4% over the same timeframe.
  • A 2009 study by the Brookings Institution and Syracuse University found that any emissions reduction resulting from a CBAM would occur not by incentivising the trade of less carbon-intensive goods, but primarily due to decreased international trade.

In the studies above, estimates of overall global emissions reductions do not consider the knock-on benefits from a CBAM, such as incentivising clean energy investment.

Projected economic impact of the EU CBAM

A fully implemented CBAM should incentivise investment in emissions reductions for carbon-intensive exporters, so they are not required to pay as high tariffs at the EU border. Additionally, it allows exporters whose production of goods is relatively ‘cleaner’ or less carbon-intensive to capture higher margins.  

Based on current emissions intensities, the World Bank’s Relative CBAM Exposure Index shows that Zimbabwe, Ukraine, Georgia, Mozambique and India will be the countries most exposed to the CBAM. Countries such as the US, Australia and the UK will likely have little-to-no exposure to the CBAM. Some countries, such as Colombia and Albania, are anticipated to gain more competitiveness as they produce products covered by CBAM in a way that is cleaner than the EU average.

Figure 1. Countries most and least exposed to the EU CBAM
Source: World Bank, 2023

The 2021 UNCTAD study highlighted that developing countries could lose USD 10.2 billion in income due to the implementation of the EU CBAM. Non-EU countries are anticipated to lose USD 14.2 billion, while the EU gains USD 5.9 billion. Overall, there is a net income loss of USD 8.3 billion. 

Anticipated impacts in other regions include:

Ultimately CBAM’s impact on other economies will depend on how other players globally respond to its implementation. The more countries decarbonise their exports to the EU, the less they will feel its impacts and the greater their margins. Some countries are already considering carbon pricing and other mechanisms that will reduce their exposure to the CBAM.

Announcement of the CBAM has sparked strong reactions 

While the EU supports the introduction of the CBAM as a mechanism to increase climate ambition both within and outside the EU, not all countries share this perspective. 

The CBAM has been perceived as a protectionist measure, particularly by the African negotiating group and BRICS. Criticisms have focused on two areas: the EU CBAM possibly being in violation of World Trade Organization (WTO) rules and burdening developing countries. 

While the EU CBAM has been designed to be compliant with WTO rules, not all countries agree. Countries such as China, Brazil, India and South Africa have criticised the EU CBAM at international fora, including the WTO, for being a unilateral measure – the EU intends to implement it independently and “without requiring consensus or agreement from other countries.” 

India’s Finance Minister Nirmala Sitharaman has denounced the CBAM as a “trade barrier”. Brazil has strongly opposed the policy due to it being “discriminatory” and has warned that it may hamper global climate efforts. However, the EU is “confident the measure would survive a possible challenge at the World Trade Organization because it applies to domestic producers as well imports,” according to the Financial Times.

Developing countries have argued that they are disproportionately burdened by the CBAM, hindering economic growth and “further take[ing] away the ability of developing countries to finance decarbonisation”. As a major exporter, China also strongly opposes the policy. The EU CBAM will expose a lot of Chinese exports to tariffs and it is likely that “similar measures from other countries including the US, UK, Canada and Japan may amplify the exposure of Chinese exports to border adjustment taxes.”

The domino effect

The introduction of the EU CBAM has triggered, both directly and indirectly, a cascade of carbon pricing announcements from other countries. Countries are aiming to reduce their exposure to the CBAM by introducing their own carbon pricing mechanisms and incentivising the production of less carbon-intensive products.

Resources for the Future wrote that implementation of a CBAM could “lead to a virtuous cycle, where more and more countries adopt carbon pricing”. 

The carbon taxes and emissions trading schemes currently in effect worldwide cover almost a quarter of all global emissions. As of September 2024, there were “78 different carbon pricing and taxation mechanisms in the world,” according to WTO Director-General Ngozi Okonjo-Iweala. Between 2009 and 2022, the WTO was notified of over 5500 trade measures linked to climate objectives.

Box 1. Policy responses to the EU CBAM

United Kingdom

In October 2024, the UK government confirmed that it will introduce a CBAM for some sectors from January 2027, with the primary aim of addressing the risk of carbon leakage. The UK CBAM will operate similarly to the EU CBAM but with some differences in the sectors covered. For example, the UK CBAM will not cover imported electricity. 

There have been calls for better alignment with the EU CBAM, “suggesting that this would reduce the economic risk to the UK.” Already the UK steel and energy industry has successfully demanded the UK government align EU and UK mechanisms more closely following the closure of Port Talbot steel works in 2024. 

United States

There has been ongoing debate in the US about potentially implementing a CBAM. However, without a unified domestic carbon pricing mechanism a CBAM would not be able to accurately reflect the emissions-related costs borne by US producers. Without carbon pricing, it would likely only work as a tariff costing foreign exporting countries without requiring domestic producers pay the same fees – therefore not contributing to overall emissions reductions. 

There has been much activity in Congress focused on implementing a CBA-like mechanism. Multiple bills to enact a US version of a CBAM have been introduced, including the Republican-endorsed Foreign Pollution Fee and the Democrat-sponsored Clean Competition Act. Recent statements from Republicans Donald Trump and JD Vance have defended tariffs against dirtier producers to protect US industry. 

Canada

The Canadian government launched a consultation to explore establishing its own CBAM in 2021. 

Australia

In Australia, the government launched a review to assess the potential of a CBAM to prevent carbon leakage. The recommendations are due to be presented before the end of 2024.

Fraying trade relationships between major blocs are driving developed and developing economies to consider their own CBAMs and carbon taxes. The EU has suggested that India consider setting its own carbon price or CBAM to reduce tariff payments to the EU. Malaysia’s Investment, Trade and Industry Ministry has been advised to “think about adopting a carbon tax or carbon pricing more broadly, but also consider adopting its own Malaysian CBAM,” with a pilot in the steel industry.

