Transcript provided by Kensho.

Lindsey Hall: Hi. I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1.

Esther Whieldon: And I'm Esther Whieldon, a Senior Writer on the Sustainable1 Thought Leadership team.

Lindsey Hall: Welcome to ESG Insider, an S&P Global podcast where Esther and I take you inside the environmental, social and governance issues that are shaping the rapidly evolving sustainability landscape.

 In the recent episodes we brought you coverage of key outcomes from COP29, the UN Climate Change Conference that recently wrapped up in Baku, Azerbaijan. Today we’re back with a bonus episode where we're focusing on what COP29 means for carbon markets. Because you've been reading the headlines from Baku, you know that after years of debate, countries finally reached some key agreements on this front.

Esther Whieldon: As a reminder, carbon markets are one tool available to companies and countries to transition to a low-carbon economy. In basic terms, these are trading systems where carbon credits can be bought and sold. The idea is that you can offset your emissions by purchasing carbon credits from entities that have projects to remove, avoid or reduce greenhouse gas emissions. We released a series about the different kinds of carbon markets earlier this year and we’ll include links to those episodes in our show notes. 

So Lindsey, what did happen in Baku?

Lindsey Hall: Well, it's been nearly a decade since the Paris Agreement. And at COP29, countries have agreed on the final building blocks that set out how carbon markets will operate. On the first day of COP29, countries agreed to standards for a centralized carbon market under the UN. This released Article 6.4 of the Paris Agreement. The Paris Agreement crediting mechanism is underpinned by mandatory checks for projects against strong environmental and human rights protections, including safeguards that ensure a project can't go ahead without explicit informed agreement from indigenous peoples.

On country-to-country trading, known as Article 6.2 of the Paris Agreement, the decision out of COP29 provides clarity on how countries will authorize the trade of carbon credits and how registries tracking this will operate. And the UN said this outcome provides reassurance that environmental integrity will be ensured upfront through technical reviews and a transparent process. To learn more, today, we're going to talk with the Executive Director of the Voluntary Carbon Markets Integrity Initiative or VCMI. This is an international nonprofit with a goal of enabling high-integrity voluntary carbon markets that contribute to the goal of the Paris Agreement on climate change, protect nature and support the UN's sustainable development goals. Here's my conversation.

Mark Kenber: My name is Mark Kenber. I'm the Executive Director of the Voluntary Carbon Market Integrity Initiative, also known as VCMI. And what we do is we try and bring integrity to the carbon markets and through integrity, rebuild confidence in project-based carbon markets and therefore, drive scale. And we do that because we see that there is a huge financing gap for activities that reduce or remove or avoid greenhouse gas emissions, particularly in the developing world in emerging markets and that well-designed, high-integrity carbon markets can at least fill some of that gap by making the difference for projects that would not otherwise be financeable.

Specifically, we look at two aspects of the market. One is the demand side. That is we ask two questions, when and under what circumstances can companies credibly make voluntary use of carbon credits? And secondly, what they can say about it. And those two questions go to the heart of a lot of the concerns that companies, NGOs and other stakeholders have the suspicion that companies might be using carbon credits to avoid or evade their responsibility to reduce their own emissions.

We believe that when designed with the right guardrails and safety mechanisms in place, allowing companies to use carbon credits for some portion of their corporate climate transitions can enable them to go further and faster and can encourage companies that would otherwise not take on targets to commit to doing so because they see a way to achieve them. We also work in the same vein of trying to encourage high-integrity carbon markets with countries that are looking to host projects.

And those could be any kind of project from clean energy to sustainable agricultural to reforestation or avoiding deforestation. And we work with countries to help them think about how carbon finance -- the financing that comes from sale of carbon credits can be used strategically in a way that helps their transformation towards a net zero aligned economy. I mean to put a bit more flesh on the bones of that, carbon credits could become like another tropical commodity, where countries compete with each other on price.

The only people who benefit are the buyers and the countries and the host -- communities that are hosting projects do not really benefit from them. So we work with countries and sectors and regions to look at what is their overall net zero aligned development strategy. What do they want to achieve over the next 20 to 25 years of economic and social development. And then say or ask the question, how can carbon finance help either leverage other sources of capital or bring on board technologies that a country or region doesn't yet have access to, or drive the development of skills that will enable those technologies to take hold and scale up in the future?

