The voluntary carbon market has been plagued by criticism and lack of trust. The adoption of global standards will give investors the necessary confidence to fully embrace carbon offsetting
COP29 in Baku made headlines by tripling financing for developing countries, committing $300 billion to their net-zero transition. Yet, another equally monumental agreement—largely overlooked—was sealed at the very start of the Conference.
On the first day [of the Conference], participant countries passed a resolution adopting standards for a UN-supervised carbon market under Article 6.4 of the Paris Agreement. Initially established by the Article 6.4 Supervisory Board in October, these standards were formally approved by the parties at COP29. Setting the foundations for a global marketplace where companies and countries can offset their carbon emissions by trading UN-backed credits, it will add integrity to a market that has been plagued by scandals and a lack of trust since inception.
The agreement is no small feat. Historically, carbon markets have lacked adequate governance. Flawed methodologies and rogue operators have created a market ridden with unrealistic emission reduction claims and greenwashing accusations against well-meaning project developers and purchasers of carbon credits. For instance, a report by The Guardian, Die Zeit, and SourceMaterial found that over 90% of the forestry carbon credits issued by Verra, the world’s largest verifier, do not represent genuine carbon reductions. These credits, also known as REDD, are among the most prevalent type of carbon credits. However, estimates show that as little as 6% of carbon offset projects may be linked to additional carbon reductions. These issues have led voluntary carbon markets to shrink from $1.4bn in 2022 to $1.1bn in 2023.
The COP29 agreement could change this. Adequate oversight, homogenised standards, and strict enforcement mechanisms have allowed compliance markets to be considered as effective tools in curving emissions. To scale, voluntary carbon markets require similar top-down governance that ensures that emissions are properly measured. By introducing UN-backed standards, companies and investors will have more confidence in the integrity of Article 6.4 credits, encouraging their adoption and driving overall demand. Furthermore, the implementation of UN standards gives independent verifiers the opportunity to adapt their methodologies to align them with UN standards and issue Article 6.4 eligible credits. Doing so would boost their credibility after controversies over their verification processes and allow them to actively participate in a high-integrity market that can attract more private capital to carbon projects.
Improving the quality of carbon credits through UN-approved standards would drive buyers and investors to pay a premium for high-quality credits. If Article 6.4 credits become widely traded and voluntary credit standards increase as a result, overall prices should increase too, incentivising developers to undertake more carbon projects. In 2023, the average price of a carbon credit was $6.97, far below the EU ETS allowance price of €83.24. Addressing this price imbalance is key to scaling the voluntary carbon market.
By improving quality and aligning credit prices with those in compliance markets, voluntary carbon credits would more likely be incorporated into compliance systems. Firstly, regulators would be less concerned of a potential collapse in overall carbon credit prices within compliance markets if price differences are less pronounced. Moreover, while questions remain over the integrity of voluntary carbon credits, UN-backed credits may give regulators across jurisdictions the necessary confidence to integrate Article 6.4 credits into their compliance systems. If they do, companies would be able to use credits in voluntary and compliance markets alike, boosting demand for carbon credits and channelling more funding to address the climate crisis. The World Bank has estimated that carbon credit trading can cut the cost of implementing developing nations’ emissions reductions plans by $250 billion in 2030, and this agreement may increase this number.
Scaling such a market, however, will require the UN to delegate monitoring, reporting, and verification responsibilities to experienced market players. Verifiers in the compliance and voluntary carbon markets are well-positioned to become key stakeholders in this high-integrity framework. Organisations like Gold Standard have already announced plans to align their protocols so that project developers can smoothly transition towards Article 6.4 requirements, while also updating their own methodologies and standards with the Paris framework. Their experience and expertise position them to support the implementation of this new market.
The COP29 agreement has the potential to end the market’s fragmentation. With endless methodologies and flawed standards, the market has been fraught with scandal. If implemented effectively, the Article 6.4 deal could bring much-needed credibility to a market that has long struggled to gain it. With over $6tn in global investment required to address climate change, private finance will play a critical role in driving the green transition. Scaling carbon markets is essential to unlocking capital, making this agreement a pivotal step forward.
Azerbaijan is known as the Land of Fire, and the Article 6.4 agreement might just be the spark that ignites the voluntary carbon market. It’s a milestone that verifiers, exchanges, developers, and investors alike have hoped for to bring confidence to scale the market. This is only the first step in a global UN-backed carbon market, yet one that can determine the future of carbon trading altogether.