However, only one of 80 low and lower-middle income countries has implemented a carbon price. Implementing a carbon price could help countries avoid paying higher CBAM fees as exporters will be incentivised to reduce the carbon-intensity of their goods. This raises concerns that they are unprepared for the end of the EU CBAM transition phase in 2025.

Lacking coordination 

The rapid introduction of various carbon pricing mechanisms has so far lacked coordination, resulting in an increasingly confusing global trade landscape. There are also wide disparities in carbon pricing among countries, ranging from as low as  USD 6 per tonne in South Korea to around USD 80 per tonne in the UK and EU in June 2024. 

Governments and stakeholders have expressed concerns that the “evolving patchwork” of national plans could undermine climate action, by fragmenting trade and “fail[ing] to provide businesses with the predictability and assurances they need to drive transformation of production and supply chains.”

The International Institute for Sustainable Development (IISD) warns that because every CBAM regime will be different to comply with national policies, there is a risk that exporters will have to comply with many different requirements, including the measurement, reporting and verification of the carbon embedded in their goods. 

This would make it difficult for developing countries and small producers to meet the high cost of compliance, potentially excluding them from the marketplace. This could restrict international trade, with knock-on impacts for poverty alleviation and sustainable development.

Box 2. Not all CBA mechanisms are made the same

The label ‘CBA’ (carbon border adjustment) can be applied to a wide range of mechanisms. The IISD suggests six key factors in how a CBAM is developed that can greatly affect its potential impact:

  1. Trade scope: Will the tariff be charged only for imports, or also provide rebates for exports? 
  2. Country exceptions: Will there be any tariff exceptions for specific countries, such as developing countries or countries with more ambitious climate policies?
  3. Scope of coverage: Will the mechanism cover only ‘direct’ emissions, or also ‘indirect’ emissions from energy used in the production of products and ‘precursor’ product emissions embodied in imported CBAM goods? 
  4. Carbon accounting methodologies: How will the carbon intensity of products be measured and defined?
  5. Credit for foreign action: If a foreign producer is already subject to a carbon price or climate-related fee in their own country, will this be considered and compensated for?
  6. Use of revenues: How will the funds generated from the CBAM be used? Sending the money back sends a strong signal that the regime was not about protecting domestic producers and could compensate for the need for compliance.

A CBA mechanism would need to be designed to complement distinct national policies, as well as inevitable costs for foreign producers arising even in the “most thoughtfully crafted BCA regime.”

Moving discussions on climate and trade forward

As in previous years, trade-related climate measures are likely to be brought up during discussions at COP29, as countries express their differing views. 

There is a need to create a clearer understanding of the impacts of implementing the EU CBAM, as well as other potential climate and trade measures. International cooperation can help set agreed on principles and best practices for the development of CBA mechanisms, helping to prevent future trade frictions. Without a unifying trade-climate framework, this will lead to prohibitively high costs that disproportionately burden the poorest countries and smaller firms.

Climate and trade goals can be aligned in a way that prioritises fair economic relations and embodies the UNFCCC principles, including “common but differentiated responsibilities and respective capabilities and their social and economic conditions.”

The WTO released a report in October 2024 that outlines “pathways for coordinated approaches on climate action, carbon pricing, and the cross-border effects of climate change mitigation policies with a view to achieving global climate goals.” The International Chamber of Commerce (ICC) has also released a set of “global principles” to guide countries in introducing their own CBAMs and avoid disjointed mechanisms. The principles highlight that CBAMs should support Paris Agreement goals as “the primary objective,” ensure WTO compliance, respect UNFCCCC and Paris Agreement Principles, and provide targeted exemptions for most vulnerable countries. 

Existing and future climate finance commitments and obligations need to be met to enable developing countries to bear the costs of decarbonisation and compliance with CBA mechanisms. A key moment during COP will be discussions on the New Collective Quantified Goal on Climate Finance (NCQG), which has the potential to unlock trillions in critically-needed climate financing for developing countries.

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    The BRICS group of countries is made up of Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia and the United Arab Emirates.

Article 6 of the Paris Agreement at COP29: What is at stake?

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Key points:

  • Article 6 (A6) is a key component of the Paris Agreement. It aims to finalise the rules on how countries can use UN-governed carbon markets to reduce their emissions and reach their climate targets. 
  • Negotiations have been drawn out over multiple years and the resulting lack of clarity means that A6 is already being misused. Competing objectives mean that instead of helping to slow climate change, A6 could in fact let countries get away with making inadequate emissions cuts.
  • Making progress on A6 has been highlighted as a priority by the COP29 Presidency. While the topline rules have been largely agreed upon, with some progress made during 2024, several key details are still under discussion. 
  • Sticking points for COP29 negotiations are likely to include ensuring transparency in credit trading and review processes, implementing strong methodology requirements that prevent the inclusion of low-integrity carbon credits and developing robust guidelines to prevent human rights abuse and fraud.  
  • There are reports that decisions on Article 6.4 will be pushed through early in Baku, but countries may still be able to request changes to the mandate of the Supervisory Body, which governs A6.4 implementation, to provide more specific guidelines in how the Body operates. 
  • In light of the scrutiny over carbon markets, non-market approaches to financing nature may also attract more attention at COP29.
  • Decisions made are also likely to influence the voluntary carbon market, particularly those regarding double counting and carbon removals.
Update: Progress on A6 at COP29

Since this briefing was published, the operational standards on A6.4 were pushed through for adoption on the first day of COP29. Parties at COP29 will still need to agree on other issues before Article 6.4 is completely operationalised, including rules for the authorisation, transparency and reporting of carbon credits and deciding on how different carbon credit registries will function.

The decision to address the issue so early in the conference has been criticised, as it meant countries and observers did not have much time to consider and debate the issue. Isa Mulder of Carbon Market Watch said that “Kicking off COP29 with a backdoor deal on Article 6.4 sets a poor precedent for transparency and proper governance.” 

Last updated 15 November 2024.

What is Article 6? 

A6 is one of the least accessible and most complex articles in the whole Paris Accord. It allows countries to cooperate voluntarily with each other to achieve the emission reduction targets set out in their Nationally Determined Contributions (NDCs) via the transfer of carbon credits. 

