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“An Accountant’s Nightmare”: Will carbon markets deliver?

By Charles Di Leva and Scott Vaughan

As the private voluntary carbon markets try to reset to improve practices, governments are still working out new rules for the public international carbon market in which they are buyers and sellers.

The public carbon market rulebook, Article 6 of the Paris Agreement, has started with a few government-to-government deals. The 28th United Nations Climate Change Conference (COP 28), however, saw little progress in clarifying exactly how public carbon markets will actually work.

It is still an open question whether the emerging Article 6 rules and deals will learn from past attempts at public carbon markets and do better than the current private carbon market practices. COP 28 made no progress in finalizing standards or guidance, widening the gap between emerging Article 6 deals and clear rules.

Voluntary Carbon Markets Under the Spotlight

The 2023 United States Fifth National Climate Assessment, similar to many market forecasts, expects the value of global carbon-offset trading to grow 15-fold by 2030 and 100-fold by 2050, presenting “opportunities for U.S. firms to meet mitigation goals through overseas investments and the potential to generate resources to support local adaptation measures.”

At the same time, the U.S. assessment politely pointed to “concerns” about carbon markets. That’s an understatement. An early 2023 bombshell report by the United Kingdom-based The Guardian concluded that 90% of carbon credits for land-based removals of CO2 approval by Verra—among the world’s leading carbon-offset certifiers—were “useless.” Since then, there has been a steady stream of media stories exposing badly flawed carbon-offset deals. A Goldman School of Public Policy assessment concludes that voluntary carbon credits have been “exaggerated across all quantification factors,” while safeguards like “no net harm” have been weakly implemented.

Various efforts have tried to plug the integrity holes in voluntary markets. The 2022 report of the UN Secretary General’s High-Level Expert Group on the Net Zero Emissions Commitments of Non-State Entities recommended steps to “prevent dishonest climate accounting and other actions designed to circumvent the need for deep decarbonization.” In 2023, the Voluntary Carbon Market Integrity Initiative (VCMI) released its Claims Code of Practice. Some practitioners complained that the more stringent rules are now too onerous. Indeed, one review estimates that 97% of existing credits from voluntary carbon markets would fail to meet the new VCMI standards.

Ironically, VCMI’s approach seems to use many of the same elements that are being proposed under Article 6.4. For this reason, VCMI urges parties to use their high-integrity approach until the Article 6.4 mechanism is operational.

At COP 28, various private sector initiatives—including the creation of a new senior advisory group by Verra—struggled to restore confidence as voluntary markets contracted in 2023.

Regulations to the Rescue?

Today’s international carbon markets are reminiscent of how economist John Maynard Keynes—in his 1933 essay “National Self Sufficiency”—characterized unregulated international financial markets as a “parody of an accountant’s nightmare.”

As with most other markets, there have been growing calls to regulate carbon markets. While over 70 federal and sub-federal jurisdictions have compliance carbon markets, only a handful—notably, California and British Columbia—have rules explicitly covering carbon-offset deals.

This is changing. The United States Commodities Futures Trading Commission (CFTC) announced in early December 2023 its intention to introduce new standards intended to ensure that voluntary carbon markets adhere to CFTC regulations. The Canadian government plans to release its carbon-offset regulations in 2024.

The European Commission is likely to take the most comprehensive regulatory approach. The proposed Corporate Sustainability Due Diligence Directive sets the stage by bluntly noting that “voluntary action does not appear to have resulted in large scale improvement.A new Carbon Removals Certification Framework proposes a new verification system for all European Union-based carbon credit claims, while the September 2023 decision by the European Parliament establishes a timetable to ban corporate marketing claims like net-zero and other green claims, in order to quash greenwashing.

In a further step, the environment ministers of Austria, Belgium, Finland, France, Germany, the Netherlands, and Spain released a statement during COP 28 “recommending”—as of yet, not requiring—specific steps intended to bolster the integrity and transparency of voluntary carbon markets.

China is set to relaunch its private sector carbon credit market—known as the China Certified Emission Reduction scheme—after a 6-year pause. China’s Ministry of Ecology and Environment is reported to be reviewing market rules, especially around additionality.

