Words by Janet Hallows, CMI Director of Climate Programs & Nature-Based Climate Solutions.

The past year has seen a significant focus on the domestic carbon credit scheme here in Australia, and rightly so given that it is an important cog in the government’s climate change policy mix. With the reforms to the ACCU Scheme taking place, however, it’s easy to overlook significant recent regional and international carbon market trends that will increasingly require our attention.  

By enhancing global cooperation and investment in climate solutions through carbon markets, the implementation of Article 6 of the Paris Agreement has the potential to deliver an additional 4 to 12 billion tonnes of emissions reductions annually by 2030.  

Since the Article 6 rulebook was finalised at COP26 in Glasgow, over 100 countries have expressed their willingness to use cooperative approaches in their updated Nationally Determined Contribution (NDC). Many of these countries have been busily signing preliminary bilateral agreements to transact carbon credits, and Australia needs to understand how these will shape the decarbonisation efforts of our major trading partners, and our Pacific neighbours. 

Unexpectedly, COP28 failed to finalise the last administrative elements for managing country-to-country trading in emissions mitigation, including the establishment of a new UNFCCC emissions crediting system under Article 6.4, which would replace the previous Clean Development Mechanism (CDM). 

But these final elements, while desirable, are not essential. Nearly all the rules for bilateral emissions mitigation trading agreements – including rules to avoid emissions reductions “double-counting” – have been in place for some time and Article 6.2 is already operational, with the first trade of ITMOs (internal transferred mitigation outcomes) between Switzerland and Thailand on track for completion.  

Consequently, a number of countries have already made significant advances towards legally-binding bilateral agreements. 

The Indo-Pacific region in particular has seen a surge in Article 6.2 activities, with major economies actively seeking bilateral partnerships and formalising Memorandums of Understanding (MoUs) to secure international credits for meeting domestic NDC targets. Singapore alone has signed more than a dozen MoUs that will pave the way for bilateral agreements, with countries including Vietnam, Chile, Colombia, Mongolia, Fiji, Costa Rica, and Senegal – with the latter three announced at COP28. 

At COP28, Singapore also advanced on a pre-existing MoU with Papua New Guinea, by signing an “implementation agreement” on carbon credits that provides a framework for authorising carbon projects in Papua New Guinea – marking the first time Singapore has moved beyond the MoU phase.  

Other abatement demand-side countries that are already actively preparing for legally-binding bilateral agreements include the United Arab Emirates (the COP28 host), Japan, Sweden, Switzerland, South Korea and Norway.  

Potential supply-side countries are far more numerous – which is unsurprising given the potential for the abatement projects they would host under these agreements to deliver important environmental, economic and social benefits to developing countries.  

For these countries, the ability to rapidly develop a domestic value chain of capacity and expertise will derive the most benefit from North-South market-based collaborations. This means building market readiness capacity at the government, policy, and practitioner levels.  

Without robust policy and market frameworks in place, there is a risk that countries entering into agreements without a full understanding of the implications might oversell project credits, fuel local disbenefits and become unable to meet their own Paris Agreement targets as part of their NDC.  

To engage effectively, cornerstone readiness requirements should include digital registry infrastructure, an internal policy framework (with sectoral emissions breakdown), an export strategy, measurement, reporting and verification (MRV) processes, project oversight authorities and processes, and local capacity-building. 

Therefore, it is in the collective interest that potential host countries obtain adequate access to financial and technical resources and expertise tailored to address their specific needs to strengthen local capacity, foster an enabling environment, and facilitate project development.  

This is not simply about supporting transparency. There are significant efficiencies in taking a regional approach to market readiness and capacity-building in the Indo-Pacific, in building partnerships and knowledge-sharing.  

Australia’s response to international trading will become somewhat clearer next year, following a federal government consultation process on international credits and review of the Morrison Government’s Indo-Pacific Carbon Offsetting Scheme. 

Despite the lack of progress on international markets in formal negotiations, events at COP28 affirmed on several fronts just how important they will be as part of efforts to rapidly achieve a net-zero global economy. The voluntary market has been doing much of the heavy-lifting, developing infrastructure and market maturity to pave the way for Article 6. Major initiatives to back in the credibility of VCMs were announced at COP28 on both the demand and supply side of the voluntary carbon market, spearheaded by COP Presidency patronage. 

This included the historic collaboration of independent voluntary standards, as well as the establishment of an end-to-end integrity framework bringing together key international organisations to collaborate on best practice. 

Additionally, there were a number of initiatives launched such as a World Bank ambitious plan to grow global carbon markets and a major NGO joint statement on the role of high-integrity markets, transparent carbon markets as part of broader corporate transition, based on science-based targets and disclosing the use of carbon credits. 

As global attention moves away from the Dubai talks, there will undoubtedly be a renewed focus on what all this means for our domestic climate policy, and fine-tuning the role of our carbon crediting scheme within that. However as global carbon markets continue to move forward, Australia shouldn’t lose sight of the chance to assist vulnerable Pacific island countries in a way that serves their respective interests, so they can move further and faster too.  

Janet Hallows is Director of climate programs and nature-based climate solutions with the Carbon Market Institute. 

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