A6 sets out two market mechanisms and one non-market mechanism:

Fig. 1: Carbon trading mechanisms under Article 6
Source: Adapted from The Nature Conservancy (2023)
How do carbon markets work?

Carbon markets allow countries and governments to buy and sell emission reduction credits to help them reach climate targets. The underlying principle is fairly straightforward: country A can buy a credit, the money from which pays for country B to restore a rainforest or a natural carbon sink. Country B benefits from receiving funding for its efforts to restore ecosystems, while country A can count that credit towards offsetting its own hard-to-abate emissions and meeting its NDC targets. If the rules are properly defined and implemented, carbon markets can, in theory, unlock additional finance and cut the cost of reducing emissions.

There are two types of carbon markets:

  • Voluntary markets (VCM) are unregulated. They function outside compliance markets and enable companies and individuals to trade carbon credits on a voluntary basis. The credits generated by these markets are not allowed to fulfil compliance market demand, unless they are explicitly accepted into compliance regimes. Unregulated VMCs exist because of companies making voluntary net zero and carbon neutrality claims, often for PR purposes. A6 does not apply directly to voluntary markets but is very likely to influence them (see below).

Offsetting is not the same as reducing emissions

However, the concept of offsetting carbon emissions has faced criticism for being a distraction from emissions reductions. Offsetting is at best a zero-sum game and by design does not reduce emissions: done properly it merely compensates for emissions growth by a reduction elsewhere. If it lacks environmental integrity (i.e. does not result in real emission reductions where it promises to) it leads to an overall increase in emissions. 

The quality of credits has come under fire, with critics pointing out that the majority of offsetting projects are not permanent and do not actually reduce or remove emissions. Nature-based offsets, for example, are vulnerable to climate impacts such as extreme weather and forest fires. 

Credits need to be issued from projects that are ‘additional,’ meaning the reductions would not have occurred without the project. Credits issued from renewable energy projects are no longer seen as ‘additional’ emission reductions, as they are already profitable without relying on revenues from selling credits. 

Reports have also shone a light on the overuse of credits as a way to avoid emissions reductions. Countries and corporates are putting unrealistic demands on offsets, making assumptions that massively overestimate the amount of land available for offset projects.

Why will Article 6 be so important at COP29?

While the framework of A6 – the ‘Article 6 Rulebook’ – was agreed at COP26, slow negotiations at COP27 and COP28 have left key details undefined and open to interpretation. The longer we wait for effective carbon markets – that sell only a small number of high-quality offsets for hard-to-abate emissions – to become a reality, the further we delay essential emissions reductions. The release of the IPCC Sixth Assessment Report in 2023 confirmed that we cannot afford to invest in ineffective solutions. Straightening out the details of A6 could ensure that ineffective offsetting is not allowed. 

Agreeing on the practical details remains one of the main objectives of COP29, with countries and the private sector already gearing up for A6 implementation. The current context for the conference means there are many reasons eyes will be on A6.

The integrity of carbon markets has come under fire

A series of investigations have raised major red flags over the integrity of the voluntary carbon market. An analysis released in 2023 found that 90% of Verra’s rainforest carbon credits do not represent real emission reductions. Additionally, a systematic review of 90% of all carbon offsets in the VCM, estimated that “only 12% of the total volume of existing credits constitute real emissions reductions.” As a result, demand and prices have fallen, particularly for nature-based offsets, and the value of the VCM has shrunk by 61% in the past year alone after peaking in 2022 at over USD 2 billion. 

Corporations have distanced themselves from offsets due to increased scrutiny over credit quality and accusations of greenwashing, as well as crackdowns from regulators on claims of “carbon neutrality”. Developing stringent rules for the global carbon market under A6.4 could set a precedent for high standards and restore faith in carbon trading if paired with regulation to ensure that credits are only used to offset hard-to-abate emissions.

Questions are being raised as to whether, in practice, the use of offsetting aligns with 1.5°C. Setting higher standards and proper review processes that exclude previously issued credits with poor integrity could ensure that a smaller number of high-quality, expensive offsets become the norm, rather than flooding the market with poor-quality credits that undermine 1.5°C. However, even if done perfectly, carbon offsetting is at best a zero-sum game and should only be used to compensate for emissions in hard-to-abate sectors.

Lack of agreement on details means A6 is being misused 

A6.2 has been operationalised and countries can already technically start trading A6.2 credits, despite there still being many details that need ironing out – including crucial review and transparency processes. This has resulted in the announcement of large-scale deals that potentially lack integrity and do not disclose their methodologies. Carbon markets are being pushed as a climate solution and are growing without any regulations or laws, particularly in Africa. 

For example, UAE company Blue Carbon has signed MoUs with eleven countries to gain rights to massive portions of land and develop carbon credits, with only a small proportion of the benefits going back to the government and local communities. The UAE also announced in 2023 that it would buy USD 450 million worth of carbon credits from the African Carbon Markets Initiative, which aims to achieve a 19-fold increase in the size of the African carbon market by 2030.

We are at a crunch point for land 

Demand for land is increasing as high food prices put pressure on increasing production, leading to indigenous land rights abuses, pressure on farmers and unstable ecosystems. NDCs and corporate targets are drastically over-relying on land for mitigation. The Land Gap Report states that to meet the nature-based mitigation pledges in NDCs alone, a land mass almost four times the size of India is needed – and that is before corporate targets are taken into consideration. Improving A6 standards and transparency could help to reduce the burden on land.

Financing for nature is becoming more urgent 

As scrutiny of forest credits grows and emissions avoidance credits are no longer eligible for use under Article 6, negotiations at COP29 may turn towards alternative ways to pay for the protection and restoration of nature – especially in the lead-up to COP30 in Brazil, which is expected to focus on forestry – and alongside ongoing negotiations on financing for nature in the Convention on Biological Diversity. This is essential for adaptation and mitigation – the IPCC estimates that protecting natural forests currently contributes between five to seven billion tonnes of CO2 per year to climate mitigation efforts. 

