Article 6 agreement will transform carbon markets as we know them

Luke Leslie of Key Carbon writes on the landmark agreement on Article 6 of the Paris Agreement, the crowning achievement at COP29.

The landmark agreement on Article 6 of the Paris Agreement was the crowning achievement at COP29 this year and sets the stage for a transformative growth in the voluntary carbon market (VCM) in 2025 and beyond. Once operationalised, Article 6 as a centralised mechanism for carbon trading is poised to be the most significant coordinated, global multi-lateral achievement since the Montreal Protocol was established in 1987 to protect our ozone layer.

The agreement provided much-needed clarity and standardisation for international carbon trading and established a robust framework for countries to cooperate on climate action. It also addressed concerns about integrity, like double counting, and provided provisions to ensure carbon projects contribute to local communities and biodiversity conservation.

Increased interest in the market

Demand for carbon credits has been tepid because it has historically been voluntary. All that changes with Article 6 as countries like Singapore put in place financial incentives for corporates to buy high integrity credits. This will increase liquidity and eventually commoditise the market at the national level. It will also increase the efficiency of capital allocation across the VCM to the most impactful projects.

While changes will not happen overnight, we anticipate a significant impact on corporate behaviour as companies look to secure supply several years in advance – much like buyers of hard commodities (such as uranium) look to contract supply several years ahead of use.

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Considerable progress depends on what happens at country level

Progress will depend on what incentives are put in place and how different countries approach regulation and incorporation of carbon markets into national decarbonisation efforts. For example, in Singapore, carbon credits function as tradeable permits that allow companies to offset a portion of their emissions by purchasing credits generated from projects that reduce emissions elsewhere. These credits must meet specific standards of environmental integrity to be eligible for use against their carbon tax liability, allowing companies to offset up to five per cent of their taxable emissions with high-quality international carbon credits (ICCs).

Following the Article 6 agreement, other countries may take a Singapore-type approach. This would create an upsurge in demand as corporations and other entities purchase credits to lower exposure to carbon taxes being implemented in various jurisdictions.

Increased transparency and reporting regulations following the agreement will primarily benefit countries with large forests to protect or restore. This could provide a once-in-a-generation opportunity for countries like Madagascar which has faced rampant deforestation in recent years but is also one of the lowest cost and highest impact places in the world to launch a reforestation project. If countries can create a stable investment environment for investors, they will be well placed to attract significant flows of foreign direct investment.

Rigorous standards will continue to be necessary

The increasing diversity at the domestic level - as host countries design unique and context-specific approaches to regulate and incorporate the carbon markets as part of their national decarbonisation effort - presents opportunities and risks for buyers and investors alike. At the same time, there is more consensus and integration than ever before when it comes to methodology, quality, trading, tracking, and monitoring, reporting, and verification (MRV), as well as end-use purposes and claims. This combination of convergence and divergence is an important dynamic, enabling the VCM to take off and we expect a steady stream of announcements from countries detailing their embrace of the carbon markets, which will redirect capital across the VCM.

Buying countries will continue to hold a lot of the power and responsibility to enforce demand for only the highest quality and integrity of credits. At the same time, acquiring countries will need to be vigilant about which projects they approve to prevent the market being flooded with low-quality credits while still ensuring that methodologies are robust and stand up to ongoing questions about integrity.

Next steps

As the market continues to grow stronger, we cannot lose sight of the tangible impact that high-integrity carbon offset projects have on combatting global emissions, improving biodiversity, and elevating the standard of living for some of our most vulnerable communities around the world.

To date, Key Carbon has provided $45 million in funding to expand the roll out of clean cookstoves in eight African countries - which will improve the lives of an estimated 7.5 million people and help avoid or remove more than 45 million tonnes of carbon emissions. Key Carbon also has financed the planting of 3.75 million trees since its incorporation alongside other projects that support biodiversity action.

However, our impact could expand considerably as the Article 6 agreement positions the market for rapid growth in coming years. Ultimately, we will be watching close how countries operationalise this agreement quickly and efficiently and make our investments accordingly. And while there are still a lot of unknowns, the Article 6 agreement provides a solid foundation for a completely new and transformed carbon market that can accelerate climate action and build a more sustainable future for generations to come.

About the author

Luke Leslie is the Co-Founder and CEO of Key Carbon, one of the largest investors in carbon offset projects.

Founded in 2021, Key Carbon is a permanent capital vehicle, building a large, diversified portfolio of high-integrity carbon credit streams and royalties for corporates and other organisations on their journey to net zero.

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