COP30 has a carbon trading problem

Carbon trading is a notoriously fraught enterprise; making an accurate assessment of a given project’s capacity to draw down CO2 and keep it permanently out of the atmosphere is a process prone to technical pitfalls and net zero claims that, intentionally or not, can easily cross into greenwashing. Since the 2015 Paris COP, Article 6 negotiations were the forum for some of the most arcane and hair-splitting debates in climate politics, and a reliable target for activists claiming the whole thing is a scam. But when the rulebook was finally settled last year, it seemed like most issues had been resolved, more or less, to everyone’s satisfaction. The one problem negotiators didn’t seem to consider is that many countries would simply choose not to participate in the market.

The fundamental problem with Article 6 trading, Furey said, is that it essentially constitutes the subsidization by taxpayers in one country — usually a rich one with a big carbon footprint — of carbon projects in another, most likely poorer, country. That makes it a hard sell politically, he said.

There’s another problem, from the perspective of potential sellers. Say a country in Africa stands up a big reforestation project and sells credits from it, via Article 6, to a European country struggling to meet its ambitious carbon reduction goals. The selling country is prohibited from counting those credits against its own emissions targets. And so far, it seems many potential sellers would rather keep those reductions in-house, rather than sell them off and then have to find some other, probably more expensive way of meeting their target, said Guy Turner, managing director of carbon markets at the ratings firm MSCI. “A lot of governments are sitting on the sidelines while they make that decision,” he said. And many developing countries simply lack the institutional capacity to properly vet and accredit projects, he said.

The question of whether a developing country should keep or sell credits from projects in its borders creates a perverse incentive to lower their climate ambitions, Turner said. If a country really wants to sell, but still meet its own climate targets, all it has to do is lower those targets. If that practice becomes widespread, then Article 6 will amount to a paper-shuffling exercise that exerts no downward pressure on total global emissions. MSCI is currently studying that phenomenon, Turner said, especially since, if the voluntary market is an indication, questions of credibility will ultimately be an important factor for credit pricing.

In the meantime, the UN’s ability to oversee all of this already appears to be flagging: In a report this week, the Article 6 supervisory body warned that it faces a critical funding shortage.

Demand for Article 6 credits will probably pick up later this decade once the first deadlines for many countries’ climate targets start to kick in, Turner said. And demand is slowly recovering in the pre-existing voluntary market, as shadier early projects crumble and more credible projects come online; tech companies in particular still have a voracious appetite for carbon removal credits, as evidenced by a major deal signed by Google last week for credits from the Amazon rainforest. “The trickle could turn into, I won’t say a flood, but maybe a stream,” Turner said.

Ghana has been one of the first countries to make major Article 6 sales, and some other African nations are eager to follow, Ali Mohamed, Kenya’s special climate envoy, told Semafor. Kenya is currently working on the domestic regulations it needs to comply with the Article 6 rules, he said. But in the meantime it is facing what he described as bias from potential buyers. “Many countries are knocking on our door to buy credits, but they are picky about the kind they want,” he said: Reforestation and other nature-based projects are the kind most readily scalable in many African countries, but buyers in Europe are much more interested in more expensive, tech-based approaches.