Initiatives such as the LEAF Coalition aim to bring the public and private sectors together to mobilise funding for tropical forest protection, and similar announcements may follow. However, like other carbon offsetting schemes, these initiatives have raised concerns, including over the threat to indigenous rights and enabling greenwashing. Negotiations on A6.8 – outlining non-market mechanisms for making contributions – can help to answer questions around what the Paris Agreement means for nature, and who pays.

What is REDD+ and how does it relate to Article 6?

REDD+ is a UN financing mechanism, outlined in Article 5 of the Paris Agreement. ‘REDD’ stands for Reducing Emissions from Deforestation and Forest Degradation, while the ‘+’ encompasses additional activities of conservation, sustainable management of forests and enhancement of forest carbon stocks. Under the REDD+ framework, developing countries can receive results-based payments for emissions reductions when they reduce deforestation. 

However, emissions reductions from REDD+ projects should not be treated as carbon credits or be used for offsetting purposes. Reductions are verified under the UNFCCC’s REDD+ Measuring, Reporting and Verification process and are known as REDD+ Result Units or RRUs. To verify RRUs, the UNFCCC requires national-scale accounting and reporting to address leakage and permanence. RRUs are also subject to safeguards.

Ultimately, UN REDD+ projects are only designed to enable the transfer of money to countries engaging in forest-related activities, so the REDD+ framework misses some essential criteria to qualify as a carbon standard. For example, there is no fixed methodology, with countries given freedom in how they measure results.

 REDD in the VCM

RRUs under the REDD+ programme have never been implemented in the UN carbon trading system. However, the accounting methodologies of the VCM standard Verra enable credits from REDD projects to be traded in the VCM. In the VCM, REDD is used to describe the category of projects related to avoided deforestation. 

Verra is the leading provider of REDD credits and had certified over 97 REDD projects, generating 445 million credits as of 2023. Verra provides carbon credit project developers with a large amount of flexibility when estimating emissions reductions, enabling them to choose among several different methodologies to calculate the amount of credits their projects would create. As a result, emissions reductions are often overstated, among other issues, and REDD credits have drawn increasing criticism in recent years. Other major carbon registries, such as the Gold Standard, do not allow the inclusion of REDD activities.

Eligibility of REDD+ credits under Article 6

Some REDD+ activities can be considered for inclusion under A6.4 if they meet the relevant criteria and involve emission reduction and removal – as opposed to emissions avoidance, which are not eligible for use under A6.2 or A6.4. For use under A6.4, the UN’s A6.4 Supervisory Body would have to approve REDD+ related methodologies. However, to be traded as ITMOs under A6.2, countries only need to decide that REDD+ activities meet the criteria under A6.2 – which can be decided nationally.

Some submissions from countries and organisations have already called for REDD+ activities to be included in A6. For example, the Coalition for Rainforest Nations (CfRN), a non-profit and single-issue negotiating block of 50 countries, led by Papua New Guinea and Costa Rica, helped establish the concept of REDD+ in 2005 and is a major proponent of its use. CfRN claims that there are “no legal reasons” that RRUs cannot be used like other carbon credits and traded in global carbon markets. 

The CfRN has promoted the idea of REDD+ “sovereign” credits, where countries are able to sell their UN-verified RRUs from REDD+ projects. The CfRN has already set up a platform where host countries can sell UN-verified RRUs to businesses and individuals on the VCM, called REDD.plus. The platform is completely separate from UN infrastructure.

In 2022, Gabon said it planned to issue 90 million RRUs, citing its right to do so under Article 5 of the Paris Agreement. However, the country failed to find buyers for its credits. Additionally, Xpansiv, the world’s biggest VCM platform, reversed plans to host trading of RRUs in 2023 due to technical reasons and lack of demand.

In September 2023, CfRN launched a for-profit spin-off, called ITMO Ltd., which sells post-2020 RRUs. It has renamed these RRUs as ITMOs, therefore classing them as equivalent to credits traded under A6.2. CfRN has signed MoUs with countries including the Democratic Republic of the Congo, Honduras and Belize to sell their credits through this platform. In August 2024, it supported Suriname in the development of 1.5 million ITMOs, which were back-issued from 2021 through improvements in addressing deforestation and forest degradation. ITMO Ltd. claimed, “These are the world’s first carbon credits from the new Paris Agreement Carbon Markets where countries are allowed to issue and trade their Sovereign Carbon with other countries and the private sector.”

There is not much that can be done to prevent the creation of ITMOs from REDD+ activities, as this is up to countries under A6.2. However, it is possible that there will be no buyers for these low-quality credits, preventing this approach from being used widely. 

Negotiations have progressed slowly since COP28

While the adoption of the Article 6 Rulebook lays out the fundamental rules for how A6.2 and A6.4 are to operate, negotiations over the past few years have been slow, leaving a great deal of work to be done – and the devil lies in the detail. At COP28, lack of consensus on many agenda points meant countries failed to adopt decisions on A6.2 and A6.4. The COP29 President has highlighted that it will be a priority for technical issues around Article 6 to be finally resolved at COP29. 

Parties met at negotiations in Bonn in June 2024 to discuss “crunch issues” for 6.2, “including authorizations, the agreed electronic format, sequencing of reviews and addressing inconsistencies, and registries.”  Generally, there is a divide between countries that want to see more regulation over carbon trading and those that want trading to occur with little oversight. 

Few decisions were made in Bonn, with many core issues to be discussed again in Baku. However, negotiators did approve an appeals and grievance procedure under A6.4. Another positive development is the decision in Bonn that emissions avoidance will not be allowed under either A6.2 or A6.4 and that this will only be reopened for discussion in 2028 – a win for environmental integrity. It is unlikely that they will be included again at this later date. 

