The text that was agreed upon by all the negotiators at the just-concluded COP28 climate talks is silent on carbon credits. This is because the parties could not come to an agreement on Article 6.2 (bilateral trading) and Article 6.4 (carbon markets) of the Paris Agreement. 

A vibrant system for trading in carbon credits (or carbon offsets) is a key mechanism for financing climate action projects. An entity that does an activity that reduces emissions of greenhouse gases (or removals from the atmosphere) is given a ‘credit’ that can be bought by another entity that must reduce emissions — either by law or voluntarily. This way, money flows into climate action. 

The World Bank has estimated that carbon credits could reduce the cost of countries’ climate action commitments ( Nationally Determined Contributions or NDCs) by about $250 billion by 2030. 

Also read: India’s carbon credit market: All you need to know

Article 6.2 allows countries to trade in carbon credits with one another through bilateral or multilateral deals. These traded credits are called Internationally Transferred Mitigation Obligations (ITMOs). Article 6.2 has been operationalised, but there are a few sticky issues. One is whether non-government entities, including the private sector, can buy offsets from a country or not.  

For example, can the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), or, say, Google, buy carbon credits from, say, the Indian government, to offset its own obligations? Such a deal comes under the head Other International Mitigation Purposes (OIMP). ITMOs can be transferred for NDC compliance or for OIMP. 

Also, a country authorising another entity to issue carbon credits is a bit of a grey area, notes Kishor Rajhansa, Chief Operating Officer at the Doha-based Global Carbon Council. Can a country unilaterally authorise an entity or should both or all the parties agree to the authorisation? There are some technical issues such as authorisation of credits and interoperability of registries. 

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GCC, for one, is going ahead with selling carbon credits to private entities, said Rajhansa. Article 6.4 is even more complicated and there are several issues that are under negotiations. The Article deals with a market mechanism for trading in carbon credits. Rules need to be set up for measuring baselines and recognising ‘additionality’, explains Rajhansa. To put it in simpler terms, rules need to be agreed upon to avoid cheating.  

The COP28 text does not mention carbon credits or carbon trading even once. There is a reference to Article 6 .1 (voluntary cooperation) and Article 6.8 (non market approaches, such as technology transfer), but nothing on Articles 6.2 and 6.4, which are the operative provisions of the Article. 

Carbon credits enterpreneur Manish Dabkara, President, Carbon Markets Association of India, and founder of the BSE-listed EKI Energy Services Ltd, told businessline that the “failure of negotiators to adopt two pivotal texts (A 6.2 and 6.4) on compliance in carbon market modalities and international trade has left us in a state of uncertainty”. 

‘beacon of hope’

He added that the “path for advancing UN-led carbon markets remains unclear”. However, Dabkara also pointed out that the voluntary carbon market — where entities trade on their own — was a “beacon of hope”.