If you want to sell and buy greenhouse gas (GHG) emissions reduction credits, stakeholders in the carbon trading system must agree on what is being sold and on system operating rules. For the UN Framework Convention on Climate Change (UNFCCC), Article 6.4 of the Paris Agreement provides the framework for Parties (member governments) to offer Emissions Reduction credits (A6.4 ERs) for sale to Governments and private sector entities. Clear rules effectively implemented and with a strong compliance structure are essential to — but cannot ensure — the economic, environmental, and social success of the A6.4 ER market.
The A6.4 Supervisory Body (SB) is advised by a Methodological Expert Panel (MEP) which drafts recommendations that the SB will present in nearly final form to country delegates at the UNFCCC’s 30th meeting (COP30) that starts on November 10 in Brazil. The SB will try to agree on draft standards at its October 29-30 virtual meeting. However, the texts sent to COP30 delegates may still contain bracketed text, signifying disagreement for COP30 Parties to resolve.
The MEP drafted a recommended standard about the non-permanence of emissions credits issued by the Paris Agreement Crediting Mechanism (PACM). “Non-permanence” is carbon trading shorthand for emissions reversals resulting from e.g., wildfires and floods. A reversal is the difference between emissions reductions within the boundary of an ER project for which tradeable A6.4 ER credits have been issued, and the estimated release of greenhouse gases due to a reversal event within the project boundary, as reported in the project developer’s reversal monitoring report. In sum, the MEP recommendation “translates” the physical result of a reversal into A6.4 ER credit accounting terms.
Non-permanence/reversals is a crucial standard for the PACM. If ER project developers don’t report emissions reversals clearly and completely according to SB rules, prospective PACM credit buyers may shun the credits due to uncertainty about credit value and integrity. According to the State of the Voluntary Carbon Markets 2024, initiatives to improve carbon credit integrity had not yet reversed the decline in VCM prices and transaction volume. (page 19) A 2024 peer-reviewed synthesis study of studies, covering 2,346 emissions reduction projects, estimated that “less than 16% of the carbon credits issued to the investigated projects constitute real emission reductions.”
The MEP issued a call for input for the non-permanence/reversals draft standard (closed for comment on August 4). IATP’s August 2 submission is one of 110 that can be read here.
The MEP members (save one) agreed on a draft comprised of a cover note and Appendices 1 and 2, which are to be applied interactively. Appendix 1 is for use by “methodology mechanism proponents,” which implicitly include those, such as the UNFCCC secretariat, who use the agreed methodologies to implement the PACM (IATP requested the SB to explicitly define “methodology mechanism proponents.”) Appendix 2 is to be used by “activity participants,” i.e., ER project developers, their financiers and other involved in the carbon credit supply chain. Appendix 3 is directed only to “activity participants,” and was developed to enable the marketing of forestry sector ER credits.
Appendix 3: Though manifestly inadequate, points to an important problem
IATP urged the SB not to adopt Appendix 3 as a non-permanence/reversal standard. For example, we asked the SB to delete the following paragraph (43): “Unintentional reversals will include personal or business insolvency leading to the defaulting of an activity participant on their obligations for remediation actions.” IATP commented,
According to this paragraph, a declaration of insolvency or bankruptcy, whether related or not to emissions reduction and/or removal projects, would suffice to end the activity participant’s obligations under the non-permanence reversals standard. Such declarations by multiple activity participants would eviscerate the PACM’s integrity and render it counterproductive to Paris Agreement objectives.
Appendix 3 is manifestly inadequate to provide ER project developers with uniform and clear rules about how to assess and report the risk of reversals in their projects. However, the Appendix 3 authors raise one important issue not considered in Appendix 1 or 2: the market integrity and financial sustainability of the PACM.
The PACM’s Reversal Risk Buffer Account Pool is supposed to receive from each project developer a portion of the SB-issued credits, according to the project’s anticipated reversal risk, estimated by the developer for each project. The Buffer Account Pool (BAP) credits should be of sufficient project quantity and quality to compensate for reversals of credits held by buyers or offered for sale on the PACM registry. If the BAP credits are insufficient to compensate for the reversals in a critical mass of projects, the insufficiency could decrease PACM credit offering prices as prospective buyers shun the project developer’s credits. Furthermore, prices could fall for credits of associated project types, e.g., forestry sector ER projects. What options should the SB consider that would prevent a PACM price collapse before the registry is fully operational?