The Supervisory Body (SB) for A6.4 also held meetings throughout 2024. As negotiators were not able to reach an agreement on the recommendations put forward by the SB on A6.4 during COP27 and COP28, the SB has taken a different approach for COP29: instead of releasing recommendations on methodology requirements and on activities involving removals for approval by during COP, the SB has converted these into internal SB standards which “procedurally do not require CMA approval”, according to Olga Gassan-zade, member of the A6.4 SB. This approach seeks to avoid the standards being open for line-by-line edits for countries’ approval at COP29. However, countries must still endorse this approach at COP29 and provide guidance if needed.

During pre-COP meetings, the SB agreed upon mandatory environmental and human rights safeguards, which will be enforced through a “sustainable development tool.” The ‘SD Tool’ provides a structured approach for users to conduct a risk assessment, identify and assess potential positive and negative impacts on sustainable development goals, and monitor and report on indicators. 

As in previous years, it is essential that while parties are keen to get things up and running, rushing the negotiation process may jeopardise transparency and proper safeguards for environmental integrity and human rights.

What are the key sticking points for COP29?

Article 6.2 (bilateral trading between countries)

While ITMOs are already being traded, there are still some key elements that need to be agreed upon to ensure the functioning and integrity of trading. The bottom-up approach and lack of transparency requirements under A6.2 means there is a risk it may be exploited. Negotiations in Bonn, as well as those in past years, failed to reach an agreement on many key issues, which will be discussed again at COP29.

Ensuring transparency

So far under A6.2, countries have been given a broad scope to decide whether key details of carbon trading should remain confidential, including the type and quantity of offsets traded. There are no limits on what information can be treated as confidential – while countries “should” explain why information is confidential, there are no requirements to do so. This is particularly concerning as, unlike A6.4 where credits are subject to UNFCCC authorisation, under A6.2 countries themselves decide if credits meet their standards. Countries do not have to provide any information before they announce the issuance and use of ITMOs. 

Discussions during Bonn on what information should be disclosed, and if any of this should be compulsory, failed to reach a consensus and will continue during COP29. Activists and civil society have previously raised concerns that a lack of transparency will make it hard to ensure deals struck between countries are meeting integrity standards. Carbon Market Watch suggests that in addition to the authorisation of ITMOs (which can be done at any stage of the process, including after they have been issued and even sold for use), cooperative approaches should also be authorised, requiring upfront disclosure of information.

Strengthening the review process

A review team, made up of technical experts assigned by nations participating in A6.2, is mandated to check deals struck under A6.2 for inconsistencies and ensure all rules are being met. The scope and remit of this team has been weakened considerably during previous negotiations. There are also questions about how confidential information will be treated in this review process. Although the review team is able to carry out checks on ‘inconsistencies’ that are deemed confidential, they may not be able to make their findings public or impose any sort of consequences. 

At discussions in Bonn, the development of a code of conduct for how to treat and review information identified as confidential was requested for negotiation at COP29. Recommendations on the review process and associated confidentiality will be negotiated at COP29 and have the potential to give more weight and authority to the review process. This is particularly important, as there are no safeguards to prevent human rights abuse under A6.2 – which is a major concern given the human rights abuse and land abuse cases in other carbon market schemes, particularly the CDM.

Clarifying the authorisation process

The authorisation process for ITMOs, including timing and the possibility of revoking credits, was debated during talks at Bonn. Some countries want flexibility to take back their authorisation at a future date, if, for example, they are unable to meet their NDC targets, which could threaten the integrity of trading under A6.2. The authorisation process could also enable revocation of ITMOs under “extreme circumstances”, such as fraud or human rights abuse. Recommendations on country authorisation requirements will be discussed at COP29.

Deciding on registries

To trade ITMOs, countries either need to set up their own national registries to track the types of credits being sold by who and from where, which can involve a lot of time and capacity, or use a third-party registry or use the A6.2 international registry. The A6.2 international registry is still under negotiation and not yet operational which has stalled progress on A6.2. Some countries are in favour of linking the A6.2 international registry with the A6.4 registry, while others oppose it. Decisions regarding a registry are not likely to have huge implications for the environmental integrity of A6.2, but the type of registry decided upon could help ensure countries have equal access to A6.2 regardless of national capacity and pre-existing carbon trading infrastructure.

Who has already signed deals under Article 6.2?

There are already 91 cooperative agreements at various stages of implementation under A6.2, with Japan, Singapore and Switzerland having signed the most of all countries. However, most of these only represent an intention to trade in the future and are not legally binding – only 22% are at the signed bilateral phase. 

Only deals for five projects have issued authorisation statements, Switzerland’s agreements with Ghana, Thailand and Vanuatu, and only one transfer has occurred under A6.2 – from Thailand to Switzerland for a “Bangkok E-Bus Programme” at the start of 2024. However, it is typically a lengthy multi-year process for countries to authorise A6.2 agreements.

Under A6.2, governments can agree for companies to trade ITMOs within the overarching frameworks established by those governments, enabling private sector participation in ITMO transactions. 

The involvement of some companies has raised concerns. For example, the UAE-based private company Blue Carbon has come under fire for bilateral deals announced with eleven countries, most in Africa. One deal gives customary land rights of around 10% of the land area of Liberia to Blue Carbon, which claims to be generating credits by adhering to REDD+ standards. However, key gaps arise: for example, REDD+ credits must be ‘additional’ – meaning the emissions reductions would not have occurred in the absence of the project – which is not true in the case of Liberia, as the purchased land already includes nature reserves.

Article 6.4 (project-based emission trading)

The A6.4 Supervisory Body (SB) has been set up to establish the rules for a new global carbon market. As trading under A6.4 will be overseen by the UN, key rules need to be agreed upon before the global market for carbon trading can be set up. 

Many aspects of A6.4 have already been decided by the SB, and not all outstanding items are set to be discussed at COP29. However, there is potential for countries to request the SB to set future timelines to review guidance that is not up for discussion during the conference.

Aspects of A6.4 to be discussed at COP29

Approving standards on methodologies and removals

The SB has developed standards on methodology requirements and on activities involving removals. However, as the SB has its own governing power, it can make decisions without requiring approval during COP. During COP29, it will only need to seek approval on the two standards it has developed on methodologies and removals. It has only asked the decision-making body at COP to endorse this approach and provide additional guidance. 

