Amid the debates surrounding its climate finance agreement (see page 28), COP29 marked a significant achievement in carbon markets. Supporters are optimistic that this agreement will greatly bolster initiatives aimed at addressing climate change, whether by sequestering carbon from the atmosphere or preventing its emission in the first place.

“Once these carbon markets are fully operational, they will enable countries to implement their climate action strategies more rapidly and economically, which will help lower emissions,” asserted UN climate chief Simon Stiell. “Despite the challenges ahead to halve emissions this decade, the advancements made in carbon markets at COP29 will help guide us back on track.”

Article 6 of the Paris Agreement has been a complex and debated subject throughout nearly a decade of climate negotiations. The premise of countries collaborating voluntarily through carbon credits to accomplish climate goals was introduced in 2015, yet the process of finalizing the operational details has proven to be quite difficult.

Nonetheless, COP29 was able to announce a major breakthrough on the first day of the summit, with an agreement concerning the activation of one of its key elements, Article 6.4. This entails adopting standards for the methodologies used to measure the emissions reductions or removals associated with carbon credit projects, guaranteeing that these projects employ methodologies that provide verifiable results.

Shortly after, an agreement on Article 6.2 was reached, which allows for the transfer of carbon credits among countries. For example, Norway could purchase carbon credits from a project based in Kenya, which would then count toward Norway’s climate target goals—known as the Nationally Determined Contribution—that it submits to the UN.

Africa stands to benefit immensely. The continent has considerable opportunities to scale up carbon removal initiatives, particularly through tree planting and projects that help maintain carbon-absorbing ecosystems.

The African Carbon Markets Initiative estimates that Africa could earn $120 billion annually by 2050 through the sale of carbon credits. However, despite progress with Article 6, hurdles remain in turning this potential into concrete actions.

‘Fundamental transformation’

This agreement is seen as a “complete game changer,” according to Luke Leslie, CEO of carbon markets investor Key Carbon. He explains to African Business that this deal lays the foundation for a profound transformation in the voluntary carbon market. Presently, this market depends exclusively on voluntary credit purchases by corporations, which have faced fluctuating demand against a backdrop of various scandals that undermined trust.

With an international framework established for regulating carbon credit standards, Leslie foresees a transition toward a compliance-driven market. Companies may increasingly purchase credits to mitigate their exposure to carbon taxes implemented in different regions.

Leslie states that the Article 6 agreement sends a “huge demand signal” likely to prompt a significant uptick in credit purchases, similar to how buyers of physical commodities secure supply contracts in advance.

He emphasizes that this constitutes a “once-in-a-generation opportunity” for nations like Madagascar. In spite of recent widespread deforestation issues, Madagascar is considered one of the most cost-effective places globally to initiate reforestation projects, making it an attractive target for investments from carbon credit project developers.

A silver bullet?

While nearly all developers and investors in carbon markets have welcomed the Article 6 agreement, many express caution against expecting an immediate surge in market activity.

Nick Marshall, co-founder and head of carbon at TASC, an Africa-centered carbon project developer, acknowledges that the Article 6 agreement is an encouraging indicator that will eventually boost credit demand. He notes that the aviation sector has largely avoided the voluntary carbon marketplace thus far.

However, with the necessary frameworks and mechanisms in place, he feels “quite optimistic” about airlines being prompted to purchase credits from proactive countries like Zambia, which is making progress in creating frameworks for carbon credit sales.

Storm Patel, TASC’s commercial director, mentions that the company could significantly increase its project scale in Zambia two to three times “if policy certainty, clear guidelines, and off-takers for these 6.2 mechanisms were established.”

Nevertheless, Marshall warns that the Article 6 deal will not lead to immediate changes “overnight.”

He observes that implementing the Article 6.4 mechanism has a long road ahead. While the Article 6.4 agreement specifies requirements for carbon credit methodologies, the actual approval process for methodologies that meet these requirements is still in the pipeline. The timeframe for establishing a “Paris Agreement Crediting Mechanism,” allowing emissions reductions to be credited for sale to companies in other countries, is still uncertain.

Johnson Penn, CEO of EcoLinks, which is developing carbon credit projects in nations like Rwanda and Ghana, also asserts that the Article 6 agreement is not a “silver bullet” for the carbon market. While he views the finalization of the agreement in Baku as “very good,” he emphasizes that further efforts are essential before Africa can reap the benefits of increased demand.

In fact, Penn notes that talks for bilateral agreements regarding carbon credit transfers had begun prior to COP29. Though he is “cautiously optimistic” about the potential positive impacts of the deal, he admits that it remains unclear whether and when a wave of Article 6.2 agreements will materialize.

Easier in Asia

During COP29, Singapore announced several Article 6.2 agreements, including one with Zambia. However, Penn notes that only a few other countries have demonstrated strong interest in procuring credits through this mechanism. So far, the narrative in carbon markets has been “more talk than action.” For example, South Korea, where EcoLinks operates, has negotiated multiple memoranda of understanding with other governments regarding carbon credit purchases but has been slow to convert these MoUs into concrete agreements.

Penn cautions that African governments need to take proactive measures to ensure they realize the benefits of upcoming market developments. Currently, he claims that “larger projects” are significantly easier to implement in Southeast Asian markets than in most African nations.

He cites Rwanda as an outstanding example within Africa for fostering a “very supportive” atmosphere for securing credit deals. However, due to its small land area and dense population, the country is limited in its ability to execute extensive carbon removal projects.

In contrast, Penn points out that acquiring letters of authorization for carbon projects in Ghana has been a lengthy and arduous process, filled with “lengthy and unnecessary procedures.” His advice to governments is to focus on improving competitiveness to draw investment.

“If you want the carbon markets to scale quickly as anticipated, it is crucial to have efficient processes in place for when you implement all the enabling mechanisms for market growth,” Penn recommends.