This opinion piece was first published on Quantum Commodity Intelligence’s website. Click here to visit the article page. 

As we start the year 2025, the world is in turmoil. Wars are raging. Protectionism is on the rise. Unilateralism is triumphant. Societal fractures abound. Weather extremes driven by accelerating climate change wreak havoc.Even wealthy nations show an appalling lack of preparedness as shown by the recent flooding in Spain killing 230 people. 2024 was the first year to break the threshold of 1.5°Celsius (C) warming from pre-industrial times. We are perilously close to key tipping points of the climate system and warnings by reputed researchers are becoming more and more strident.

Despite these more and more ominous signs of accelerating climate change, in many countries the climate policy landscape is bleak. The population grumbles about cost-of-living increases driven by carbon pricing. In Germany the government fell due to public dissatisfaction with a law mandating renewable energy-based heating systems. Climate sceptic parties win elections. Key policies driving emissions reductions are under acute threat. How can we close the emissions gap that would enable us to reach a 2°C let alone 1.5°C compatible path?

Similarly, the mood on the voluntary carbon markets is sombre. Two years of scandals have led to a meltdown of credit prices. Entire credit categories became unsellable. Many companies buying emission credits have withdrawn or try to weather the storm by ‘greenhushing’.

Attempts to self-regulate the market like the Integrity Council for the Voluntary Carbon Market (IC-VCM) only advance slowly and suffer setbacks, such as the loss of key methodology experts after the acceptance of contested REDD+ methodologies.

Cooperative approaches under Article 6.2 are thus increasingly seen as an alternative to the voluntary carbon market. Some voluntary market programme operators therefore are trying to convince developing country governments to let them run their Article 6.2 process.

The demand for emission credits with corresponding adjustments has already led to the emergence of shady unilateral Internationally Transferred Mitigation Outcome (ITMO) deals.

COP29

In that situation, the outcome of COP29 in Baku provides a ray of hope. After nine years of tortuous and acrimonious negotiations, the rules for the international carbon markets under Article 6 have been finalised.

Reporting of Article 6.2 activities will have to be detailed, enabling “naming and shaming” of low-integrity approaches. It has been prevented that private sector registry operators get a monopoly for registry services. Even better, the Article 6.4 mechanism is now based on a set of principles and criteria that bodes well for its environmental integrity. This is critical as many observers had already written off carbon markets as a credible solution for climate change mitigation.

The 30-year history of international carbon markets has seen two major failures that have led to an increasing exasperation regarding the ability of this policy instrument to seriously contribute to climate change mitigation.

After an unexpected surge in the mid-2000s, the Clean Development Mechanism (CDM) faltered from 2012 onwards. Policymakers did no longer believe that CDM projects were additional. NGOs attacked project types such as industrial gas reduction for generating high rents and limited sustainable development benefits.

A similar fate befell the voluntary market exactly a decade later. Media relentlessly exposed baseline overestimations, non-additional projects and outright fraud for sectors as diverse as REDD+, rice paddy methane reduction and efficient cookstoves. Disturbingly, the key voluntary carbon market standards had not seen the writing on the wall as they were chasing higher market shares and ignored calls for higher integrity.

The voluntary carbon market crisis may have been a blessing in disguise. It clearly showed policymakers that international carbon markets would fail again unless more stringent rules would be applied.

In an unexpected move, the Article 6.4 Supervisory Body (SBM) in October 2024 agreed to significantly strengthen the additionality test and undertake downward adjustments for all baseline approaches. Moreover, it redefined the regulatory document containing these principles as “standard” instead of “guidance”, the latter being the format in which it had unsuccessfully been negotiated at two COPs.

With bated breath, we waited for the COP to pronounce itself on the courageous move of the SBM to usurp authority vested in the COP- and already on its first day, the COP did vet the SBM’s decision.

‘Lighthouse’

2025 will become decisive for the long-term future of international carbon markets. We need to ensure that the encouraging Baku decisions are translated into robust rules that make the Article 6.4 mechanism unassailable. Then it can serve as a ‘lighthouse’ guiding the international carbon market community and start a ‘race to the top’. What needs to be done to achieve this outcome?

The methodology and removals standards agreed in Baku need to be translated by the SBM into a set of detailed regulations. This is scheduled in the next months. The devil lies in the detail and one small oversight can open a large loophole that could erode trust in the mechanism. Over the last two years, the International Initiative for the development of Article 6 Methodology Tools (II-AMT) spearheaded by Perspectives has established approaches that can help the SBM in its work.

Additionality is the cornerstone of any baseline and credit mechanism and thus needs to be treated with utmost care. The Glasgow COP26 decision on additionality already improved the situation compared with the unwieldy and circular definition used under the CDM. It made clear that an activity developer needs to show that the revenue from the sale of emission credits has mobilised the activity.

As past experience has shown that a single non-additional project attacked by media and NGOs can ‘poison’ entire market segments, it is better to err on the side of caution and thereby exclude some projects that may actually have been additional.