Although there are some shortcomings in the texts, it is likely that these standards will be approved. Even if the standards are adopted, countries are able to request changes to the mandate of the SB, providing them with more specific guidelines on the guidance they are able to provide. For example, they may request that scientists will need to be involved in the development of the methodological requirements.

Development of registries

Transactions under A6.4 will be recorded in a registry, the features of which are still to be discussed at COP29. Developing an effective registry can help improve the integrity and transparency of A6.4. Carbon Market Watch recommends that the registry provides publicly available and up-to-date information on each project and a record of all transactions and holders of A6.4ERs, among other information. Some countries have raised the need for a registry that connects both A6.2 and A6.4 transactions, as well as registries outside the UN system, however, views on this were split in Bonn.

Other outstanding issues on A6.4

Transfer of Clean Development Mechanism (CDM) credits

The SB has developed a standard on methodology requirements, but, until new A6.4 methodologies are approved, the first 6.4 activities will likely be from transitioning CDM projects, which are likely of lower quality compared to current methods, threatening the integrity of A6.2 transfers. This will likely include large amounts of credits from reforestation and renewable energy activities from countries like Brazil and India, which issued many CDM credits. So far, the transition has been approved for nine activities which include hydropower, renewable energy and clean cookstove projects – all likely to have low additionality.

Developing clear guidelines for authorisation

Under A6.4, emission reduction credits authorised by host countries to be used towards NDCs, or other international mitigation purposes, must undergo a corresponding adjustment (CA) to ensure they are not double-counted. This means that if an emission reduction credit is authorised for sale to another country, it must be taken off the host country’s balance sheets and only accounted for by the purchaser. However, it remains unclear when exactly a 6.4ER credit is required to undergo a CA. At COP27 it was suggested that if a country does not authorise the use of credits for trading, these could be used as a “mitigation contribution 6.4ER”, where they do not require a CA as they will only be claimed for use by the host country. Lack of clarity means contribution credits may be double counted and could create what some observers have termed a ‘subprime market’ in carbon credits, which could overestimate progress towards 1.5°C.3It was also decided at COP27 that credits (known as Certified Emissions Reductions) issued under the previous carbon trading scheme (the Clean Development Mechanism) established under the Kyoto Protocol registered after 2013 can be transferred to the A6.4 for use against a first NDC without a corresponding adjustment by the host country. The issue of double counting may also be exacerbated if changes can be made after authorisation.

Human rights considerations

The Sustainable Development Tool is designed to mandate environmental and human rights safeguards and the appeals and grievance procedure are important steps in the right direction, but also contain room for improvement. Given the corruption and fraud within carbon market schemes, there are concerns that the measures as-are will not go far enough to prevent this in future. According to the Institute for Agriculture and Trade Policy, the Sustainable Development Tool still lacks “criteria that Parties could use to combat carbon market related corruption”. Both the Sustainable Development Tool and the appeals and grievance procedure have been agreed upon, however, it is possible that countries can ask for this to be reviewed and strengthened in future.

Will countries favour A6.2 over A6.4?

One other distinctive feature of A6.4 is a requirement that credits issued will have 2% of credits cancelled for Overall Mitigation of Global Emissions (OMGE) and 5% of credits forwarded towards a global adaptation fund to help Global South countries finance efforts to adapt to climate change. This means that conducting transactions under A6.2 is comparatively less costly than under A6.4, and might result in A6.2 becoming the favoured mechanism – particularly as the infrastructure to start trading already exists and it is still unclear when exactly trading under A6.4 can commence. 

Trading under A6.2 still requires countries to develop their own national registries and spend time and effort signing agreements with other countries or organisations. However, transactions under A6.2 may be conducted with lower integrity, as countries can decide their own guidelines for issuing credits, whereas UN guidelines have to be used to trade credits under A6.4.

Article 6.8 (Non-market Approaches)

A6.8 remains the least well-defined and discussed approach under A6. As the ongoing scrutiny of VCM reduces confidence in market-based mechanisms and developed countries fail to deliver their fair share of climate finance to developing countries, some countries and civil society groups are likely to shift attention towards A6.8 as an alternative financing mechanism for climate action. 

For example, Souparna Lahiri from the Global Forest Coalition said in June 2023 that A6.8 is an “opportunity for the global south to find sources of climate finance to strengthen resilience and take real climate action, instead of surrendering land, resources and rights to the global north.” Peter Riggs from the Climate Land Ambition & Rights Alliance highlighted that A6.8 could be the better mechanism as it is “not limited to a carbon metric” and can better support co-benefits such as the protection of biodiversity and Indigenous rights. Additionally, leaders of eight Amazon basin countries signed the so-called Belém Declaration in 2023, which highlights A6.8 as an opportunity for establishing funds for protecting the Amazon.

A key issue is that the term non-market approaches (NMA) is not well defined. At COP26, the Glasgow Committee was established to continue work on A6.4 and has since put together a technical report including examples of NMAs. Work is continuing on the development of a “web-based platform”, which could potentially match countries in need of climate financing with those providing funds. However, discussions in Bonn in June 2024 failed to highlight many concrete initiatives under A6.8. 

To be successful in presenting a practical alternative to market mechanisms, there will need to be a larger focus from parties on operationalising A6.8 at COP29.

How will negotiations impact the voluntary carbon market?

While A6 does not directly address the interaction between voluntary and compliance carbon markets, decisions made under A6.4 are likely to indirectly influence the VCM, particularly in relation to double-counting. A key concern is that ambiguity in the A6.4 text opens up the possibility of issuing credits that are not authorised by countries. These ‘non-authorised’ credits could be traded internationally for use in the VCM without requiring a Corresponding Adjustment – meaning they may be double counted and result in greenwashing if used by companies to make offsetting claims. 

