ANALYSIS: UN 'inter-sessional' climate talks in Bonn back 'tidier' texts on Article 6 carbon markets

Quantum Commodity Intelligence – The annual UN 'inter-sessional' climate talks in Bonn, which concluded last week, backed draft negotiation texts on the Paris Agreement's carbon trading mechanisms, an outcome that market participants said was much needed so that negotiators have clearer wording for the higher-level COP29 climate conference in Baku, Azerbaijan in November.

The Bonn plenary session late on June 13 agreed to back texts that various blocs and countries said had attempted to "streamline", "bring better order" and "tidy up" the various, and often highly-contradictory, options on offer.

"Constructive discussions in Bonn clarified positions on Article 6.2 and 6.4 ahead of COP29. Delegates also agreed to hold a workshop to further progress technical work on Article 6.2 and 6.4 ahead of November," the UN Framework Convention on Climate Change (UNFCCC), the UN's climate arm, said in a statement published later on June 13.

"As a result, they will be better placed to meet in Baku ready to finalise an outcome and move towards better carbon markets," the UNFCCC added.

However, the text did not reduce the options on key aspects that include authorisation of credits, tracking, the role of registries, and "sequencing" in the process of generating and transferring credits. The less-centralised country-to-country Article 6.2 market already enables bilateral deals on credits, but is said to need clearer accounting rules to ensure integrity.

The country-to-company 6.4 mechanism that is administered by the UN, needs a decision by the COP to become operational so that it can fulfil its intended role as a successor to the Clean Development Mechanism, the main market provided by the Kyoto Protocol.

The text also decided to exclude emissions "avoidance" projects and programmes in Articles 6.2 and 6.4, with a review of this procedure not an option until 2028, according to what negotiators agreed in Bonn.

Emissions avoidance has long been a source of contention and confusion in UN climate talks, say observers. That is mainly because the term has been ineffectively and inconsistently defined, and that the nature of some activities, such as avoided deforestation, is seen by some to convey unacceptable integrity risks.

Yet, some observers say not having avoided deforestation in Article 6 could prevent much-needed higher carbon prices for the sector, and weaken incentives to prevent deforestation in developing countries.

Texts also agreed options on "common nomenclatures", which is in effect uniform wording that helps harmonise the functions of registries. Negotiators also agreed a process to set up a code of conduct for handling confidential information in a "technical expert review" mandated under Article 6.2.

The Bonn meeting was primarily a preparatory session, and has given various blocs the chance to hold a "dress rehearsal" on how to conduct further highly-complex negotiations at COP29.

In Baku, the more political tone of the talks means there is greater pressure to get agreements than at the more technical Bonn interim meeting.

"Whilst progress on the complex substantive issues on Article 6 here in Bonn has been limited, negotiators have engaged in a constructive spirit," said Bjorn Fonden, international policy advisor at carbon trading association IETA.

At COP28 in Dubai late last year, talks on markets failed partly because of highly differing views on what extra measures are needed on transparency and accountability of activities that yield credits, and the role of registries, issues that will once again be a major focus of talks in Baku.

Carbon Market Watch, a Brussels-based NGO that is opposed to most forms of carbon trading, said that because "widely divergent options" remain in the Article 6 negotiation texts, there are "fundamentally clashing visions over the level of transparency, oversight, and integrity needed in UN carbon markets".

Earlier during the two weeks of talks, a senior policy advisor to Sweden's government outlined the risks presented by a failure to build in greater transparency to deals done through the Paris Agreement's Article 6.2 carbon credit mechanism.

Sweden has signed several early-stage deals on Article 6.2 with developing countries that could mature into fully fledged contracts that yield internationally-tradable credits, most recently with Ghana late last month.

"Transparency is critical in the sense that it's not going to occur spontaneously," said David Newell, a senior policy advisor on international climate cooperation at the Swedish Energy Agency at a side event organised by IETA.

"As UN intermediaries, get this right, and it's not going to be perfect, but it needs to be right enough that it's not going to cause this massive second loss of faith in the future [in carbon markets]," said Newell, who is a negotiator for the Nordic country.

He was referencing the wave of distrust that followed integrity concerns in the voluntary carbon market (VCM) and the need for a UN market to avoid a repeat in how it draws up rules for Article 6.

Bound by EU mandate

But, as an EU member state, Sweden and other countries are bound by the bloc's shared mandate to negotiate for more detail in Article 6.2 on how the mechanism's credits, known as Internationally Transferred Mitigation Outcomes (ITMOs), are issued and safeguards on environmental integrity.

Newell called the talks in Bonn "constructive", adding that "we have the potential to get a deal in Baku. Absolutely. Everyone's here to play. I don't think there's anyone here that's obstructing for obstructionism's sake. So I really think the potential is there".

However, "there are some important differences we need to get over", the Swedish government negotiator added.

Finding agreement in Baku on Article 6 will be set against the background of other highly- charged and consequential strands of the UN talks. In these areas, the Bonn meeting made only little tangible progress in terms of refining key texts.

These include the 'New Collective Quantified Goal' on climate finance, which non-OECD countries say should vastly scale up the flow of grants and loans to poorer countries so they can invest in lower carbon technologies.

Poorer countries say they need the new mechanism to deliver potentially as much as $1 trillion a year to replace the previous $100 billion a year climate finance vehicle committed to at COP15 in Copenhagen in 2009.

The current structures have long been criticised by poorer nations for being far too slow and ineffective in raising and delivering the right forms of finance.

Richer countries don't want to be pinned down on a specific number for future commitments, and advocate that the private sector, rather than governments, should be mainly responsible for raising and lending climate-related funds. They also want the donor pool widened to include fast-growing developing economies and oil-rich Middle Eastern states.

Meanwhile, texts on the Global Stocktake, otherwise known as the 'ratchet' of the Paris Agreement that requires countries to submit scaled-up climate plans early next year, also failed to show collective will to raise ambition, said NGO observers of the talks.

"Too many items are still on the table... We've left ourselves with a very steep mountain to climb to achieve ambitious outcomes in Baku," the UN's climate chief Simon Stiell said in a statement.