Appendix 3 proponents are asking the SB to consider the “use of insurance policies, or comparable guarantee products, or third-party guarantee approved by the Supervisory Body to cover the risk that reversals occur.” (paragraph 49) Insurance policies would backstop the use of BAP credits to compensate for reversals to ensure there would be some form of reversal compensation for A6.4 ER credit holders if the BAP failed. As IATP noted,
The Integrity Council for Voluntary Carbon Markets (ICVCM) work program report on permanence (version 1.1) recommends that the ICVCM explore the use of insurance products and the industry-wide pooling of buffer pool credits as approaches to manage risk reversals beyond the ICVCM’s 40-year [reversals] monitoring limit. (pages 20-21) Whether these approaches can be financially viable and achieve the emissions reductions objectives of the Paris Agreement on a science-based pathway opens a lot of questions that cannot be considered here.
Most GHG emissions must be reduced or removed for at least 100 years to contribute to the Paris Agreement goal of limiting average global warming to 1.5⁰C (2.7⁰ Fahrenheit) above the 1850 emissions baseline. ICVCM believes project developer monitoring of ER projects for 40 years is economically feasible for the ER project developers and private carbon crediting programs, such as Verra. Carbon credit investors might be made whole by an insurance mechanism that compensates for reversals occurring after 40 years. But will the climate be made whole if buffer account credits no longer compensate for reversals?
Appendix 1: Shortcomings and strengths
One of the most consequential determinations for ER project developers and their Designated Operating Entities (DOEs), who validate the project designs and verify ER reporting, is when a project is characterized as having “negligible risk of reversal.” This determination greatly reduces the project developer’s reversal monitoring and reporting requirements. IATP commented, “Because the consequences of myriad reversals in aggregate are likely to be severe for the climate, the quantum of reversals to qualify an activity as having “negligible risk of reversal” should be very conservative.” (paragraph 3 g) We chose the most conservative option the MEP offered for this definition: “Negligible risk of reversal: A risk of reversal that would result in a loss of no more than one tenth percent of all the A6.4 emission reductions [claimed for a project].”
The MEP is trying to develop a non-permanence/reversal methodology that is applicable to all ER project types, whether land-based or technology based, such as Carbon Capture and Storage (CCS). IATP suggested that the application of the methodology could be clarified in footnotes to paragraphs. However, we were alarmed by one footnote, according to which, “The following types of activities are deemed not to be subject to reversal risks.” (paragraph 3.6) “This includes, for example, landfill gas capture and utilization, abatement of nitrous oxide emissions from nitric acid production, reduction of N2O emissions from fertilizer application, or reduction of methane emissions from rice cultivation or enteric fermentation.” (footnote 8)
IATP commented, “Methane and landfill digesters may be deemed to have negligible risk but occasionally they explode, releasing methane into the atmosphere. Furthermore, digesters leak and overflow. Surely, the MEP cannot deem methane digesters to have no risks.” We provided links to relevant articles and recommended that the MEP delete “methane and landfill digesters” from the project types “deemed not to be subject to reversal risks.”
Another shortcoming of Appendix 1 is any mention of the role that Designated National Authorities (DNAs) of the Parties hosting the ER projects are to play in ensuring the environmental, social and market integrity of projects operating within their jurisdictions. This lack of guidance about the responsibilities of DNAs is not the fault of the MEP. The Cover Note to the Appendixes concludes, “The MEP noted that the [emissions] Removals Standard does not refer to Host Party roles. The MEP seeks clarification from the Supervisory Body whether it should conduct further work on this matter.” (paragraph 45) Such work is needed to prevent conflicts between national regulations and Article 6.4 requirements that might disrupt PACM operations.
The core strengths of Appendix 1 are the 11 equations proposed to provide uniformity in how active participants quantify the reversals they report to the carbon crediting programs and other Designated Operational Entities that verify reversals reporting. Quantification is a major factor in determining how many BAP credits must be released to compensate for reversals. IATP made some proposals for clarification in the verbal description of elements in the equations but otherwise supports the proposed equations.