Increasing scrutiny over offsetting claims has pushed the VCM to consider new rules. The Voluntary Carbon Market Integrity Initiative developed a Claims Code of Practice in 2023 which addresses double counting. The Integrity Council for the VCM (ICVCM, formed by Mark Carney’s Taskforce for Scaling up the VCM) has also released a set of Core Carbon Principles to measure the quality of carbon credits. However, this alone is unlikely to resolve the deep-rooted integrity issues in the VCM.

VCM standard setters have different positions on the use of authorised vs non-authorised credits. Verra and the ICVCM, for example, will continue to sell non-authorised credits – stating in 2023 that a CA should not be obligatory in the VCM – whereas Gold Standard does not sell them. Regardless, both Verra and Gold Standard have begun developing labels for credits that have been authorised by host countries under A6 and issuing guidance for projects seeking compliance under A6.  

Although VCMs don’t have to abide by A6 rules, it is unlikely that credible, standard-setting bodies will want to appear as having weaker standards than the UN under A6. Just as many VCM registries used methodologies and standards from the CDM, it is expected that A6 guidelines will heavily shape the future guidelines of the VCM. For example, the ICVCM is awaiting decisions from the A6.4 SB.

Decisions around authorised and non-authorised credit sales on VCMs, as well as decisions around avoidance credits (which make up roughly 75% of all certified credits and the definition of a ‘high integrity’ removal, could drastically limit the scale of VCM growth. Growth in compliance markets through more widespread implementation of A6.2 and A6.4 could reduce the significance of VCMs. While some countries, like Singapore, are investing in growing the VCM, others, like Australia and Japan, are planning to trade domestic carbon credits under A6, instead of using the VCM. Many countries have put carbon trading plans on hold until the rules for carbon trading under A6 are finalised. 

Actors in these markets should also note that all countries who have ratified the Paris Agreement have agreed that simple offsetting is no longer acceptable and that credits must deliver climate adaptation finance.

This briefing was originally published in November 2023 and was updated in November 2024.

  • 1
    The Supervisory Body consists of 12 member parties to the Paris Agreement and will have met 14 times by the opening of COP29.
  • 2
     The Clean Development Mechanism (CDM), Joint Implementation (JI) and the EU Trading System (ETS).
  • 3
    It was also decided at COP27 that credits (known as Certified Emissions Reductions) issued under the previous carbon trading scheme (the Clean Development Mechanism) established under the Kyoto Protocol registered after 2013 can be transferred to the A6.4 for use against a first NDC without a corresponding adjustment by the host country.

Asia’s booming voluntary carbon market

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Key points:

  • Asian governments and companies are trying to keep up with the global trend of developing voluntary carbon markets (VCM) by scaling up local versions. New initiatives have been set up to make buying and selling voluntary carbon credits in the region easier.
  • While there is no money to be made yet, market players are hoping that building the infrastructure for carbon trading will increase the size of the VCM, attracting foreign investment to the region.
  • However, there are a number of issues with the current VCM, including a lack of standardisation, poor quality credits, transparency and low pricing, as well as increasing scrutiny over the wider use of carbon offsets. These issues are hampering progress in the existing global markets. If they are not overcome, those looking to benefit from the booming Asian markets risk wasting resources on projects that are unproven to benefit local communities or the environment. 
  • While initiatives are starting to address these concerns, the future of the VCM remains unpredictable.

The global VCM

Carbon markets enable the trading of carbon credits – each equivalent to one tonne of carbon dioxide (CO2) emissions – and now cover close to a fifth of global emissions. While the majority of carbon markets are compliance markets – in which governments allow the trading of emissions to meet mandatory targets – the VCM, where companies and individuals can choose to buy carbon credits to offset their carbon footprint, has exploded in recent years. Between 2020 and 2021, the value of the global VCM grew fourfold, reaching almost USD 2 billion, with some analysts estimating the market could grow to USD 50 billion by 2050. This growth is driven mainly by rising demand from companies as they face increasing pressure to develop and meet net-zero goals. Between 2021 and 2022, the number of global corporations with net-zero goals increased by 150%.

However, there are a number of issues that prevent the VCM from providing a considerable source of finance for project developers while having real climate impact. Growing scrutiny over the use of carbon offsets, uncertain regulations and global economic slowdown have seen the purchase of credits dry up in recent months, making the future of the VCM unclear.

Recent developments in the Asian VCM

While the majority of the projects that sell carbon credits are located in Asia, South America and Africa, historically the majority of trading has taken place in Europe and the US. Now market players are taking the first steps to scale up the VCM in Asia. In theory, this would increase funding for the protection of nature and low carbon technologies in the region and enable companies to offset emissions and meet net-zero goals through buying credits. 

There is no money to be made yet, but companies are eager to tap into the anticipated financing opportunities. The potential funds raised by offsets generated in Asia is estimated at USD 10 billion annually by 2030. Asia is already the world’s largest producer of carbon offsets, producing 44% of global credits, and is home to some of the world’s most valuable investable carbon stock. Additionally, of the more than 1,600 companies that have committed to net-zero targets globally, nearly a quarter are from Asia, potentially increasing regional demand for credits. 

Main players in the offset boom

Carbon trading platforms and voluntary domestic initiatives to facilitate the buying and selling of carbon credits have recently been set up in Singapore, Thailand, Hong Kong and Malaysia, with others planned in Japan, Indonesia, India and South Korea.

Key players and new developments in Asian carbon markets

Singapore currently dominates the Asian VCM, hosting platforms Aircarbon Exchange and the newly-launched Climate Impact X (CIX), which was founded by state investment fund Temasek and others to position Singapore as a carbon trading hub. These platforms are anticipating increased demand for credits after Singapore announced that, from 2024, companies can use VCM carbon credits to offset up to 5% of their taxable emissions. This is the first time a carbon tax scheme has allowed the use of VCM credits, and highlights the increasing overlap between voluntary and compliance markets, particularly in Asia. 

Other platforms are hoping to expand investment in Asia’s VCM. For example, Hong Kong’s Core Climate is the only exchange to offer settlement for the trading of international voluntary carbon credits in Chinese currency, opening up the VCM for mainland China’s participation. Meanwhile, Malaysia’s Bursa Carbon Exchange is the first Shariah-compliant carbon exchange in the world, potentially attracting foreign Islamic finance. 

