In an ideal world, both the voluntary carbon market and the signatories of the Paris Agreement would pull together toward net zero. However, some stakeholders worry that aspects of the voluntary market are churning the waters.

Many global carbon market stakeholders look to the market planned under Article 6 of the Paris Agreement as a driver of faster progress toward net zero, higher prices and reliable demand. Others worry that incorporating voluntary practices and standards into Article 6 could favor short-term gains over long-term progress.

Stefano Merlin, CEO of  Sustainable Carbon, was working to secure approval from the host countries in which his business operates to issue Article 6-aligned credits.

“We understand that in a very short period, maybe one year from now, most buyers will want to have a letter of approval,” Merlin told OPIS. “Prices will supposedly be higher, and we can sell our credits [under Article 6] if demand in the voluntary market continues to fall. So now the question is, ‘Okay, how will a country decide to give a letter of authorization (LOA) to a certain project?’ Will they prefer a certain standard and not another one?’ Most countries are not prepared to make a decision.”

Article 6-aligned credits have already demonstrated a strong price premium to credits traded on the voluntary market. The Klik Foundation, which manages Switzerland’s decarbonization efforts, paid an average price of CHF 27/metric ton ($31.92/mt) for its Article 6.2-aligned credits in 2023, according to its latest annual report.

Credits from blue carbon projects, which restore coastal environments, have traded at or near that level, but they are considered very high quality and remain in very low supply. REDD+ credits, which conserve standing forests and are much more abundant, have recently traded as high as $13/mt and as low as less than $1/mt.

OPIS calculated the REDD+ Vintage 2021 Credits Average at $8.75/mt on Wednesday, Sept. 4. REDD+ stands for reducing emissions from deforestation and forest degradation.

‘Parallel Worlds With Parallel Standards’

Despite higher prices associated with Article 6-aligned credits, some stakeholders have proceeded with caution.

“The problem that we are seeing now on a daily basis almost is that the LOAs countries issue are not legally robust,” said Dr. Alexandra Soezer, director of the Doha-based Climate Action Center of Excellence, which promotes Article 6 activity.

Article 6 of the Paris Agreement established mechanisms by which countries can work together to advance their nationally determined contributions to combatting climate change. Article 6.2 was planned to create an accounting mechanism for countries to transfer credits – referred to in the text as internationally transferred mitigation outcomes (ITMOs) – on a bilateral basis. Article 6.4 was planned to replace the Clean Development Mechanism (CDM) of the Kyoto Protocol and create a global carbon market serving Paris Agreement signatories.

Neither Article 6.2 nor Article 6.4 have been fully completed, but activity under Article 6.2 was allowed to proceed.

For a country to transfer an ITMO to another country, it must issue a letter of authorization promising it will make a corresponding adjustment to its NDC. That process ensures credits are not counted more than once, but LOA issuance must comply both with existing requirements from UN bodies and potentially with future alterations to Article 6.2.

This process is distinct from the voluntary market, which draws participation from corporates that have no obligation to reduce their emissions but choose to do so.

So far, 121 bilateral agreements for ITMO transfers have been initiated, while 20 have been signed, according to the UN Environment Program. Several other countries have issued LOAs to domestic carbon removal and reduction projects that have historically supplied the voluntary market, typically in exchange for a share of credits, revenue or both.

In a worst-case scenario, a country could arrive at a deal to issue an LOA promising a corresponding adjustment that won’t hold up in the future, according to several sources. It could be non-compliant with Article 6 requirements or it could be viewed by future governments as a bad deal and get renegotiated or revoked, sources said.

The voluntary market and bilateral action under Article 6 of the Paris Agreement are “parallel worlds with parallel standards,” Soezer said.

“This confuses countries so incredibly,” Soezer said. “They have very little capacity to implement and evaluate projects, implement and issue the letters of authorization and do the reporting.”

A whitepaper published by CACE on Aug. 29 took aim at voluntary market quality initiatives, such as the Integrity Council for the Voluntary Carbon Markets’ (ICVCM’s) Core Carbon Principles (CCPs). The efforts “threaten to fragment global efforts and dilute the stringent environmental integrity principles set forth by Article 6, potentially leading to less effective climate action and increased investment risks,” according to the whitepaper.

ICVCM CEO Amy Merrill told OPIS in response to the whitepaper that her organization’s CCPs help countries prepare for Article 6.

“The ICVCM is operating as a threshold quality for carbon crediting programs,” Merrill said. “The idea is that, over time, because of the close coordination that we have through de facto processes and direct conversations, you create a virtuous cycle of alignment.”

There is “concern that the 6.2 guidance itself doesn’t set an incredibly detailed template for that LOA,” Merrill continued. “And that’s because the template needs to comply with domestic law. Any country under 6.2 can take any project operated by any independent program or its domestic program and say, ‘I am going to give a LOA to that project,’ and [the country] is on the hook for explaining how that project meets Article 6 guidance.

“ICVCM makes it much more likely that that’s going to be a high-integrity project because ICVCM provides a way for a country and for developers and for independent programs to make sure that the design is high integrity, even when there isn’t domestic guidance.”

Developers Must Navigate an Uncertain Path

Pablo Fernandez, CEO of project developer Ecosecurities, hopes to one day sell nearly all of the credits his business generates into a compliance market.

“I work with the voluntary markets because the compliance markets are not functional today,” Fernandez said. “Our view and our strategy have always been that if you want to mobilize capital, it has to be through regulation.”

For now, “the corresponding adjustment mechanisms are not there yet,” Fernandez said. “We’re still in the alignment phase and not in the eligibility phase for anything related to corresponding adjustments.”

Still, Fernandez believed that some of the concerns over issued LOAs are overblown. Lessons can be learned from the CDM, which established a global carbon market to serve the Kyoto Protocol, he said.

“It’s a risk that does exist,” Fernandez said. “It existed under the CDM. But you can check and see how many letters issued under the CDM were revoked. It was a very small number.”

Both Fernandez and Merlin said they will continue their work storing and removing greenhouse gas emissions.

“The CDM failed,” Merlin said. “The voluntary market, in a certain way, failed because you have seen all these reputational issues and it’s a voluntary market. So, by definition, it will not solve everything, it’s an additional tool. And at the same time, Article 6 is taking so long to be implemented. The issue is that all these mechanisms have failed. And at the same time, all these mechanisms are very important.”