COP29 finally achieved a breakthrough on international carbon markets. The agreed rules for carbon credits could also become relevant for the crediting of carbon prices already paid in the EU’s carbon border adjustment. Even if recognition in CBAM appears difficult, the full meaning of Article 6 for CBAM is still to unfold.
Breakthrough in international carbon markets
Baku marks a milestone in international carbon markets. An agreement was finally reached at the 29th Conference of the Parties (COP29) to the United Nations Framework Convention on Climate Change (UNFCCC).
After nine years of negotiations, the rules on certification and trading of carbon credits under Article 6 of the 2015 Paris Agreement have finally been adopted. A decision was postponed at COP28 a year ago.
International carbon markets intend to raise additional funds for decarbonization, especially in developing countries. They therefore also play a role in mobilizing the USD 1.3 Trillion by 2035 that will be needed annually for climate change mitigation and adaptation.
Countries in the Global South can generate carbon credits through climate projects. These can then be purchased by other countries or companies.
The rules for these exchanges could also become relevant in the EU Carbon Border Adjustment Mechanism (CBAM). Carbon prices already paid can be credited against the carbon-based import levies.
International carbon markets under Article 6
Carbon credits can be traded within national markets or internationally. Article 6 creates rules for both international certification (Article 6.4) and intergovernmental trading (Article 6.2).
International certification framework according to Article 6.4
Article 6.4 creates an international certification framework for high-quality emission reductions (6.4ER). These rules allow a company (in one country) to certify emission reductions or carbon removals, and sell them to another company (in another country).
On the very first day of the COP29 negotiations, an agreement was already reached on the standards for the Paris Agreement Crediting Mechanism (PACM). The requirements for the development and evaluation of methods and for carbon removal activities were adopted.
A supervisory body is now responsible for developing and approving the various certification methods. This has been set out in the work plan for 2025. Only then can the first A6.4ERs be certified and traded. Over 700 projects have already been registered with the UNFCCC for this purpose.
Intergovernmental trading according to Article 6.2
Article 6.2 allows voluntary cooperation between countries via Internationally Transferred Mitigation Outcomes (ITMOs). The idea is that carbon credits generated in one country can be transferred to another country, which then counts them towards its climate targets.
COP29 has now reached an agreement on the authorization and revocation of these carbon credits. The establishment of an international registry was also agreed. This will not serve as a central registry but as a data exchange platform.
Even if some details still need to be worked out, implementation can now start. There are already 91 agreements or MoUs between more than 50 countries.
Recognition of carbon credits in CBAM
According to the CBAM Regulation 2023/956, carbon prices that have already been paid in a third country can be credited against the required CBAM certificates. From the texts there is a greater scope for interpretation as to which CO2 pricing instruments can reduce these CBAM costs.
More specifically, the regulation defines 2 criteria:
- Only actual payments for carbon prices in the country of origin are eligible (§9);
- The carbon price is, among other things, the “monetary amount paid in a third country under a carbon emissions reduction scheme, in the form of a tax, levy or fee or in the form of emission allowances under a greenhouse gas emissions trading system, calculated on greenhouse gases covered by such a measure, and released during the production of goods” (§3).
According to the first criterion (i), 6.4ER or ITMOs from Article 6 would be relevant for CBAM if a producer of CBAM goods purchases such carbon credits. The expenditure for this could then constitute an actual payment in the country of origin.
Yet, these carbon credits do not represent any of the payment forms defined in the second criterion (ii). And they are not calculated based on emissions from the production of the goods.
In fact, the certification of Article 6 carbon credits is project-based, while CBAM levies are calculated on the basis of product-based emission intensities. This difference is likely to complicate their crediting for CBAM purposes.
In addition, the EU Emissions Trading Scheme (ETS) as the basis for CBAM does not currently permit the use of such carbon credits.
While this interpretation appears relevant for 6.4ER, this line of argument becomes more complicated for ITMOs. If these intergovernmental carbon credits are not recognized, further concerns of unequal treatment of developing and emerging countries could be raised.
For example, ITMOs can be purchased by an EU country for the decarbonization of the production of CBAM goods in a non-EU country of origin. They would then affect the CBAM costs by:
- Reducing emission intensities for which CBAM certificates are to be purchased;
- Additionally reducing the CBAM payment burden if ITMOs would be eligible for CBAM crediting.
In addition, a linking of emissions trading systems is also possible under Article 6.2. The EU ETS is already linked to the Swiss ETS. Imports from Switzerland are therefore exempt from CBAM. Other countries could also strive for such a linking to simplify trade with the EU.
Keeping an eye on carbon markets
The full significance of the Article 6 rules for corporate CBAM implementation is not yet fully foreseeable. Detailed analyses of the implications will only be possible in the coming months once further legal and technical interpretations are available.
These will also depend on the crediting of third country carbon prices in CBAM. The implementing regulation to set these rules is expected in Q4 2025.
Untill then we recommend:
- To observe further interpretations of Article 6 and, in particular, the crediting of carbon prices in CBAM;
- To identify existing or planned carbon pricing in the countries of origin of CBAM goods;
- To collect evidence of carbon prices already paid by suppliers from these countries of origin to build up the database;
- To calculate possible carbon price deductions from CBAM levies to better estimate CBAM costs.
A study by the EU Commission to inform the legal provisions is underway. The results could provide further insights into the relevance of Article 6 for CBAM.
Sources and further information:
- A6IP, GGGI, iC, UNDP, VCMI and World Bank: Navigating Decisions on Carbon Markets
- ICAP: Applying Rules under Article 6 of the Paris Agreement to Linked Emissions Trading Systems
- World Bank: Status and Trends International Carbon Markets 2024
Photo from Matthew TenBruggencate on Unsplash