Carbon exchanges in Thailand and Malaysia also aim to help companies meet import requirements and improve national industry competitiveness, especially in the face of tariffs on high-carbon imports, such as the EU’s upcoming carbon border adjustment mechanism. Both countries allow domestic offsets to be traded internationally. However, other countries, including Indonesia and India, have recently imposed restrictions on the exports of carbon credits generated from their territories to prioritise the domestic use of credits for meetingnational climate targets. While more clarity is needed on these regulations, this is raising concern among buyers.

Risks of a poorly regulated VCM

While the VCM has strong ambitions globally and in Asia, a lack of regulation and transparency means the market is currently overrun with cheap, low-quality offsets that are not funding genuine climate solutions, which is increasing the reputational risks for both sellers and buyers. 

Lack of standards: The VCM is largely unregulated and lacks a standardised approach, with carbon registries, such as Verra and Gold Standard, issuing credits in line with their own standards, resulting in a highly-fragmented market in which the type and quality of credits offered vary wildly (see below). Alongside unreliable verification of credit quality and lack of transparency, this makes it difficult for buyers to determine which credits are high quality, especially as quality is not necessarily linked to price. The extensive range of private and public schemes for certifying and trading credits in Asia complicates efforts to standardise, and contrary to their goal of streamlining VCM trading, new carbon exchanges have so far created more division in the market. For example, CCER credits issued under China’s voluntary emission reduction programme and traded via domestic emissions trading schemes can also be traded internationally on the VCM, however low quality and transparency has limited this so far. 

Low-quality credits: The current VCM is dominated by low-quality credits, with around 80% generated from projects that avoid emissions, rather than reduce or remove them. If a project is not actually removing CO2 from the atmosphere, it is not offsetting emissions. Determining ‘additionality’, which refers to whether or not the project would have gone ahead without the carbon credit revenue, is also difficult. Investigations have found that most renewable energy projects are not additional, making the credits worthless from a climate perspective, and that over 90% of rainforest carbon offsets issued by Verra (which is currently working with carbon exchanges in Singapore, Thailand and Malaysia to facilitate use of their standards) did not result in emissions reductions. As a result, price and demand for Verra’s rainforest credits dropped and Verra is currently revising its methodologies to verify rainforest credits, which may limit their issuance in Asia. Asian carbon credit projects are likely to be made up of forestry projects that face these same additionality concerns, as well as issues regarding the permanence of carbon stored due to land use changes and wildfire risks. Renewable energy credits are also still issued in some Asian schemes, such as via China’s CCER scheme. CIX is taking this a step further and promoting the use of a new type of credit for the protection of forests, even when there is no to low risk of deforestation. While protecting forests is important, it does not remove CO2 and should not produce credits that allow companies to continue to emit. 

Consequences for local communities: Carbon offset projects have often come at the cost of local communities and indigenous peoples, who are frequently not consulted and, at times, forced off their land. This is particularly concerning as many of the carbon sinks targeted by offsetting schemes are located in areas without indigenous or local land rights – especially in Asia. Increased interest in carbon markets may drive government officials to bypass consultations and fast-track potentially harmful projects in order to capture financial benefits. For example, in 2021, Malaysian officials signed over USD 76.5 billion of carbon credits and natural capital from a state forest to a small Singaporean company without involving local communities and indigenous leaders in the decision-making process.

Cheap offsets: In part due to their low quality and oversupply, offsets have historically been very cheap. The average price of global VCM credits was USD 4 per tonne of CO2 in 2021 and fell as low as USD 1.7 per tonne in January 2023 as purchases stalled. And prices from projects based in Asia generally receive below average prices. Such low prices tempt companies to purchase credits rather than decarbonise their practices , with the World Bank estimating that, by 2030, a price of USD 50-100 per tonne is needed to limit warming to below 2oC. While some predict that VCM pricing issues will be resolved as a preference for high-quality offsets will create a more expensive sub-market, this has not happened in practice.

Indeed a number of factors suggest supply will continue to outstrip demand:

  • Reputational risk: As questions grow around the legitimacy of offsets, companies are increasingly at reputational risk from the purchase of carbon credits 
  • Article 6 uncertainty: Discussions on Article 6 of the Paris Agreement, which sets out rules for international trading of carbon credits, have so far been inconclusive, stalling progress on new carbon trading plans for both government and industry 
  • Recession fears: Traders and analysts anticipate that polluters will reduce buying amid soaring inflation, rising energy prices and economic instability.

Firms bought 4% fewer credits in 2022 compared to 2021 and retirements of renewable energy and forestry credits declined in two consecutive quarters for the first time due to falling demand. In addition, the VCM is currently oversupplied, with a current reserve of over 683 million tonnes – over four times the total amount of credits traded in 2022. There are concerns that diminishing demand and oversupply will flood the market, further lowering the price and integrity of credits and threatening the overall functioning of the VCM. 

Improving market integrity and transparency

Following calls to increase the integrity and transparency of the VCM, new initiatives have been established to develop guidelines and restore confidence in the market. The Integrity Council for the Voluntary Carbon Market (ICVCM) aims to create industry-backed standards and guidelines to establish a quality baseline for carbon credit generation and trading that is credible and transparent, while the Voluntary Carbon Markets Integrity (VCMI) Initiative has developed a code of conduct with stakeholders to ensure that standards are implemented correctly. While the guidelines released by both initiatives last year were criticised by some for being too stringent and overbearing (and by others for not being strict enough), they present a starting point for moving forward. 
Additional guidance from the UN high-level expert group (HLEG) on net-zero emissions has reiterated that offsets cannot be used at the expense of genuine emissions reductions. The VCM should emphasise quality over quantity, with companies only using carbon offsets as a last resort for emissions that are very difficult to avoid, especially because, due to limited available land and resources, high-quality carbon offsets are finite.

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