The MEP gave two options for the application of the equations to maximize or minimize the Share of Proceeds (SOPs) from the sale of the A6.4 ER credits that would contribute to the UNFCCC’s greatly underfinanced Adaptation Fund. We urged the SB to recommend the use of the equation that would require the largest contribution of SOPs to the Adaptation Fund. Similarly, the MEP presented two equations that would contribute the greatest or least in compensated reversals to the Overall Mitigation of Global Emissions (OMGE). We urged the SB to recommend activity participant use of the equation that would maximize a project’s contribution to the OMGE.
Appendix 2: The rules of the game (for reporting reversals)
If the PACM is to operate transparently and effectively and be seen as doing so by A6.4 ER credit suppliers and buyers, the rules for monitoring, verifying and reporting (MVR) reversals will be fundamental for that operation. Likewise, penalties must be clear, fair, and uniform for failing to notify the UNFCCC secretariat of events in the project area that might result in reversals, and for failure to submit reversal reports and/or the submission of incomplete reports. Generally, Appendix 2 clearly stipulates these rules of the game with one exception.
As IATP has contended in three comments to the SB in 2024 (here, here and here), the application of the Sustainable Development Tool (SD Tool) to the design of projects and verification of project benefits to the communities residing in the project area is not an optional exercise. Reversals may decrease or even eradicate the sustainable development benefits claimed by activity participants. Appendix 2 requires project developers to report on negative social and environmental impacts related to reversals and on plans to mitigate those impacts in new project documents. (paragraph 8 e) However, there is no compliance mechanism for failing to assess and mitigate sustainable development impacts that is comparable to the compliance mechanism for reporting reversals after deadline, failing to report them or reporting them incompletely. IATP proposed some language towards a robust compliance mechanism for use of the SD Tool in assessing reversal impacts.
One proposed reversal-related penalty likely to spark controversy at COP30 is the designation of a project’s reversals as “avoidable.” (Appendix 2, paragraph 32) Appendix 1 defines “avoidable reversals” as “Reversals caused by factors over which the activity participants have influence or control.” (paragraph 3 e) According to the draft standard’s Cover Note:
Unavoidable reversals are remediated by cancelling A6.4ERs in the Reversal Risk Buffer Pool Account, with the number cancelled equal to the amount of the unavoidable reversal expressed in tonnes of carbon dioxide equivalent. Avoidable reversals are remediated in the same manner, with the additional requirement that activity participants shall replenish the buffer pool with an equal number of A6.4ERs. (paragraph 29)
Remediation of unavoidable reversals simply requires cancellation of A6.4 ER credits that the project developer has already contributed to its buffer account. Remediation of avoidable reversals is expensive for the project developer who had planned to sell the A6.4 ER credits that now must be taken off the market to replenish the buffer pool. Furthermore, characterization of reversals as avoidable will increase the stringency of risk reversal assessment prior to ER project approval.
Another MEP proposal that is likely to trigger debate at COP30 concerns who is to monitor for reversals after A6.4 ER credits have been put on the PACM registry, i.e., the “post-crediting monitoring period.” The MEP asks the SB to consider requiring project developers to contract with third-party monitoring services, subject to SB oversight. IATP supports this idea but recognized that the SB would have to develop guidance for the MEP to propose third-party monitoring criteria. (paragraph 37)
Conclusion: A long way to go
IATP has long regarded carbon credit trading as an ineffective means to reduce greenhouse gases. Carbon credit trading is vastly inferior to direct government and corporate funding of emissions reductions and adaptation to climate change. However, since very few wealthy governments and corporations are scaling up finance to adapt to climate change and pay for the loss and damage from extreme weather events devastating the most climate vulnerable countries, IATP continues to comment on the texts of the Article 6.4 rulebook.
Some 80 days before the official start of COP30, the logistics of the meetings — particularly accommodations — are far from ready, and as a result, governments may send smaller delegations. The prepared texts of negotiations to reduce the number of disagreements among Parties are particularly important when negotiating logistics are difficult. Despite the work of the MEP, the SB will be challenged to persuade Parties to put aside some disagreements to get an overall agreement on the non-permanence/reversals standard. Without such an agreement the PACM will remain operational only at the pilot testing level.
