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December 14, 2023

EU and US at loggerheads in failed COP28 carbon markets talks

No agreement was achieved during negotiations over Articles 6.2 and 6.4 of the Paris Agreement that took place at COP28 in Dubai. The articles deal with the trading of greenhouse gas emissions reductions and the mechanism for these trades. (Photo: Fadel Dawod/Getty Images)
No agreement was achieved during negotiations over Articles 6.2 and 6.4 of the Paris Agreement that took place at COP28 in Dubai. The articles deal with the trading of greenhouse gas emissions reductions and the mechanism for these trades. (Photo: Fadel Dawod/Getty Images)

Two weeks of negotiations on carbon markets ended without agreement, with rules’ flexibility and emissions removals among the sticking points

COP28 negotiators have failed to agree on principles governing the trading of greenhouse gas emission reductions, after some negotiating parties – including the EU and the US – disagreed over the nature of the regulation that should be applied to trading between countries and the robustness of carbon credit standards.

Negotiations over Articles 6.2 and 6.4 of the Paris Agreement took place at the UN climate conference that concluded yesterday in Dubai. Article 6.2 provides the foundations for countries to trade greenhouse gas emissions reductions, while Article 6.4 establishes the mechanism for emissions trades.

In November, the UN announced its Article 6.4 Supervisory Body had created a proposal on how it would operate the latter mechanism, which would allow credits registered with a UN supervisory authority to be purchased by countries, companies and individuals. 

The supervisory body’s recommendations set expectations on the monitoring and reporting of removals, as well as how to tackle “reversals”, which is when the carbon removed by an offsetting project ends up being released back into the atmosphere (for example, when a wildfire destroys a reforestation project). These proposals were submitted to COP28 for discussion by signatories of the Paris Agreement.

Negotiators could not, however, agree on the final text for either article. The EU and US fell into two camps, according to Kevin Conrad, co-founder of the Coalition for Rainforest Nations, an intergovernmental organisation that took part in the talks. The EU favoured tighter rules while the US advocated for less oversight, he said.

“You had these titans with different philosophies and then … developing countries [fell] in different coalitions,” he tells Sustainable Views.

“A lot of the developing countries actually fell on the side of Europe because they’ve experienced these fractured voluntary markets for a long time,” he says. “I think the US was expecting they were going to get a rally of support from developing countries and it didn’t materialise.”

Reopening the Paris Agreement

The EU is viewed as wanting a more prescriptive approach to the regulation of carbon markets, while the US is seen as preferring a system that allows countries flexibility in how they apply their rules.

“The EU was trying to introduce provisions that would make oversight of carbon credit trading more centralised,” says Andrea Bonzanni, international policy director at non-profit IETA, which was an observer of the negotiations. “The US, meanwhile, favoured a more decentralised approach that relied upon standards that have been created in the voluntary carbon market, and “didn’t want to introduce this layer of oversight”. 

During a briefing following COP28, Alexia Kelly, managing director of the Carbon Policy and Markets Initiative part of non-profit High Tide Foundation confirmed this view. “The EU tends to be in favour of more top-down, UN-regulated systems,” she said. In contrast, the US thinks “it really important that countries have the ability to determine for themselves … and can often be a little allergic to strong forms of international oversight in the context of climate legislation, broadly”.

“That difference of worldview is really what we saw playing out in the rooms, and has always been a point of contention,” she continued. Usually, the EU and US are able to come to compromises, she added, “so it’s a little surprising that that didn’t happen here, because that’s always happened previously”. EU and US representatives have been contacted for comment.

The level of oversight for transactions was a key point of contention in Article 6.2 negotiations, according to Bonzanni. Article 6.2 offers the framework for countries to trade greenhouse gas emissions via a carbon credit known as “internationally transferred mitigation outcomes”. Though a final text was not agreed at COP28, countries can still trade credits bilaterally. For example, the Thai and Swiss governments have an agreement aimed at introducing 2,000 electric buses in Bangkok, Thailand’s capital city.

“According to the [UN] proposal, a group of countries working under 6.2 would have to first submit a report, have this report reviewed and approved by a team appointed by the UN Framework Convention on Climate Change,” Bonzanni says. “Only after this report was approved, countries could authorise ITMOs and trade with each other. This, to other countries in the room, was seen as a reopening of decisions made in Glasgow and even a reopening of the Paris Agreement itself.”

Not all experts agree that the EU’s approach would result in better regulation. The US was pushing for the adoption of Articles 6.2 and 6.4 in the belief that the rules did ensure “environmental integrity”, according to one person with knowledge of the discussions, taking the view that “you can add more details, but what was there was a sufficient framework to get started”.

High European threshold

Discussions over Article 6.4, meanwhile, came unstuck over proposals for emissions removals. The EU’s main concerns were how to deal with the issues of permanence and removals. The Coalition for Rainforest Nations confirmed that it shared the EU’s objections over removals, while the Independent Alliance of Latin America and the Caribbean believed that the proposals were “a bit too high level”, according to one person with knowledge of the discussions. Ailac has been contacted for comment.

In the recommendations by the 6.4 Supervisory Body, it was proposed that there would be post-crediting period monitoring, which would tackle the thorny issue of what to do if a reversal of the removal took place after the project stopped generating carbon credits.

The recommendation did not include a fixed timeline, however. Some countries wanted more than 100 years, according to Bonzanni, while others wanted a shorter time period. The EU was against adopting this recommendation on removals, he says, while other countries such as Mexico wanted reference to a part of the Paris Agreement that acknowledges the need for parties to consider their human rights obligations, Bonzanni says. This reference was included in a draft 6.4 text published on December 12, although Mexico would go on to reject both Articles 6.2 and 6.4, he notes. 

“The EU have been very cautiously but deliberately considering including removals credits in the EU Emissions Trading System, in a future framework towards the end of the decade,” says Finn O’Muircheartaigh, director of policy and markets at carbon ratings agency BeZero Carbon.

“They’re doing everything they can to get that right. They want a very high threshold, and it seemed to be for them that it was a red line in terms of raising the threshold for 6.4 in the negotiations,” he adds.

Conrad points to the EU’s experience of running its ETS compared to the US. “The EU had two decades of actually running a multi-country carbon market, and [an] understanding of what it takes to actually regulate [it], and what it takes to manage price,” he says. This “is very different to the US, which hasn’t done any of that”.

Negotiators will resume discussions over Articles 6.2 and 6.4 at COP29 next year. While the failure to agree final texts for either Article has been widely viewed as disappointing, experts also agree that finalising sub-standard texts would have been a worse outcome. But politics, as well as technical details, have been a factor in discussions, according to Lina Barrera, senior vice president of global policy and government affairs at non-profit Conservation International, which observed the COP28 negotiations.

“On Article 6.4, it’s not just technical issues at play,” she tells Sustainable Views, adding that there are “political elements at play, and if we don’t get past those, then I think we’re possibly looking at the Article 6.4 market never really getting to scale”.

A service from the Financial Times