October 9, 2023. Zeina Moneer

Tasneem Alsultan/Bloomberg via Getty Images

Introduction: The Paris Agreement enables carbon trading

One of the key outcomes of the 2021 U.N. Climate Change Conference (26th Conference of the Parties, COP26) meeting in Glasgow was the establishment of Article 6, which regulates carbon markets under the U.N. Framework Convention on Climate Change. The article indicates that “some Parties choose to pursue voluntary cooperation in the implementation of their nationally determined contributions [NDCs] to allow for higher ambition in their mitigation and adaptation actions and to promote sustainable development and environmental integrity.” It is argued that carbon markets could lead to more rigorous climate action by enabling governments and entities to trade carbon credits generated by the reduction or removal of greenhouse gases (GHGs) from the atmosphere, such as by phasing out fossil fuels and switching to renewable energy or conserving carbon stocks in ecosystems like forests. The results of an analysis carried out by the International Emissions Trading Association and the University of Maryland indicated that implementing NDCs, or national climate action plans, cooperatively through international carbon trading, rather than individually, could save governments more than $300 billion per year by 2030. In addition, it is estimated that relying on carbon markets has the potential to reduce the total cost of implementing NDCs by more than half ($250 billion/year in 2030), or alternatively facilitate the removal of 50% more emissions by 2030, at no additional cost.

What are carbon markets?

Carbon markets are trading systems in which carbon credits are sold and bought. Corporations or individuals can thus buy carbon credits to compensate for their GHG emissions from entities that managed to remove or reduce GHG emissions. One tradable carbon credit is equivalent to one ton of carbon dioxide or other GHGs that were reduced, sequestered, or avoided. When a credit is used to reduce, sequester, or avoid emissions, it becomes an offset and is no longer tradable.

How are carbon markets governed?

Countries agreed to set the framework for international carbon trading through Article 6 of the Paris Agreement, and its main provisions are as follows:

Article 6.2

This article allows countries to trade emission reductions and removals with one another through bilateral or multilateral agreements. These traded credits are called Internationally Transferred Mitigation Outcomes (ITMOs) and they help the buyer country to fill any gaps in meeting its own carbon reduction targets, while the host country can generate carbon revenues, benefit from technology transfer, and deliver socioeconomic gains. The ITMOs are measured as metric tons of carbon dioxide equivalent or other non-GHG metrics, such as kilowatt-hours of renewable energy. This trade of credits is expected to take different forms: project-based credits generated by private developers, jurisdictional credits generated by governments, and international linking of emissions trading systems. There are currently no limitations on the type of units that can be traded as ITMOs, and mitigation activities can be tailored specifically to national priorities. At COP27, Ghana and Switzerland authorized the first ever ITMO under Article 6.2. According to this agreement, Switzerland installed eco-friendly lighting and cleaner stoves in 5 million households in Ghana that will abandon using carbon-polluting wood for cooking. Switzerland will include these emission cuts in Ghana as part of its own climate pledges, which necessitate halving Swiss GHG output by 2030. While COP27 sought to define rules on the information that shall be reported regarding the trading of ITMOs, it remains up to the participating countries to choose to “designate information as confidential” when reporting to the technical review team. This change raises considerable concerns among environmental activists, who argue that the reporting mechanism is not sufficiently transparent and may open the door for “greenwashing” practices, enabling polluting businesses to offset their carbon emissions by paying for alleged climate mitigation and adaptation projects in developing countries. This would provide an avenue for them to maintain environmentally harmful business-as-usual practices, while exacerbating environmental injustices between rich polluting countries and poor ones.

Article 6.4

Article 6.4 creates a new mechanism for trading GHG emission reductions between countries, known as the Sustainable Development Mechanism, and in contrast to other cooperative approaches, this mechanism will be overseen by a U.N. entity, referred to as the Article 6.4 Supervisory BodyThe Article 6.4 Supervisory Body is responsible for establishing guidance and procedures, approving methodologies, registering projects, and issuing credits. Under this offsetting mechanism, a purchasing (acquiring) party can use the entirety of the credits resulting from the emissions reduced by a project or program in a host party to offset the same level of domestic emissions. In this way, according to Article 6.4,the trading of carbon credits will take place in an open market, rather than under a bilateral agreement between two countries. The text is unclear regarding the possibility of issuing credits that are not authorized. These non-authorized units can be used by private companies as a way of providing finance for climate mitigation in developing countries, but they should not be considered part of their efforts to decarbonize their activities and/or used to advertise “net zero” claims. To avoid the problem of double counting emissions, the agreement on Article 6 established an accounting mechanism known as corresponding adjustment, which means that when one country agrees to transfer a mitigation outcome to another country, this mitigation outcome must be “un-counted” from its GHG accounting. In this way, Article 6 helps to ensure the integrity and accuracy of global emission accounting to provide a real impression of progress towards meeting the collective global goals of limiting future temperature rise to less than 1.5° Celsius.

Article 6: Opportunities and challenges for the MENA region

Recognizing the opportunities that Article 6 offers for funding projects and activities in the Middle East and North Africa that advance climate change mitigation and adaptation, countries in the region are gearing up to participate in carbon trading and carbon markets. At the forefront is Saudi Arabia’s Regional Voluntary Carbon Market Company (RVCMC), which was founded by the kingdom’s Public Investment Fund and the Saudi Tadawul Group Holding Company to play a key role in scaling the voluntary carbon market and to encourage sustainable business practices and climate action, both regionally and internationally. In October of last year, RVCMC oversaw the sale of more than 1.4 million tons of carbon creditsOlayan Financing Company, Aramco, and Saudi Arabian Mining Company (Ma’aden) bought the largest share of these credits, although the total value sold was not disclosed.