So we look both at how companies should be using carbon credits, create guidance and rules for that and supporting countries think about how carbon credits can be part of a bigger package of investment in their sustainable development future. And just finally, we work very closely with the Integrity Council for the Voluntary Carbon Market, which has created standards and an assessment framework to judge the quality of carbon credits and the projects they come from.

Lindsey Hall: Mark just mentioned the Integrity Council for the Voluntary Carbon Market, or ICVCM, and that's an independent governance body. I asked Mark to describe his time at COP29, and you'll hear him mention NDCs. As a reminder, these are nationally determined contributions. And under the Paris Agreement, countries update these climate pledges every five years with the goal of ratcheting up their ambition over time. The next NDC submission deadline is in 2025. You'll also hear Mark use acronym CSR later on, and that refers to corporate social responsibility.

Mark Kenber: So we were there for the first week, focusing on the role that carbon markets can play in contributing to the overall climate finance need, how it can contribute to countries achieving their commitments, the famous nationally determined contributions. How they can help countries have more ambitious NDCs as they're known in the future and also how companies that are currently not doing anything or doing very little can be encouraged to do more.

For those of us who are working on carbon markets, the rules around the Paris Agreement’s carbon markets, known as Article 6 were finally agreed. And that now gives some confidence to those who are developing projects, looking at investing in the market, developing markets at a national level and, of course, buyers that there is now a UN imprimatur on project-based carbon markets. And with luck, that will encourage more investment.

Lindsey Hall: I ask Mark to explain in plain English, what should we understand about Article 6 and what was agreed in Baku?

Mark Kenber: Okay. So Article 6 covers what are known as the cooperative mechanisms, which broadly speaking, means how two countries can work together to meet their specific climate objectives. And so, for example, a country that has a defined target may not be able to meet all its emission reduction obligations through domestic action alone, and then it can use Article 6 in different ways to work with another country. So one example, which is called Article 6.2 is transactions between countries at the national level.

And there are some examples of this whereby countries like Switzerland and Sweden have drawn up agreements with countries like Guyana and Ghana and Thailand, where the developing country agrees to sell some units, some emissions units from its inventory to the Swiss or Swedish government. And the Swiss or Swedish government, in this example, can use those credits, those units as part of how it demonstrates that it has met the targets that it agreed under the Paris Agreement.

Those transactions tend to be backed up by some kind of project or activity, for example, agreeing to reduce the rate of deforestation or as in the case of Thailand, making a clean transport system in Bangkok. And so, they tend to be underpinned by an activity, but they're not a specific project like we might see in the voluntary carbon market. The rules for that were agreed, much is determined between countries, how they want to decide what to transact, the cost, what safeguards they want to put in place.

Then the other important one was Article 6.4, and that's about project-based carbon reductions and removals. And there, you're talking about specific projects within a boundary that reduce, remove or avoid emissions, and they tend to be invested in by private sector companies. So if you think about all the stories that we've heard over the last couple of decades about carbon crediting projects, those are the kind of things we're talking about, projects that reduce deforestation in a given area, projects that restore natural habitats somewhere, projects that replace dirty coal or oil-fired power stations with renewables, replacing dirty inefficient cook stoves with clean cook stoves.

All of those are examples of projects that could take place under Article 6.4, whereby an investor normally from a Global North country, but a company that has either a legal obligation or a voluntary commitment to meet a target, which allows it to use carbon credits, it can then invest in these projects by the carbon credits and use them to meet that commitment. Now the key thing is that those projects and the credits from them are what is called additional.

And so, some of the methodologies for determining additionality and how the credits are quantified and so on were agreed in Baku under Article 6.4, including very importantly, a mandatory sustainable development framework. For those who are listening who have followed the ups and downs of carbon markets and particularly the voluntary carbon market, over the last few years, we have seen that one of the big concerns that people levy at carbon crediting projects is that they don't take into account the rights of the host community.

They don't have rules for how the benefits are shared with the host community, and they can cause potentially adverse social and environmental impacts. And this sustainable development tool that was adopted in Baku requires project developers and project owners to demonstrate that they have met the requirements of the sustainable development tool. And that should give more confidence that there aren't any of those adverse impacts. There aren't unnecessary risks associated with the project and therefore, give more confidence for people to invest in them.