In addition to direct rules, emerging financial standards will affect how companies can report carbon offsets. Several climate risk reporting rules, such as the European Union’s Sustainable Financial Disclosure Regulation or those of the International Sustainability Standards Board (ISSB), include standards on how a company can record carbon offsets, including identifying a credible third-party certifier and assumptions about the degree of offset permanence. The United States Securities and Exchange Commission plans to issue its climate disclosure rules in the first half of 2024.

Market Regulator to Market Actor

A further shake-out of carbon-offset markets may come from governments, acting not only as regulators but also as market actors engaged in buying and selling international carbon credits.

Paris Agreement’s Article 6 set out the framework for international carbon markets. It took another 6 years for governments to hammer out more specific rules, which hopefully will result in an Article 6 market that has better credibility than previous public sector carbon markets. Indeed, past assessments of international carbon credits resulting from roughly 3,300 projects approved by the Clean Development Mechanism (CDM), part of the Kyoto Protocol, were as blunt as critiques of current voluntary markets. One evaluation of the CDM concluded that the system “consistently underperformed,” while another concluded that the methods to calculate offsets were “overly subjective, costly, unpredictable, unreliable, prone to gaming [and] counter-productive due to perverse incentives.”

While far from complete, an early picture of how Article 6 could work is emerging.

Article 6.2: Early Government-to-Government Deals

Article 6.2 is intended for government-to-government carbon credit deals, in which credits—known as Internationally Transferred Mitigation Outcomes (ITMOs)—are reported via a central registry.

To date, there have been three Article 6.2 bilateral deals, each involving Switzerland as a buyer, respectively supporting low-carbon rice cultivation in Ghana, electric buses in Thailand, and solar panels in Vanuatu. These deals resemble bilateral government cooperation agreements rather than an international carbon market; for example, Switzerland publishes the general terms of agreement while omitting the carbon price.

Article 6.2 is poised to grow. Roughly 130 pre-feasibility project agreements involving bilateral government cooperation are up and running. Most involve bilateral agreements between an Organisation for Economic Co-operation and Development (OECD) country (Japan is heavily engaged) and emerging economy governments on potential joint projects. To date, energy efficiency and renewable energy dominate proposed deals. An exception is proposed bilateral cooperation involving OECD countries such as Iceland, Sweden, and the Netherlands on carbon capture utilization and storage projects.

Nature-based carbon solutions like forest or peatland carbon offsets are barely mentioned in early Article 6.2 work. This is changing quickly. Media reports detail potential deals, such as the proposed purchase by private investment entity Blue Carbon of the United Arab Emirates of carbon credits covering about 10% of Liberia’s territory. Reported early deals also include Kenya, Tanzania, Zambia, and Zimbabwe.

In September 2023, Suriname announced its willingness to sell forestry-based ITMOs under Article 6.2 at USD 40 per tonne. A potential government buyer hasn’t yet stepped up. Yet the Suriname proposal has attracted attention due to its potential scale in financing one of the world’s largest intact forests. If it proceeds, it will also send an important signal that other would be eligible under Article 6.2.

It is unclear how these early deals will determine the methods, guidelines, and rules under Article 6.2. The process to certify greenhouse gas emission mitigation outcomes under Article 6.2 entails a “technical expert review” once projects begin rather than setting out rules beforehand. While this approach may kick-start early deals, it runs the risk of letting both non-comparable and poor-quality deals proceed. Not surprisingly, a rift emerged at COP 28 over Article 6.2 rules.

Article 6.4: Emerging layers of guidance

A sharp contrast exists between Article 6.2’s more lenient approach of setting rules after the fact and the efforts underway by the Article 6.4 Supervisory Body (SB) to clarify as many standards and guidance as possible before transactions can be authorized. With the exception of carrying over millions of legacy CDM credits (“transition credits”), no new Article 6.4 deals have occurred.

Article 6.4 has always been seen as the biggest part of Article 6, so the SB rulemaking process has been closely followed. The SB has been examining dozens of technical issues like baselines, additionality, leakage, permanence, and others. The goal, as one government official put it, is to establish a “robust carbon credit mechanism.”

