With growing recognition of the importance of tackling climate change, concerted efforts are underway to address issues within the voluntary carbon market. Various stakeholders, including governments, international organizations, and market participants, are actively working towards implementing solutions to enhance the market's quality, integrity, and transparency. These initiatives focus on establishing global market standards, promoting accountability, and leveraging new technologies to verify and measure climate change impact.
New Global Standards Promoting Quality and Integrity
Efforts to promote quality and integrity in the voluntary carbon market have gained momentum through the implementation of global market standards. One notable example is the Paris Agreement's Article 6, which aims to facilitate international cooperation on emissions reductions and sustainable development. Additionally, initiatives like the Science Based Targets Initiative (SBTi) are providing companies with science-based targets to reduce greenhouse gas emissions, promoting credibility and accountability within the market.
Also addressing the need for integrity in the VCM are initiatives and organizations such as the Voluntary Carbon Market Integrity Initiative (VCMI) and The Integrity Council for the Voluntary Carbon Market (ICVCM), both of which have emerged as significant players in this space, representing key stakeholders in the VCM. In June of 2023, the VCMI and ICVCM announced that they would be joining forces to operationalize a high-integrity market to accelerate global climate action.7 Their collaboration is one of several ongoing efforts aimed at establishing a comprehensive market integrity framework for the Voluntary Carbon Market (VCM).
These organizations are dedicated to ensuring the credibility and effectiveness of voluntary carbon offset projects. They establish robust methodologies, evaluate project eligibility, and monitor the market to identify and address potential integrity risks.
What are the Rules Related to Carbon Markets Agreed Upon at COP26?
The Conference of the Parties, also known as COP, is a yearly global event (unless the parties decide otherwise) where representatives from nearly 200 countries gather together to address climate change and develop strategies to combat its effects. The event serves as a platform for nations to discuss and negotiate international efforts to reduce greenhouse gas emissions and adapt to the changing climate.
COP26 took place in Glasgow in 2021 after being postponed from its original date in 2020 due to the outbreak of the COVID-19 pandemic. COP26 is particularly significant because it marks a pivotal moment in the international response to climate change and builds upon previous agreements like the Paris Agreement, which was adopted during COP21 in 2015.
One of the most important outcomes of COP26 was the approval of Article 6, the Paris Agreement’s rulebook governing carbon markets. By approving these rules they helped create an environment for successful international carbon markets that promote private sector investments in voluntary carbon offset projects.
There are two types of carbon markets to be aware of, voluntary markets and compliance markets. Voluntary carbon markets are distinct from compliance markets in that participation is voluntary and driven by individual choice and sustainability commitments, whereas compliance markets are mandatory and governed by government regulations and compliance obligations.
Article 6 of the Paris Agreement introduces two important mechanisms: 6.2 and 6.4. Both of which play a crucial role in international carbon markets.
- Article 6.2 establishes a mechanism for countries to trade emission reductions and removals with one another. It functions like a carbon transfer and trading system between nations. This is done through traded credits called Internationally Transferred Mitigation Outcomes (ITMOs). ITMOs can be quantified in carbon dioxide equivalent (CO2e) or using alternative metrics like kilowatt-hours (KWh) of renewable energy. This enables countries to trade Internationally Transferred Mitigation Outcomes (ITMOs) to help achieve their emissions reduction objectives.
- Article 6.4 will establish a worldwide carbon market under the supervision of a United Nations organization known as the "Article 6.4 Supervisory Body" (6.4SB). Developers of projects will be required to seek registration for their projects from this governing body. For a project to go forward it must be approved by both the Supervisory Body, and the country where it’s implemented before it can begin to issue UN-recognised credits. Prior to issuing UN-recognized credits, known as A6.4ERs, both the country in which the project is executed and the Supervisory Body must grant approval. These credits can be purchased by countries, companies, or even individuals.8
“It's important to note that the VCM operates independently from the UN-regulated carbon markets established under Article 6. However, there is a significant overlap between the two markets, and it is expected that Article 6.4 will strengthen the voluntary carbon market.9”
The primary objective of Article 6 is to make emissions reduction more cost-effective and incentivize countries to set higher emissions reduction targets. By financing carbon projects in the most cost-efficient locations, it becomes cheaper for countries to decarbonize, potentially encouraging them to commit to more ambitious emission reduction goals.
7. ICVCM and VCMI join forces to operationalize a high-integrity market to accelerate global climate action https://icvcm.org
8. COP27 FAQ: Article 6 of the Paris Agreement explained - Carbon Market Watch https://carbonmarketwatch.org
9. WHAT DOES THE COP26 OUTCOME ON ARTICLE 6 MEAN FOR NON-PARTY STAKEHOLDERS? https://www.c2es.org