Lindsey Hall: Okay. So this topic of confidence is clearly an important one when we're talking about the carbon markets.

Mark Kenber: That's absolutely right. I mean I think we've seen in the voluntary market, in particular, because there hasn't been an Article 6 market or an Article 6.4 market until now, that volumes that have been sold and issued and retired. And retirement means a company taking them off the market to meet one of its commitments have dropped quite substantially over the last two or three years.

And that has been for a number of reasons. One is because in this issue of confidence, lots of accusations, particularly at forest-related projects that they are issuing more credits than they should do, that they are not respecting forest dwellers rights and their ability to continue to feed themselves and live a dignified lifestyle.

So lots of concerns about that, concerns about whether the projects would have happened anyway. And so that unsurprisingly, if you are a company that has put a lot of effort into reducing its emissions that see yourself as a climate leader, you don't want to be associated with a project which turns up on the BBC or in the New York Times or wherever it happens to be, being accused of best greenwashing and at worst greenwashing and negatively affecting communities involved with the project.

So this question of trust and confidence is absolutely essential. And that's why in the voluntary market, you have the Integrity Council for the Voluntary Carbon Market, which has created this threshold standard, which then accredits a whole bunch of other organizations that have their own standards. And now Article 6.4, which has a very similar framework in place. On the other hand, trust also, and I alluded to before, comes from whether people believe that companies are using carbon credits to increase their ambition, go above and beyond what they would have done anyway.

So additionality on the demand side or that they're just using it to cheat the system and mixing a carbon credit with their own emissions reductions and pretending they're all the same thing. So VCMI's work, we created a claims code of practice, which provides a step-by-step guide for companies to show them how they can use carbon credits with credibility and with integrity to complement rather than substitute for their own actions to decarbonize their supply chains, their businesses, their production facilities, et cetera.

Lindsey Hall: So given these COP29 outcomes that you've just described, what would you say are the outstanding questions for carbon markets as we head into 2025?

Mark Kenber: Well, looking forward, while the broad rules have been agreed for Article 6, the Supervisory Board, as it's known of Article 6.4, will have to approve further methodologies so that -- and the methodology is almost a sort of blueprint for how a project should demonstrate that it's additional, i.e., that it wouldn't have happened anyway. What the emissions would have been had the project not existed, how you quantify the reductions or removals that have taken place, the sustainable development safeguards and all of those things, they need to be codified. And that's expected to happen over the course of the next year.

I think we'll start to see the registries, which is the place where the transactions of carbon credits or other units is made transparent to the public. And that issue of transparency is going to be absolutely key. If we want to rebuild trust, then governments, the private sector and all those in carbon markets will have to follow a principle that everything should be in the public domain unless there is a public purpose, not a private purpose, but a public purpose for it not to be. So if you want to protect the community then that's a good reason not to put their names and addresses in the public domain.

But how much benefits are shared, what the profit margins are, what the prices are, how additionality is demonstrated. All of that needs to be in the public domain. And that's something that the UN bodies associated with Article 6 will have to deal with in the same way that the voluntary market is. I think the other thing that needs to happen is to rebuild confidence and demand, particularly from the private sector is for governments to start demonstrating, saying very clearly, not only do they accept that companies are going to use carbon credits, but to encourage them, of course, within a framework of integrity like the one VCMI has established.

So it was good to see that one of the outcomes at COP29 in Baku with the British government announcing its principles for voluntary carbon and nature markets and it made a direct reference to both ICVCM and VCMI, saying to the corporate Britain, this is something that we want you to do. You have to do it with transparency, and we encourage you to engage in this because it provides a source of finance and avoids losing opportunities to reduce emissions.

And I'm hopeful that over the course of the next 12 months, not only will more governments issue sets of principles that show the carbon markets have a role to play in climate mitigation and how and the integrity rules that need to be in place. But perhaps go beyond that and put policies and incentives and regulation in place. An example of one that's already in place is, for example, in Singapore, which has a carbon tax, which is applicable to all large companies in the country, but they can offset 5% of that tax obligation through investment and buying carbon credits from high integrity carbon projects.