Authorization by the SB of individual 6.4 transactions will begin only after the United Nations Framework Convention on Climate Change parties have approved the guidance forwarded to them by the SB. So far, two guidance documents covering the approach to methodologies and removals have been sent to COP 28 for approval. Other topics will be left for 2024.

Article 6.4: Carbon removals

Rules for carbon removals have arguably been the toughest part of the SB’s work to date. It defines carbon dioxide removals as including the “anthropogenic enhancement of biological, geochemical or chemical CO2 sinks, but excludes natural CO2 uptake not directly caused by human activities.”

The clearest guidance to date from the Article 6.4 process involves what cannot be counted. Looking at engineered carbon capture and storage (CCS) projects, a subsidiary scientific body concluded that they do “not fulfill any of the objectives of the Article 6.4 mechanism.” There was the predictable backlash of a CCS industry coalition to this opinion.

Since unabated fossil fuels were a prominent topic at COP 28, clear standards on whether CCS will be eligible under Article 6 are urgently needed before they become a practice through Article 6.2 deals.

Other areas are more tentative. On the question of how permanent a carbon removal should be, the SB’s early guidance identifies carbon removals that vary between infinite storage scenarios like the “next Ice Age” and within decades. The SB is pointing to over 200 years as an emerging benchmark, but again, permanence rules remain unfinished.


If permanence is complex, emerging rules around additionality are the lightning rod of most technical or methodological critiques of carbon offsets. For example, seven United States Senators wrote to the US Commodity Futures Trading Commission (CFTC) in October 2022 stating that additionality criteria will invite exaggerated carbon offset claims.

Their urging that voluntary carbon markets be regulated as a commodity was one path to the new CFTC Guidance. Of interest, the new US rules will classify carbon market in the same way as other financial derivatives.

The SB defines additionality as comprising financial additionality based on carbon credit revenues; regulatory additionality covering laws as well as industry standards; common practice additionality, such as when entities exceed normal practices; and performance additionality, in which removals exceed an average benchmark of peers within the industry or the sector.

Since the basis of additionality entails identifying risk based on a hypothetical counterfactual–e.g., GHG emissions would increase by 100 tonne in the absence of a specific regulation–it’s likely that rules will emerge from evolving Article 6.4 practice as well as SB Guidance.

Determining additionality a few years from now will certainly look different than today: declining prices for renewable will likely mean zero marginal costs, while the sharp increase in wildfires and drought means all forests and other ecosystems face rising risks to their ability to deliver offsets.


The CDM approved roughly 250 baseline methodologies. Reviews continue to determine which legacy baselines can continue.  Some have argued that Article 6.4 needs to reduce and simplify baselines, while an OECD study concluded the opposite, stating that a ‘one size fits all” approach won’t work. A fight has already broken out over how the SB should count avoided emissions from cook-stoves.  Expect other debates in 2024 as proposals to obtain credits from liquified natural gas or CCS gain steam.

Overlaying A New Sustainable Development Lens

The SB is also introducing a new Sustainable Development tool that will require proposed projects to be evaluated and report on environmental and social risks and how the projects contribute to the SDGs. The new tool is also likely to contain rules to counter corruption.

It will also require a Procedure for “Appeal and grievance processes” open to stakeholders, activity participants, and participating Parties who wish to appeal decisions of the SB or raise grievances, such as those related to registration of activities, issuance of Article 6.4 ERs, or renewal of crediting periods or activities or programs of activities.  The SB is considering whether to include decisions on methodologies as part of the process.

Proposals for Article 6.8: Non-markets

The third pillar of Article 6 is the least examined. Article 6.8 was included at the insistence of several developing countries, including Brazil, noting that international cooperation should include non-market approaches.

The 2015 Paris Agreement text is vague as to how international voluntary cooperation would work, and specifically whether cooperation action would include carbon credits.

Article 6.8 references cooperative measures that advance nationally determined contributions and references technology transfer, adaptation, finance, and capacity building as illustrative areas, clearly signalling that such measures extend beyond mitigation and additionality tests. Subsequent work by a subsidiary body has identified other potential areas, including debt-for-climate swaps.

At the June 2023 meeting of the Subsidiary Body for Scientific and Technological Advice (SBSTA), the possibility of funding the protection and enhancement of intact forests and other ecosystems was noted, with mention of the Amazon and other forest ecosystems.

