Article 6.4 can Stimulate Global and Local Carbon Markets but Implementation Questions Remain

At this year’s COP29 in Baku, delegates reached a key milestone in the global effort to reduce carbon emissions by fully adopting the framework for Article 6.4 of the Paris Agreement. This decision paves the way for a UN-governed international carbon market, creating a new mechanism for providing economic incentives for urgently needed reduce greenhouse gas emissions reduction. While this agreement has massive potential to stimulate global climate action, it will require a careful implantation to ensure the system’s effectiveness, equity and sustainability.

Shaping a global carbon market

Article 6 of the Paris Agreement sets out how countries can pursue voluntary cooperation to reach their climate targets. It provides a mechanism for governments to collaborate through the international trade of carbon credits.

Within that framework, Article 6.2 permits bilateral or multilateral carbon trading agreements while Article 6.4, sometimes referred to as the “Sustainable Development Mechanism,” aims to standardize and centralize carbon trading under the oversight of the United Nations. As such, Article 6.4 will help countries and companies achieve consensus on what constitutes a high-quality carbon offset and deliver transparency to ensure mitigation projects deliver real emissions reductions that support national and global climate goals.

Christopher Lilholm

The promise of Article 6.4 is particularly significant for developing nations. By channelling resources into renewable energy, reforestation and technological innovation, it can spur economic growth while accelerating decarbonization. Furthermore, the mechanism aims to integrate human rights and environmental safeguards in an attempt to ensure that carbon reduction projects also prioritize equity and sustainability.

Local opportunities for city-states

The model of international collaboration enabled by Article 6 is especially attractive to city-states such as Singapore which face unique challenges in reducing their carbon footprint due to the combination of a developed economy, high population density and limited spare land. With minimal scope for large-scale domestic renewable energy projects or reforestation, Singapore’s climate mitigation strategy depends heavily on overseas carbon offset initiatives.

This is something that Singapore recognised early. The country has already begun climate mitigation negotiations with other countries as envisioned by Article 6.2 prior to the COP29 decision. Now, the adoption of Article 6.4 provides a parallel means for Singapore to meet its emissions reduction targets under the Paris Agreement through the purchase of verified carbon credits.

However, Singapore’s role in the Article 6.4 mechanism isn’t limited to being a net purchaser of credits. In recent years, the country has made concrete steps to position itself as a globally significant service and trading hub for carbon credits. It has established the highest concentration of carbon services providers in Southeast Asia – a region with massive potential for carbon mitigation project such as large-scale renewable energy installations and reforestation. Article 6.4’s emphasis on standardization and transparency helps ensure that such projects are credible, environmentally sound and socially equitable – which is crucial for delivering meaningful emissions reductions.

The role of the private sector

For businesses, Article 6.4 represents an opportunity to advance sustainability commitments through a robust, standardized framework. Companies can leverage the mechanism to validate their carbon reduction projects, fostering innovation and enhancing accountability. As corporate leaders increasingly align their goals with the Paris Agreement, Article 6.4 provides a transparent mechanism to demonstrate climate leadership while contributing to a global solution. Moreover, financial and carbon services companies in Singapore are likely to have a key role in facilitating the trading and climate financing needed to make Article 6.4 operational across Asia.

Challenges ahead

While Article 6.4 brings great promise, the path to implementing it is fraught with challenges. Article 6.4 brings higher levies and, thus, running costs for projects that could make countries see Article 6.2-style bilateral and multilateral collaboration as more attractive even though this may be more complicated to negotiate.

In addition, robust monitoring and verification systems are essential to prevent greenwashing and build trust among stakeholders. Standardized methodologies, especially for nature-based solutions, must ensure projects deliver measurable environmental and social benefits. Additionally, local and Indigenous communities must be meaningfully engaged to equitably distribute the rewards of carbon market projects.

There are also questions about how a new carbon market fits into current carbon mitigation efforts. Each Paris Agreement signatory nation has its own reduction commitments, and host countries may be reluctant to authorize projects to trade under Article 6.4 if they are worried about achieving those commitments. Meanwhile, companies and nations alike are keen to see how Article 6.4 will interact with or supersede existing systems. Policymakers must provide clarity to ensure the smooth transition to this new framework without undermining ongoing climate initiatives.

Collaboration at the heart of unlocking climate action

Adopting Article 6.4 is a turning point in global climate governance. After a long period of uncertainty since the Paris Agreement was announced, the COP29 decision brings stability that will allow projects to be deployed with confidence. However, its success hinges on collaboration. Governments, businesses, and civil society must work together to address the emerging risks and ensure this mechanism achieves its full potential. By fostering transparency, innovation and inclusivity, Article 6.4 can become a powerful tool in the fight against climate change.

Chris Lilholm is Global Head of Sustainability & ESG Services – Supply Chain & Product Assurance at DNV