And so, I would hope that other countries will follow suit that we'll see that it can be a way for countries to raise their overall ambition. They could say to their companies, you need to reduce your emissions by half, but maybe you can use credits to meet 10% of that. But if you do so, your emission reduction should be 55%. And that will be a way to start building momentum, raising ambition and showing that corporate decarbonization and investment in carbon credits can go hand-in-hand that can actually feed each other rather than being a zero-sum game where you do one or the other.

And so, this is something we’d look for in 2025 and beyond more and more governments to put the frameworks in place ideally based on the work of ICVCM and VCMI and of course, the Paris Agreement to give companies confidence that when they do invest in these projects, those investments will be recognized that they have air cover from government. So while there will never be the perfect project, they're not going to be criticized for having cheated or greenwashed because they're following robust guidance. And when we see that happen, then some of those predictions that the carbon market could be channeling 50 billion or more of debt-free finance to developing countries, that might be realizable.

Lindsey Hall: What else should our audience understand about the carbon markets implications or outcomes of COP29?

Mark Kenber: So I think one of the key things is that where is a lot of the debate in the public domain over the last couple of years is focused on carbon markets as a thing in themselves. It's much more helpful to look at carbon markets as part of the broader package of all the things that we need to do if we're going to address catastrophic climate change and keep temperature increases close to 1.5 degrees as possible. And so, looking at carbon markets, not on their own, but how do they fit into what people refer to as the capital stack?

If you're going to invest in transforming the electricity sector in a country, carbon credits and carbon markets on their own are not going to solve the whole problem. They can address certain issues, but you're going to need overseas development assistance, you're going to need private sector investment, public sector, investment guarantees, insurance and so on and so forth. And so, when carbon markets work, they are part of a broader package of actions and investments that are needed.

And I think when you look at them like that, then it's easier to see, okay, this is where carbon markets can make a difference. If we rely on carbon markets alone to solve the climate problem, then undoubtedly, we will fail. A second thing I think it's worth listeners thinking about is we often talk about carbon markets as if they're one amorphous blob. There are lots and lots of different carbon -- types of carbon market and lots of different ways, lots of different use cases. So, for example, the longest running carbon market is the European emissions trading scheme.

And that's very different from what we've been talking about so far. Under the EU ETS, companies in aggregate and individually are given targets for their emissions. They can then trade units amongst themselves. So if one company finds it's incredibly expensive to reduce its emissions and another one finds it's cheap, then the second company can go beyond what its target is and sell the extra units to the first company. And that's what's called a cap-and-trade system. The total volume of emissions is determined by the regulator or the government in charge and then companies trade within that, and that's a sealed system.

Then you have project-based markets where they could be linked to an emissions trading scheme, but they could be completely independent, and companies have various use cases. They could invest in the projects for purely reputational CSR reasons. They want to show that they've made an investment in a project that, for example, helps a poor community feed itself better or protects the forest or protects biodiversity. Or they could use them as part of a target that they have, it’s a science aligned or net zero target where they use carbon credits to meet part of that obligation.

I mentioned the Singapore example. They might be able to use them as part of compliance with other regimes. And then you have semi-voluntary approaches, for example, Japanese companies being encouraged by the Japanese government to invest in projects, which then the Japanese government can use to meet its obligations. So there are lots of different kinds of markets and lots of different use cases.

But the thing that cuts across all of them is that they try to establish a total amount of emissions that are allowed and then allow the market piece to achieve those reductions at the lowest cost. And if they work well, if costs are reduced, then it enables countries and companies to go further in the future.

Lindsey Hall: Okay. Great. Thank you. I guess, Mark, my last question in our last couple of minutes is just about one of the things I heard a lot at COP29 was discussion of how the U.S. election results are going to impact climate action or energy transition plans. Do you expect that to have any impact on carbon markets discussions?

Mark Kenber: Well, that is indeed the great unknown what will happen. I mean, we've heard in the election campaign that the new administration wants to maximize fossil fuel production and exports. And that obviously runs counter or would run counter if it happens to the objectives of the Paris Agreement and broader global objectives around climate change. In terms of markets themselves, it's hard to know. So within the U.S., there are already some carbon markets taking place.

You have the Regional Greenhouse Gas Initiative in the Northeastern states. You have the Western Climate Initiative with California, Oregon and Washington. And I heard Governor Inslee from Washington State in Baku that whatever happens at the federal level, his state is committed to ambitious targets on climate change. I think there was a referendum on their Cap-and-Invest program, which was widely supported. So that will continue.

