Article 6.4 of the Paris Agreement Has Potential, If Countries Make the Most of It
Among the many important issues currently being negotiated at COP28, one with the potential for immediate impact is a global carbon crediting mechanism—as outlined in Article 6.4 of the Paris Agreement. This mechanism, monitored by an independent UNFCCC supervisory body, would allow companies and governments to buy verified carbon offset credits to achieve Nationally Determined Contributions (NDCs) and net-zero targets.
Within this crediting mechanism, independent developers would seek their host country’s approval to have their projects credited by the UNFCCC supervisory body. These credits could then be sold to countries or corporations interested in offsetting their emissions. The credits would only count toward the buyer’s NDC or net-zero targets.
Also included in the proposed framework is a 5% transfer of revenue to a global adaptation fund. Increased financing for adaptation projects is considered crucial for minimizing the negative effects of climate change and has been an important focus at COP28, where countries have already pledged $700 million for the loss and damages fund and $166 million for the adaptation fund. Therefore, maximizing contributions to the adaptation fund should be an objective of this proposed mechanism.
In the lead-up to the present negotiations, the Article 6.4 Supervisory Body released helpful guidance on how the crediting mechanism ought to function. These new guidelines, for example, address in some detail the challenge of reversal—when negative emissions are subsequently released into the atmosphere, invalidating the offset. Within these guidelines, a variety of reporting requirements, including the establishment of a Reversal Risk Buffer Pool, help to address this concern.
Other questions regarding how offsets will be quantified, and which kinds of projects qualify for crediting are left relatively ambiguous. Although it offers a potentially useful framework for countries to voluntarily set a robust and ambitious emissions baseline, the guidance stops short of mandating a standardized procedure. Without standard baseline-setting in place, verification of additionality and reduction from that baseline will remain challenging and offset prices are likely to remain low.
Historically, prices in voluntary offset markets, which generally suffer from the same lack of credibility as the existing A6.4ER guidelines, have been trending down and currently stand at less than $1 per metric ton of carbon (MTC)—far lower than what is internally assigned by the private sector or demanded by regional trading schema.
In contrast, shadow prices have shown an upward trend. These are the internal carbon pricing schemes adopted by corporations to prioritize low-carbon investments. Regardless of region, industry, or sector, shadow prices are converging toward $75 to $100/MTC, as reported by companies to the Carbon Disclosure Project (CDP). A factor for many of these companies in setting their internal carbon prices is their exposure to compliance carbon markets where prices earlier this year were as high at $100/MTC per metric ton.
These metrics give a strong indication that the private sector’s willingness-to-pay is orders of magnitude higher than the cost of offsets they use to achieve net-zero targets today. When it comes to the Article 6.4 crediting mechanism, this gap between credit price and willingness-to-pay means that money that could be contributing to the global adaptation fund will be left on the table.
At the very least, Article 6.4 could lend transparency and establish a common rubric for evaluating individual countries’ baseline setting procedures. The registered projects at the UNFCC Article 6.4 supervisory body would have the potential to abide by robust baseline setting methodologies and verification procedures, providing much-needed credibility for purchasers. This baseline setting would need to ensure, among other things, that credited offsets represent a long-term and secure reduction from the existing carbon emissions balance. Recent guidelines by the Article 6.4 supervisory body also outlines several steps that can be taken to effectively address the issue of unavoidable offset reversals. This credibility would naturally attract a premium price that would not only increase the revenue paid to the global adaptation fund but would also provide an incentive for credited countries to increase the rigor of their baseline setting methodologies.
The Article 6.4 crediting mechanism has the potential to create an incentive for higher global ambition, calibrate carbon offset and compliance prices, and channel much needed adaptation funding to the countries and regions that need it most. For this to work, it is essential that a large majority of the countries accept the proposed rules and commit to register projects within the UNFCC platform. COP28 is therefore a crucial moment for the future of carbon offsets.
Arwen Kozak
Angela Pachon