RVCMC organized its second-largest voluntary carbon credit auction in Nairobi in June of this year. A total of more than 2 million tons of carbon credits were sold to 15 buyers, mainly from Saudi Arabia and other international entities, with Aramco, Saudi Electricity Company, and ENOWA (a subsidiary of NEOM) buying the largest number of credits. The clearing price reached $6.27 per metric ton of carbon credits, and it is estimated that at least 70% of the sold credits were associated with projects from countries in the Middle East, North Africa, and sub-Saharan Africa, including Morocco and Egypt. This October, Saudi Arabia launched the Greenhouse Crediting and Offsetting Mechanism (GCOM) during the U.N.’s MENA Climate Week in Riyadh. The mechanism is promoted as a tool to enable the deployment of emission reduction and removal activities at scale and to further support the kingdom’s ambitious climate targets.

In April 2023, the UAE Carbon Alliance, which includes a coalition of companies formed to develop and grow a carbon market in the Emirates, pledged to purchase $450 million worth of African carbon credits by 2030. The agreement is seen as a positive move to unlock Africa’s carbon credit generation potential as well as support climate action on the continent, while helping the UAE meet its climate pledges.

By easing the access of businesses and organizations to carbon credits and facilitating the trading of emissions, voluntary carbon markets will accelerate climate action in the region by helping companies offset their emissions, particularly those that cannot be eliminated by other means. The voluntary carbon trading mechanism established by Article 6 is more structured than early informal offset attempts in the region, yet offsetting still raises concerns regarding greenwashing.

Another key concern is whether or not a carbon credit is of high quality or genuine. In other words, businesses need to make sure. when buying a carbon credit that they are paying for a unit of carbon to be removed from the atmosphere, and not funding a project that would have been implemented regardless. Therefore, additionality is essential for the quality of carbon offset credits, and a project is additional if it would not have existed in the absence of the added incentive created by the carbon credits.

To date, there are two main types of carbon reduction projects: carbon avoidance and carbon removal. Carbon avoidance projectsfocus on preventing or reducing emissions that would have otherwise occurred. Examples include deploying renewable energy, improving energy efficiency, and avoiding deforestation. Carbon removal projects focus on removing emissions that are already present in the atmosphere. These include nature-based approaches, such as reforestation, and technology-based approaches like carbon capture utilization and storage technologies that capture emissions from industrial sites and power plants for underground storage or re-use. Both types of carbon reduction can generate carbon credits and are important tools in addressing climate change. However, according to the Science Based Targets Initiative, carbon removals are crucial to balance hard-to-abate emissions from sectors such as aviation and shipping, and are necessary to achieve climate goals. Under this premise, in order to avoid the worst effects of climate change in the MENA region there is a need to remove billions of tons of CO2equivalent by accelerating the deployment of cost-effective carbon removal solutions. However, prevailing carbon trading markets are dominated by avoidance credits (about 65% of the market).

In addition, double counting is a risk from carbon trading in voluntary markets that occurs when two or more entities claim the same offset or when the carbon credits from the same projects are being sold twice. More commonly, the risk of double counting is aggravated by the lack of consistent accounting protocols for credits generated from a project hosted in a country that accounts for this credit in its NDCs, while a company in that country tries to claim the same credit for its carbon offset commitments. Therefore, it is important to adopt coordinated standardized accounting protocols to achieve alignment between corporate net-zero accounting and reported NDCs under the Paris Agreement.

Equally necessary is making use of digital technologies within voluntary carbon markets to ensure the availability of transparent and comprehensive data on the complex steps of registering projects, verification, and issuing and pricing credits. The recent UAE declaration to establish a national system for carbon credits using blockchain technology is a step towards providing a high level of transparency, reliability, and security in managing the issuance, transfer, calculation, and accurate tracking of carbon credits.

Conclusion: Bringing efficiency, transparency, and equity to carbon markets

COP27 created an opportunity to accelerate action on Article 6 of the Paris Agreement with the progress that has been achieved towards aligning on key issues like the processes and methodologies that countries and businesses need to follow to access carbon markets, the environmental standards carbon credits must meet to be authorized, activities that can generate credits, accounting protocols that will apply, and safeguards to protect against adverse impacts. However, there are also serious concerns that need to be addressed to ensure the success of carbon markets. Emission reductions and removals must be verifiably real and in alignment with the country’s climate pledges. There must be transparency and coherence in the institutional settings and financial data for carbon market transactions. And there must be rigorous social and environmental safeguards in place to protect against environmentally or socially destructive outcomes, human rights violations, and fraud, as well as clarity on the link between international and voluntary carbon credit markets.

In the MENA region, the voluntary carbon market is rapidly growing as a mechanism for accelerating private sector climate action and helping it meet its net-zero pledges. However, voluntary carbon markets face credibility issues over poor-quality carbon credits, which raises doubts about their effect on emission reductions and ability to move the region’s climate mitigation agenda forward. Additionally, there is a lack of transparency from carbon markets, as relevant information on credit quality and transaction history remains scarce and inconsistent throughout the supply chain. With low market transparency, it becomes difficult for companies to know whether they are truly reducing their emissions, and to assess additionality in their offsetting schemes. Therefore, it is important to establish clearer guidance on how to generate, verify, and trade high-quality carbon credits, while ensuring that such trades will measurably reduce GHG emissions and provide climate finance for those who are most in need of it.

Zeina Moneer holds a PhD in environmental politics from Freiburg University in Germany and her research interests include environmental movements, environmental justice, environmental communication, international polices of climate change negotiations and adaption, and sustainability transition with a particular focus on the MENA region.

Photo by Tasneem Alsultan/Bloomberg via Getty Images

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