Negotiators at the COP29 climate conference in Baku have struck a landmark agreement on rules governing the global trade of carbon credits, bringing to a close almost a decade of debate over the controversial scheme.

The deal paves the way for a system in which countries or companies buy credits for removing or reducing greenhouse gas emissions elsewhere in the world, then count the reductions as part of their own climate efforts.

Some have argued the agreement provides crucial certainty to countries and companies trying to reach net-zero through carbon trading, and will harness billions of dollars for environmental projects.

However, the rules contain several serious flaws that years of debate have failed to fix. It means the system may essentially give countries and companies permissions to keep polluting.

COP29 wrapped up over the weekend, and included a deal on rules for global carbon trading. Rafiq Maqbool/AP

 What is carbon offsetting?

Carbon trading is a system where countries, companies or other entities buy or sell “credits”, or permits, that allow the buyer to offset the greenhouse gas emissions they produce.

For example, an energy company in Australia that produces carbon emissions by burning coal may, in theory, offset their impact by buying credits from a company in Indonesia that removes carbon by planting trees.

Other carbon removal activities include renewable energy projects, and projects that retain vegetation rather than cutting it down.

Carbon trading was a controversial part of the global Paris climate deal clinched in 2015.

The relevant part of the deal is known as “Article 6”. It sets the rules for a global carbon market, supervised by the United Nations, which would be open to companies as well as countries. Article 6 also includes trade of carbon credits directly between countries, which has begun operating even while rules were still being finalised.

Rules for carbon trading are notoriously complex and difficult to negotiate. But they are important to ensure a scheme reduces greenhouse gas emissions in reality, not just on paper.

Retaining vegetation is one way to store carbon. Parks Australia

 A long history of debate

Over the past few years, annual COP meetings made some progress on advancing the carbon trading rules.

For example, COP26 in Glasgow, held in 2021, established an independent supervisory body. It was also tasked with other responsibilities such as recommending standards for carbon removal and methods to guide the issuing, reporting and monitoring of carbon credits.

But the recommendations were rejected at COP meetings in 2022 and 2023 because many countries viewed them as weak and lacking a scientific basis.

At a meeting in October this year, the supervisory body published its recommendations as “internal standards” and so bypassed the COP approval process.

At this year’s COP in Baku, the Azerbaijani hosts rushed through adoption of the standards on day one, prompting claims proper process had not been followed

For the remaining two weeks of the conference, negotiators worked to further develop the rules. A final decision was adopted over the weekend, but has attracted criticism.

For example, the Climate Land Ambition and Rights Alliance says the rules risk “double counting” – which means two carbon credits are issued for only one unit of emissions reduction. It also claims the rules fail to prevent harm to communities – which can occur when, say, Indigenous Peoples are prevented from accessing land where tree-planting or other carbon-storage projects are occurring.

Carbon trading rules have been contentious at successive COP meetings. Anatoly Maltsev/EPA

 Getting to grips with carbon removal

The new agreement, known formally as the Paris Agreement Trading Mechanism, is fraught with other problems. Most obvious is the detail around carbon removals.

Take, for example, the earlier scenario of a coal-burning company in Australia offsetting emissions by buying credits from a tree-planting company in Indonesia. For the climate to benefit, the carbon stored in the trees should remain there as long as the emissions produced from the company’s burning of coal remains in the atmosphere.

But, carbon storage in soils and forests is considered temporary. To be considered permanent, carbon must be stored geologically (injected into underground rock formations).

The final rules agreed to at Baku, however, fail to stipulate the time periods or minimum standards for “durable” carbon storage.

Temporary carbon removal into land and forests should not be used to offset fossil fuel emissions, which stay in the atmosphere for millennia. Yet governments are already over-relying on such methods to achieve their Paris commitments. The weak new rules only exacerbate this problem.

To make matters worse, in 2023, almost no carbon was absorbed by Earth’s forests or soils, because the warming climate increased the intensity of drought and wildfires.

This trend raises questions about schemes that depend on these natural systems to capture and store carbon.

Temporary carbon removal into land and forests should not be used to offset fossil fuel emissions. Shutterstock

 What next?

Countries already can, and do, trade carbon credits under the Paris Agreement. Centralised trading will occur under the new scheme once the United Nations sets up a registry, expected next year.

Under the new scheme, Australia should rule out buying credits for land-based offsets (such as in forests and soil) to compensate for long-lasting emissions from the energy and industry sectors.

Australia should also revise its national carbon trading scheme along the same lines.

We could also set a precedent by establishing a framework that treats carbon removals as a complement — not a substitute — for emissions reduction.

Kate Dooley, Senior Research Fellow, School of Geography, Earth and Atmospheric Sciences, The University of Melbourne

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