Later, during the September 2023 SBSTA meeting, Bolivia raised the possibility of new financing for the “integral and sustainable management of forests.” The Nature Conservancy and WWF International proposed Article 6.8 as a means to finance nature-based solutions, and the Ford Foundation proposed that it be used to support philanthropic and holistic approaches.

Other non-market approaches could be aligned with Article 6.8. A recent non-market approach innovation in Uruguay involved the World Bank agreeing to reduce interest rate payments for a livestock sector loan if methane reduction targets are met below those in the country’s nationally determined contribution. This financial incentive can deliver “win–win” results within a monitorable and transparent structure.

What is unclear from these early discussions is whether Article 6.8 deals would generate carbon credits in return for cooperation falling outside of Articles 6.2 or 6.4. Of note, the only COP 28 decision involving all of Article 6 was a plan for more meetings in 2024.

The Way Forward

International carbon markets are at a low ebb: media and academic reports have tarnished their reputation, while rates of growth in voluntary markets have slowed. It would not be surprising to see more litigation like the recent lawsuit launched against Delta’s “carbon neutral” claims.

Broader critiques of voluntary climate action are well established. The Nobel Prize-winning economist William Nordhaus dismissed non-binding international accords like the Paris Agreement as promoting free-riding and destined to fail. The best way to cut global emissions, according to Nordhaus, is for governments to negotiate a universal carbon price rather than focus on countries’ emission limits.

As the climate emergency worsens, that may happen. In the meantime, instead of scrapping international carbon credits and reverting to climate autarkist approaches, there is an urgent need for clear rules and standards to make international carbon markets actually work.

It is too early to tell if public sector international markets under Article 6 will do any better than voluntary carbon markets. Certainly, both are struggling to sharpen rules like additionality and make the infrastructure, such as credit registries, work.

In the interim, voluntary and public carbon markets can benefit from multilateral development bank (MDB) programs, led by the World Bank’s longstanding carbon market products. As not-for-profit entities, MDBs’ financial and technical support has helped to de-risk and improve country-based carbon credit projects while providing standardized rules around transparency, reporting, and accountability systems throughout the life of these carbon-offset programs.

Multilateral Bank Backstops

One example is the World Bank’s Forest Carbon Partnership Fund, in which benefit-sharing programs with local communities enhance incentives for the long-term stewardship of the carbon reserves.

Various projects have applied high-resolution satellite data to project real-time monitoring of forest cover; introduced buffer pools to deal with the risk of forest loss, such as from fires; provided as much clarity as possible on crucial land-title and ownership issues; and expanded the territorial scope of forest carbon projects to be jurisdictional to help reduce the risk of leakage.

As part of wider MDB reforms, is time governments fulfill their commitment to help the World Bank and other MDBs crowd in public and massive private sector capital in order to scale up the blended financing needed to realize the promise of carbon markets. Alongside this effort, governments must fulfill their regulatory roles to help ensure MDB-supported and other market activities inspire confidence through credibility and accountability.

Finish the Rules

Rulemaking is notoriously hard. While easy to criticize, both public and private carbon markets are struggling with similar challenges around how to define and operationalize rules that both deliver high integrity and are administratively workable.  Both voluntary and public carbon markets have an interest in keeping distinct paths, while wanting each to succeed.

It is now eight years since governments agreed to Article 6 in principle. Few expected COP 28 to finalize all elements of the Article 6 rules. That expectation was clearly met. 2024 will see more United Nations Framework Convention on Climate Change and Paris Agreement parties push forward negotiations on rules and standards. This rulemaking urgently needs to conclude to advance high-integrity, public sector-led carbon markets.


Charles Di Leva is Partner, Sustainability Frameworks, Adjunct Professor, American University, and former Chief Officer, Environmental and Social Standards, The World Bank.

Scott Vaughan is International Chief Advisor, CCICED and Senior Fellow, IISD. 

The authors thank Isaak Bowers, Communications Officer, IISD, and Meizhen Wang, Policy Advisor, IISD, for their editing support.


The views expressed are those of the authors and not necessarily those of CCICED.

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