What Happened at COP29 and What it Means for the Carbon Markets

COP29 exceeded expectations by achieving its two main priorities: an agreement on the New Collective Quantified Goal (NCQG) on Climate Finance and the finalization of the Article 6 rulebook. While the NCQG agreement has been widely criticized, the Article 6 decision has been favorably received. We witnessed these developments from the ground - here are our headline thoughts on what they mean for carbon markets and the private sector.

The role of private finance to achieve the NCQG

Agreement on the New Collective Quantified Goal (NCQG) on Climate Finance was the top priority for COP29, considering the 2024 deadline to set a new goal. The NCQG supersedes the 2009 financial goal, which committed developed countries to deploying US$100 billion annually by 2020 to support developing countries in their climate adaptation and mitigation plans. (The latest accounting from the OECD suggests this target was only achieved in 2022.)

The NCQG negotiations in Baku started with disagreements around who should pay, what forms the funding should take, how funding should be accessed, and, most importantly, how much. Entering overtime, the NCQG negotiations concluded that developed nations will provide a minimum of US$300 billion in climate finance annually, from public sources, by 2035. A broader goal has been set to direct US$1.3 trillion annually in funding towards developing nations, including contributions from private sector investments, and the initiative Baku to Belém Roadmap to 1.3T will seek additional sources of funding to enhance the NCQG. The COP29 and COP30 presidencies will lead this initiative, and results will be presented in COP30 in Belém, Brazil.

The voluntary carbon market was featured in a draft version of the text as a funding option, but it was excluded from the final document. However, mobilizing private finance will be essential to meet the new goal. The need to unlock private finance can create new potential avenues for investors interested in energy transition and emissions reduction activities in developing countries. 

A historic decision in carbon markets: the Article 6 rulebook

Article 6 was the protagonist on the first and last days of COP29 with decisions in the opening and closing plenaries, which together marked the finalization of the Article 6 rulebook. Due to the convergence of compliance and voluntary carbon markets and the relevance of Article 6’s market mechanisms at the international level, the finalization of the text has important implications for all carbon market players. 

Before the Article 6.2 text was agreed, several countries had already signed bilateral agreements, and the first transfer of Paris Agreement credits (known as Internationally Transferred Mitigation Outcomes, or ITMOs) between Switzerland and Thailand took place in January 2024. The final text from Baku clarifies various topics that are essential to unlocking the expansion of Article 6.2 implementation, and we expect more agreements and more activities to materialize as a result. 

The most contentious and relevant topics on Article 6.2 agreed at COP29 were:

• Authorization: there is now a clear list of elements that must be included in authorization statements and the UNFCCC Secretariat will create a voluntary Letter of Authorization (LOA) template. Also, it has been agreed that the terms and conditions for changes will be defined in each individual LoA, including whether changes can occur after the ITMOs have been transferred. The conditions for changes and revocation of authorization will make it easier for buyers and investors to mitigate risk. This is especially relevant for the aviation sector, as corresponding adjustments are mandatory for international credits to count towards CORSIA obligations.
• International registry: two different positions on the nature of the centralized international registry have been resolved by creating a two-tier approach. This includes a pull-and-view function (meaning it only collects data but lacks functions like issuing credits) at its core, with the option for countries to ask the UNFCCC Secretariat for an added service to issue and track ITMOs on the registry. To participate in carbon trading, countries are required to have arrangements in place for tracking ITMOs. However, some countries do not have the resources and capacity to develop their own registries so the creation of the international registry democratizes Article 6.2 and increases the number of countries that can host Article 6 activities. 
• Cooperative approach definition: the Article 6.2 draft suggested two potential definitions for cooperative approaches. One only recognized collaboration between two countries and omitted the possibility of countries engaging with the private sector under Article 6.2. This definition removed the possibility of doing ‘unilateral’ authorizations. The fact that the final decision text did not include a definition of cooperative approaches gives room to interpretation, but has been viewed favourably by many market participants as it creates  opportunities for private sector participation in Article 6.2 directly. 

Unlike Article 6.2, which was more or less up and running before COP29, Article 6.4 had been stuck in limbo, unable to get off the ground. In its meeting before COP 29, the Supervisory Body of Article 6.4 (SBM), which oversees the detail of the 6.4 mechanism, agreed on the standards for carbon methodologies and removals without seeking approval from the CMA (a higher body within UNFCCC, which includes all signatories to the Paris Agreement). After weeks of uncertainty about the CMA’s reaction, COP29 Day 1 closed with the adoption of the standards, a huge step toward the establishment of the 6.4 mechanism (which is now to be called Paris Agreement Crediting Mechanism, or PACM). 

The final text agreed upon in Baku encourages the SBM to implement the mechanism and to establish a mechanism registry that countries can choose to link with their domestic registries for PACM projects. The SBM’s work plan for 2025 includes the development of further guidelines for PACM methodologies and removal activities, including requirements for baseline adjustment, additionality, and reversal risk. The final text also provides for the transition of afforestation and reforestation activities from the Clean Development Mechanism (CDM) to the PACM, which were on hold until now, subject to meeting the methodologies and removal standards requirements.

The PACM standards will have a significant impact on the broader carbon market as they are expected to be used as a universally accepted benchmark for quality. These advances provide clarity for investors, carbon project developers, and carbon standards, which are expected to reflect the PACM standards in their future and updated methodologies.

Watch our COP29 Carbon Markets Debrief

For a deeper dive into the outcomes of COP29 and an exploration of the crucial role the private sector can play, join us in our upcoming webinar.

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