Again and again barrier tests have been used by unscrupulous project developers for business-as-usual projects. Such tests are generally unreliable. Therefore, an investment test needs to be mandated, which cannot be substituted by a barrier test.

All really relevant barriers can be expressed in monetary terms and thus be integrated in the barrier test. For example, even the poorest people have access to loans by informal moneylenders, but the interest rates charged will be extremely high.

The temptation to give exemptions to household devices, projects in least developed countries and small island states or jurisdictional approaches needs to be resisted. Only activity categories that are structurally unable to generate revenues should be exempt from investment testing.

Baselines

Once additionality has been ensured, the next challenge is to set a conservative baseline. In the past declining baseline emissions intensity often hid growing absolute baseline emissions given that production of goods and services increased more rapidly than emissions intensity fell.

Therefore, the baseline needs to be aligned with the long-term temperature goal of the Paris Agreement. This goal can only be reached if countries rapidly reach net zero emissions. Bluntly spoken, absolute baseline emissions levels need to fall and reach zero at the time the host country reaches net zero.

I have proposed a simple and low transaction cost approach to solve this conundrum – a discount factor that increases continuously over time is applied to the baseline emissions intensity.

While the SBM has acknowledged this concept and agreed that all baselines need to apply downward adjustment, the standard text leaves many possible ‘escape routes’. One of these is the concept of benchmarks or more widely standardised baselines. More than a decade ago, I and a group of seasoned methodology experts showed that benchmarking only works for a small number of sectors with highly homogenised production technologies.

A concept that stands completely opposed to the needs to increase environmental integrity but has been acknowledged in the standard is “suppressed demand”. While the idea is appealing to provide a special provision for countries whose population is unable to satisfy its basic needs, a serious consideration of suppressed demand always means that baseline emissions need to rise. It is thus preferable to provide public climate finance to countries with suppressed demand instead of ruining international carbon markets through loose suppressed demand baselines.

Forests

Activities involving forests, either through forest protection or afforestation, were highly contested in the early days of the carbon markets due to the obvious risks of non-permanence and the reversal of removals.

Therefore, the CDM excluded forest protection while afforestation could only generate temporary credits. These were not attractive for buyers and thus forestry projects filled a small niche only.

Surprisingly, forest protection became very fashionable in the voluntary markets and in their zenith was the biggest project category, before the scandals broke and tainted the entire sector.

Powerful interest groups now try hard to push jurisdictional forest protection into Article 6. Several rainforest countries already line up to sell REDD+ ITMOs under Article 6.2, with the offer reaching hundreds of million credits. The ART Trees standard that underlies many of these approaches has no safeguards against claiming and selling credits and then leaving the programme. Moreover, its baselines for high-forest – low deforestation countries are completely arbitrary.

The removals regulation needs to prevent a bias in favour of nature-based solutions given their potential to generate huge volumes of cheap credits if the reversal risks are not properly accounted for.

Therefore, close attention needs to be paid to the definition of avoidable and unavoidable reversals. This definition must be based on good housekeeping standards for activity developers. The overall length of the monitoring period is a critical parameter, for high-risk categories it needs to cover a century. The seemingly easy solution of rapidly passing the liability from the activity developer to the host country government needs to be averted.

Reversal risk assessments need to be commensurate with latest science and regularly updated. The shares of credits filling the buffer pool needs to be set at the high end of estimates given that climate change will increase the likelihood of reversals in most regions.

For activities with geological storage the very detailed CDM rules could directly be applied. The large body of removals methodologies developed by the CCS+ multi-stakeholder initiative for the voluntary carbon markets is available for submission under the Article 6.4 mechanism.

All actors in favour of a credible, stable, long-term international carbon market now need to work together during 2025 to provide the SBM with the material to create a universally credible Article 6.4 mechanism.

Methodologies

Public submissions on draft regulations are the starting point, followed by early submissions of baseline and monitoring methodologies once the start shot is given. If the first methodologies for important activity types are of high quality, this will enable a ‘race to the top’. The earlier such methodologies are available and high-quality Article 6.4 activities come on the market, the lower the risk that low quality Article 6.2 cooperative approaches will spread.

Also, self-regulation initiatives of the voluntary carbon markets like IC-VCM will be incentivised to improve if the Article 6.4 ‘mirror’ clearly shows them their shortcomings. A good Article 6.4 mechanism will enable credit buyers to choose high quality and eschew low quality. It will be better for all actors in the carbon market ecosystem to have a smaller volume of credits at a higher price than under a ‘laissez faire’ scenario.

Already twice we have witnessed what it means to have a huge quantity of worthless emissions credits – disruption, bankruptcy, loss of trust and slow-down of climate action. Just have a look at the continued high emissions of key industrial gases, such as HFC23, that had been mitigated under the CDM – when the incentive stopped, the mitigation stopped and nobody cared. This time we – carbon market consultants, researchers and policymakers – have it in our hand to make a difference.