As more than 100 world leaders convened in Baku, Azerbaijan for COP29 from 11-22 November and more than 70,000 delegates attended in-person or virtually, Pollination had three delegates on the ground, including Managing Director Rick Saines, Managing Director and Head of Pollination Law Marisa Martin, and Associate Rachel Barrales.

This COP marked significant milestones in rulemaking around Article 6 and decisions on climate finance, which can open the gates for substantial advancements in carbon finance flows.

Completed Article 6 rulebook opens new chapter for carbon markets

Article 6 of the Paris Agreement governs cooperative approaches for internationally trading carbon emissions mitigation outcomes—i.e., it creates a framework for high emitting countries or entities to invest in emissions mitigation activities in lower emitting countries to help reduce overall global emissions. The completion of the Article 6 rulebook for international carbon trading marks the culmination of nine years of negotiations and heralds a new wave of opportunity for carbon markets.

Saines said, “The outcome of COP29 is both a milestone achievement that should be celebrated and an example of how challenging the transition to net zero remains.”

Negotiators successfully bridged divides across several contentious issues^[1] to reach decisions bolstering the two main international carbon trading approaches recognized and established by Article 6: transactions under sovereign Article 6.2 frameworks and the Article 6.4 centralized carbon trading mechanism. With this consensus, Pollination expects to see an increase in market activity. “The private sector can now be responsibly directed to scale much greater amounts of Paris-aligned finance” added Saines.

Article 6.2

Article 6.2 transactions—which offer countries a decentralized approach for trading units between themselves or to other entities—were already underway well before COP29 began. However, the guidance decided in Baku provides clarity to the market on the parameters of these transactions, including:

• Changes to authorization are allowed; however, they cannot impact units that have already been first transferred unless specific circumstances have been agreed to between the participating parties. This outcome provides a level of certainty to market participants to determine on a case-by-case basis the level of revocation risks present in the particular authorization.
• The international registry can have issuance functionalities for countries that request it, in addition to the tracking features previously delineated. This update may allow for more access to 6.2 transactions for countries, but care must be taken in the market to not conflate issuance from the international registry with credit quality, with the decision text specifically caveating that any use of the issuing function of the registry is not an endorsement of the quality of the units issued by the COP.
• Additional guidance on sequencing, reporting, and addressing inconsistencies in reports submitted by the selling and buying countries provides procedural clarifications for participating Parties. The required public reports will enable market participants and observers to review certain inconsistency and transaction information, which will help hold Parties to high standards of integrity.
• Notably, a contentious definition of “cooperative approach” was not included in the text. Without the definition, Article 6.2 remains open for unilateral authorizations, such as for use by airlines under the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).

With the final guidance on these key points in place, governments and countries are encouraged to adopt and adapt domestic regulations to shape domestic carbon market approaches to align with Article 6.2 frameworks. As further clarity emerges from these Article 6.2 decisions and implementation of related domestic policies globally, participants in carbon markets—including in voluntary carbon markets—may have greater confidence in the economic viability and environmental integrity of carbon projects and transactions.

Article 6.4

Article 6.4 establishes the Paris Agreement Crediting Mechanism (PACM), a centralized mechanism that allows for the issuance and trade of credits from projects eligible under specific methodologies and standards, managed by the Article 6.4 Supervisory Body (SB). Two decisions made at COP29 pave the way for the full operationalization of the PACM:

