15 March 2023

What role does the voluntary carbon market have in an Article 6 world?

India has shown how national carbon trading can work in tandem with voluntary markets, argues Finn O'Muircheartaigh

Which market provides the best international tool to help tackle climate change: the voluntary carbon market (VCM) or Article 6?

This is a question countries are urgently trying to understand the answer to.

For governments, carbon markets are a tool to help them achieve their climate targets. As with all markets, they capitalise on the idea of efficiency. The climate emergency demands that we reduce carbon everywhere, all at once, but the reality is that the cost of this varies drastically across the world. The promise of carbon markets is to direct climate capital to where it can have the quickest impact and, in the process, direct much-needed funds towards developing countries.

Governments now have a choice of carbon markets to deliver their objectives.

Finn O’MuircheartaighIn recent years, the VCM has been an important source of decarbonisation finance for countries, leveraging net zero commitments from companies in developed countries to help decarbonise sectors in largely developing nations.

At the Glasgow International Climate Summit in 2021, governments agreed a new carbon market for governments. This emerging market, which is bureaucratically referred to as Article 6 (named after the section of the treaty in which it was agreed), allows countries to trade national-level carbon credits with one another.

Article 6 is in fact two markets. Article 6.2, the first stage of this market, allows countries to trade bilaterally subject to a few ground rules to make sure the credits are robust. Article 6.4 will establish a UN-regulated marketplace which will specify standards for credit generation in the coming years.

The promise of Article 6 is that a government-backed market could increase the scope of emissions captured and help raise ambition. This rules-based approach would also solve accounting challenges such as double counting, improving the robustness of the market as a means of exchange.

Now governments must ask the question: which market can effectively help them to meet their climate goals and attract investment?

India has now provided an answer: both Article 6 and the VCM have an important role to play.

Last week, India set out a plan to use Article 6 to attract investment in high-cost decarbonisation technologies. It published a list of technologies that would be eligible for Article 6.2 trading, including solar thermal power and green hydrogen. The gamble is that other governments will be willing to finance these activities, in return for exchanging a share of the emissions reduced.

Concurrently, India suggested other credits outside of these sectors would be eligible for the VCM. In other words, this market will continue to operate in much the same way as it currently does, financing a range of mitigation activities across sectors and supporting India's ongoing efforts to meet its domestic climate targets under the Paris Agreement.

An important caveat to this approach – and a factor for many countries – is that credits cannot be exported to the VCM in the event that this would impact its efforts to achieve its national climate target (Nationally Determined Contribution, or NDC).

Where India is implementing domestic carbon markets, such as for energy intensive sectors, these credits are not available to be exported internationally. As India's NDC expands, so too may its domestic markets, which may reduce the credits available for export in the coming years.

India's strategy will also depend on ongoing demand for VCM credits and the price of Article 6 credits in the coming years. Much has to be clarified - including the rules on Article 6.4 - before this becomes clear.

With the emergence of Article 6 some have questioned what role the VCM would have in the event that Article 6 markets managed to scale.

India's position shows that it is not a matter of one or the other: both markets can be leveraged to address the climate challenge.

Finn O'Muircheartaigh is head of policy at BeZero Carbon, which describes itself as a global ratings agency for the voluntary carbon market.

BeZero Carbon