askST: What role do carbon markets play at the COP28 conference?

SINGAPORE – To mitigate greenhouse gas emissions and meet climate targets, countries can voluntarily trade carbon credits with one another.

In order to ensure there is no double counting and that these credits truly reduce emissions, Article 6 of the Paris Agreement 2015 highlights the rules governing these transactions.

The Straits Times explains the intricacies between Article 6 and the issues that need to be worked out at the

United Nations COP28 conference in Dubai

from Nov 30 to Dec 12.

Q: What is Article 6, and how does it link carbon markets? 

Under Article 6 of the Paris Agreement, countries can invest in solutions outside their borders as part of efforts to raise global climate ambition and limit temperature rise to 1.5 deg C.

One way of doing so is trading carbon credits,

where countries which have a greater ability to mitigate greenhouse gas emissions and meet their climate targets can sell their emission reductions or removals as credits to other countries, like Singapore, which has limited ability to decarbonise.

Each credit represents a tonne of carbon dioxide (CO2) that has been reduced or removed from the atmosphere. 

There are three key parts to Article 6.

Article 6.2: Bilateral trade of carbon credits between countries 

For example, Country A may channel finance to Country B to provide biogas digesters for a village there to get it to shift away from using firewood, which causes emissions and deforestation. Each tonne of CO2 which is reduced from entering the atmosphere will count towards Country A’s climate targets, while Country B benefits from cleaner air.

Under these agreements, corresponding adjustments have to take place – so that the CO2 emissions removed from the atmosphere through the project cannot be counted twice towards both Country A and Country B’s climate targets.  Country B will have to “strike off” these removed CO2 emissions units from its national registry or database. 

Article 6.4: Bilateral trade of carbon credits between countries via the United Nations 

Under this framework, the credits traded by Countries A and B have to go through a centralised body which determines the methodologies and types of credits being traded.  This will set certain criteria for eligible types of credits, which have yet to be decided. 

Article 6.8: Non-market mechanisms

Country A may decide to support Country B either through capacity building or by providing financial support for a mitigation project, without receiving any carbon credits in return. 

Q: In Singapore, firms which are liable to pay carbon tax can use carbon credits to offset part of their tax.  How is this linked to Article 6?

From 2024, carbon tax will be increased from $5 per tonne currently to $25 per tonne, then to $45 per tonne from 2026 to 2027, before reaching $50 to $80 per tonne by 2030. 

Companies can use international carbon credits that have been shortlisted by the Government to offset up to 5 per cent of their taxable emissions. 

For international carbon credits to be eligible for use by companies to offset their carbon tax obligations, they must be generated under implementation agreements that Singapore has signed with the projects’ host countries.

So far,

Singapore has substantively concluded negotiations with Ghana and Vietnam,

under Article 6.2 of the Paris Agreement. If these agreements come into force, local companies will be able to purchase carbon credits from both countries to offset part of their taxable emissions.

Similar agreements with over a dozen countries such as Papua New Guinea, Bhutan, Mongolia and Peru are in the works. 

In addition, the certified emission reductions or removals from the carbon credit project must have occurred between Jan 1, 2021, and Dec 31, 2030.

Just like Singapore, countries which are exporting their carbon offsets may also have their own criteria. So, eligible projects that can be used by companies to offset their carbon tax would have to adhere to both countries’ requirements. 

Companies here may also be able to use international carbon credits authorised under the Article 6.4 mechanism if its methodologies, when finalised, meet Singapore’s eligibility criteria.

Q: Why do we need to finance nature, and how does nature relate to Article 6?

A report in 2022 from the United Nations’ top climate science body, the Intergovernmental Panel for Climate Change, found that the effective conservation of a minimum of 30 per cent of the earth’s land, freshwater and oceans

can protect biodiversity,

mitigate greenhouse gas emissions and build resilience against the effects of climate change. 

Yet only 10 per cent of climate finance is being channelled to restoring and protecting nature, as returns are not as attractive as, say, setting up a renewable energy project, and many investors may not be willing to play the long game. 

While carbon credits are one way of channelling finance to nature, nature-based carbon credit projects – particularly those involving forest conservation – have been mired in controversies.  Some issues include questions raised over whether the forests will survive in the long term, and if the projects can lead to huge reductions in deforestation. 

Ms Lorna Ritchie, the practice director for climate and sustainability at strategic advisory firm Global Counsel, said: “Carbon emissions stay in the atmosphere for hundreds, if not thousands, of years, and disease, climate change and political instability can all impact whether forests survive.”

Under Article 6.2, countries can decide if they would allow the trade of nature-based carbon projects to count towards their climate targets. 

For instance, Singapore has strict criteria on forest conservation projects that can be used by companies to offset part of their carbon tax, to ensure that the project’s benefits to the climate are not overstated. 

Under Article 6.4, countries have not decided if projects involving avoided CO2 emissions – such as through forest conservation – can be allowed.

Q: What are some of the outstanding Article 6 issues that have to be worked through at COP28? 

Countries will have to come up with their own national registries to allow for tracking and accounting of carbon credits as they are traded, said Ms Melissa Low, a research fellow at the National University of Singapore’s Centre for Nature-based Climate Solutions.

This will be crucial in proving that the corresponding adjustments had taken place.  

For instance, the National Environment Agency has been tasked with developing Singapore’s national registry. 

Some countries with less resources have tasked the United Nations to set up an international registry, which would function as a national registry for countries that need it.

But countries are still discussing the terms of reference of this international registry. There may be a time lag in rolling this out, which could have implications on transparency and accountability of carbon being traded bilaterally and might affect how carbon projects receive finance.

Ms Ritchie said that there are a number of outstanding elements that countries need to agree on for Article 6.4.

In particular, carbon market experts are divided on who should be responsible if the emissions removed from the atmosphere are not permanent – for instance, if a newly planted forest burns down due to forest fires.  

Ms Ritchie also noted that experts are divided on how long projects should continue to be monitored after the crediting period ends, to ensure their long-term permanence.