• Article 6.4 made headlines with a surprisingly quick decision announced on day 1 of COP29 in which countries decided to “take note” of the standards on methodologies and removals adopted by the SB in October. The decision sets up the PACM to be fully functional without additional negotiations (as soon as the SB completes a long list of tasks including finalizing guidance and approving methodologies).
• The second Article 6.4 decision provided additional guidance to clarify the rules, modalities, and procedures of the PACM:
  • The decision clarifies that host Parties must specify the authorisation status of the tradeable units issued via the PACM (i.e., Mitigation Contribution Units, MCUs) at the time of issuance; however, un-authorised MCUs still in the registry can be authorised later. This provides flexibility to Parties to delay decisions on MCUs authorisation status (and therefore end use, e.g., meeting Parties’ Nationally Determined Contributions or trading under Article 6.2). Public and private carbon project developers will also benefit as it strengthens an interoperable pathway to monetising emissions mitigation activities between markets, which can bolster confidence in the viability of carbon projects, thereby catalysing project deployment.
  • The decision also holds that Least Developed Countries (LDCs) and Small Island Developing States (SIDS) are exempt from the 5% share of proceeds fee to the Adaptation Fund that is otherwise required of all PACM projects at issuance. Exempting LDCs and SIDS from the contribution may increase the viability of emissions mitigation projects in those countries and enable a greater share of climate finance to flow directly to the countries. It is also seen as an equitable and efficient outcome, as the revenue from the fee is likely to be directed back to many of the LDCs and SIDS as beneficiaries of the Adaptation Fund.

It may be a year yet before the PACM is fully functioning with approved methodologies and new registered projects.^[2] To realise the greatest impact from Article 6, Parties, civil society and market participants must continue applying pressure to push for high integrity across the transaction lifecycle.

With this significant win under their belts, negotiators pack their bags until Article 6 negotiations resume substantively in 2028 on contentious topics such as multi- vs single-year NDC adjustments and emissions avoidance. Martin reflects, “As we recognise the achievement of the Article 6 negotiations, it is up to all of us in the market to turn these decisions into action that drives climate finance and real mitigation outcomes.”

Inching closer to closing the climate finance gap

COP29 in Baku was promoted as “the finance COP” with the Presidency particularly focused on achieving agreement on the new collective quantitative goal for finance (NCQG), aka the Baku Finance Goal. The final NCQG is a commitment by developed countries to mobilise, through all available mechanisms, at least $300B per year for developing countries for climate action by 2035—which triples the previous commitment of $100B per year. This commitment was paired with a broader call to action to the public and private sector to significantly scale up climate finance, by more than 4X by 2035. “This is a meaningful step in the right direction, and should be recognised as a successful achievement by the COP. The challenge is that the finance need is estimated at 1.3T per year, which has left some developing economies frustrated at the significant financing gap that remains” said Saines.

Proponents felt encouraged by the increased global commitment and were quick to laude the mandate put to the Presidencies of COP29 and COP30 to produce a “Baku to Belem Roadmap to $1.3T.” This roadmap is intended to explore ways to scale up international climate finance through grants, concessional and non-debt-creating instruments and other measures. Critics of the outcome were dismayed that wealthy countries could not definitively commit to providing even a quarter of the total required international finance, leaving many to wonder whether and how this funding will materialise.

Pollination remains cautiously optimistic about the funding gap. Recognising the valid points made by critics of the NCQG and developing economies left frustrated by the outcome, we see the potential for private sector vehicles and development institutions to help close the international climate finance gap.

Countries now have expanded opportunities to drive capital toward global climate impact through carbon market transactions.

Martin notes, adding “The COP29 decisions emphasise the important role that market-based mechanisms and the private sector can play to fill gaps in international climate funding.”

It is important to celebrate the significant progress of COP29, particularly the major win in completing the Paris rulebook for Article 6. This achievement sets the stage for carbon markets to deliver real impact on the ground and channel much-needed finance for climate solutions – especially considering the remaining finance gap to the goal of $1.3T by 2035.

With leaders in law, policy, finance, investment, technology and business, Pollination helps organisations tackle the complex challenges in navigating the climate transition.

To learn how your organisation can navigate the new directives coming out of COP29, contact us today.

^[1] For a refresher on where negotiations ended in June 2024, please see the previous Pollination piece on Bonn outcomes.

^[2] Projects transitioning from the Clean Development Mechanism are subject to different timelines that will allow them to issue credits under the PACM before new projects.