FEATURE: First Article 6 projects emerge, but stay in the background

Quantum Commodity Intelligence – Developers have started work on the first few carbon projects under Article 6 of the Paris climate change agreement, two years after the world's governments agreed a deal defining the key parameters of carbon trading at the COP26 summit in Glasgow.

However, for now, private sector firms have preferred to remain silent about their intentions, because few countries have finalised their legal framework and as negotiations are still ongoing at the UN level to operationalise Article 6.2 for government-to-government transactions and Article 6.4 for project-based trade.

At this year's COP28 in Dubai, UAE, several developing countries are expected to officially announce a list of sectors eligible for carbon credit exports. Sources tell Quantum that in the background, many of these are already known to developers, at least for the 'most advanced' countries.

Potential project types

To date, projects in the cookstoves, transport, rice farming and waste management sectors have been mulled, while a new developer launched officially last month in Asia that is working on some of the first 'Paris-compliant' nature-based carbon removal units.

Nations in advanced stages of discussions on the matter include Ghana, the first country in the world to adopt carbon rules compliant with Article 6, Senegal, Chile, Ivory Coast, Vietnam, Peru, Rwanda and Timor Leste, among others.

Last year, project developer Allcot and financier Carbon Growth Partners announced the world's first private sector investment to generate carbon credits under Article 6 for a waste management project in Senegal. The project, located near Senegal's third-biggest city of Touba, has since been confirmed with a $2 million investment.

"Article 6 is about 90% formed. We're very, very close to finalising all the loose ends around us. And in reality, we see governments already taking actions around Article 6 via one of the mechanisms which is built for, each week," said Hannah Hauman, head of carbon trading at commodity giant Trafigura, in September.

"We are spending a tremendous amount of time with both buy-side countries as well as export countries that are establishing infrastructure... it's already happening today," added the executive, who expects the first Article 6 transactions to be announced at COP28.

In the past few weeks, Quantum has heard of projects to electrify a major commodity logistician's truck fleet in an African country, as well as a separate scheme to subsidise imports of electrical vehicles (EV) in a different nation using carbon credits. The first few clean cookstove deals should also be announced soon, with some advanced transactions from Ghana and Senegal heard at $20-25 a tonne of carbon dioxide equivalent last month.

Africa leads on Article 6

"Africa is the most advanced when it comes to Article 6 readiness but Latin America is getting its act together," said a source close to a major buyer. "Peru and Chile are seen as the two countries in the Americas most likely to enter agreements with Singapore in the future."

Developers and consultants are busy lining up finance to kick-start projects, helped by greater certainty following successful UN negotiations on Article 6.2 at COP27 last year. As a source at a major developer recently put it: "Corresponding adjustments (the process of accounting for carbon transfers between countries under Article 6) have almost become a requirement from several investors."

A second trading source said: "What developers are mostly looking for is the corresponding adjustment rather than certainty on whether this will be 6.2 or 6.4. With 6.4 people have the option to trade into ICAO's Corsia scheme where demand is seen as more solid than in the voluntary carbon market (VCM)."

However, supply is just one side of the equation and more buyer countries will need to enter before a real 'Article 6' market can emerge. Singapore and Switzerland appear to be the most advanced to date and, while both are host to significant trading hubs for commodities and carbon credits, they do not represent by themselves significant enough demand centres.

Carbon credit criteria

In October, Singapore announced several important criteria for the types of carbon credits that will be eligible as offsets under its revised carbon tax framework. It has finalised two deals with Ghana and Vietnam, and is likely to announce two more agreements in the coming weeks, sources said.

"Singapore has sent a strong signal on the price," said one industry source, adding that several projects have already been secured some financing thanks to the Singapore guidelines. Other 'active' demand countries include Norway, Sweden, Japan and South Korea.

A major point of uncertainty for investors is the price that these projects will fetch. While some developers have used prices seen in the voluntary carbon market as references, Article 6 deals are likely to price at much higher levels because of the wider scale of the projects, which reduces the risk of so-called 'leakage' – when emissions migrate to another location – and the compliance status of Article 6.

Underlying this is also the assumption that countries will not be interested in exporting cheap carbon abatement volumes from their economies. "Without much in the way of benchmarks, we are spending a lot of time documenting marginal abatement costs in different sectors," said one developer.