How that interacts with federal regulation remains to be seen. U.S. companies that have international supply chains and obviously export a lot into Europe and other markets will want to continue to be showing leadership on climate change. Because, for example, the EU and the U.K. are both introducing Carbon Border Adjustment Mechanism, which is a kind of tax that companies exporting into the European Union would have to pay based on the carbon intensity of their products compared to what they would have to be in Europe under the European emissions trading scheme and other policies.

So those companies are going to continue to want to reduce their emissions. And if they are allowed to use carbon credits or other carbon units from the carbon market to meet some of those carbon border adjustment mechanism obligations, then they will continue to do so. There are also a large number of companies in the U.S. that have signed up to science-based or other commitments, some of which have allowed them to use carbon credits.

And for reasons of reputation, because they have already invested a lot in meeting their targets and decarbonizing their companies, they will want to continue to do so. So I think it's a mixed bag. I think any hope that there will be some kind of federal carbon market or federal trading system. I mean we know over the last two and a half decades of various attempts to establish one how difficult that is. And I suspect that's even less likely, if not completely impossible over the next four years.

But what it means for international markets remains to be seen and how much the U.S. continues to engage in international negotiations, how much it sees carbon markets as a market-based private sector-led initiative. And therefore, something that it would encourage as opposed to a top-down regulatory approach, a lot of unknowns that will start to pan out in the first few months of next year, I imagine.

Lindsey Hall: Great. Well, Mark, thank you so much for taking the time to share your perspective and your experience with me and our listeners. It's been a pleasure talking to you.

Mark Kenber: Thank you very much indeed.

Lindsey Hall: So today, we heard from Mark about the big outcomes from COP29 related to how carbon markets will operate under the Paris Agreement. For Article 6.2, there was an agreement that provides clarity on how countries will authorize the trade of carbon credits and how registries tracking this will operate. For Article 6.4, countries agreed standards for centralized carbon market. And even calls this outcome good news for developing countries that will benefit from new finance flows.

Esther Whieldon: You heard Mark say that trust and confidence are essential for these markets. He also noted that carbon markets are just one tool in the decarbonization toolbox, and they need to be considered in tandem with many other solutions. We'll continue covering carbon markets in upcoming episodes. So stay tuned for our coverage of the Global Carbon Markets Conference hosted by S&P Global Commodity Insights.

Lindsey Hall: Thanks so much for listening to this episode of ESG Insider. If you like what you heard today, please subscribe, share and leave us a review wherever you get your podcast. 

Esther Whieldon: And a special thanks to our agency partner, The 199. See you next time.

Copyright ©2025 by S&P Global  

This piece was published by S&P Global Sustainable1, a part of S&P Global.     

DISCLAIMER  

By accessing this Podcast, I acknowledge that S&P GLOBAL makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in this Podcast. The information, opinions, and recommendations presented in this Podcast are for general information only and any reliance on the information provided in this Podcast is done at your own risk. This Podcast should not be considered professional advice. Unless specifically stated otherwise, S&P GLOBAL does not endorse, approve, recommend, or certify any information, product, process, service, or organization presented or mentioned in this Podcast, and information from this Podcast should not be referenced in any way to imply such approval or endorsement. The third party materials or content of any third party site referenced in this Podcast do not necessarily reflect the opinions, standards or policies of S&P GLOBAL. S&P GLOBAL assumes no responsibility or liability for the accuracy or completeness of the content contained in third party materials or on third party sites referenced in this Podcast or the compliance with applicable laws of such materials and/or links referenced herein. Moreover, S&P GLOBAL makes no warranty that this Podcast, or the server that makes it available, is free of viruses, worms, or other elements or codes that manifest contaminating or destructive properties.  

S&P GLOBAL EXPRESSLY DISCLAIMS ANY AND ALL LIABILITY OR RESPONSIBILITY FOR ANY DIRECT, INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR OTHER DAMAGES ARISING OUT OF ANY INDIVIDUAL'S USE OF, REFERENCE TO, RELIANCE ON, OR INABILITY TO USE, THIS PODCAST OR THE INFORMATION PRESENTED IN THIS PODCAST.