Rasim Huseynov Managing Editor of Seamless Trade from Baku COP29
In my previous article on the eve of COP29 in Baku, I highlighted key perspectives and anticipated outcomes of this pivotal conference. You can read it here.
I am thrilled to see meaningful responses emerging from COP29, meeting the high expectations shared by millions around the world who are eagerly awaiting its outcomes. This article will guide you through some of the critical events from the past week, particularly those related to Article 6 and Carbon Markets.
The 29th Conference of the Parties (COP29) in Baku commenced on a high note, marked by a significant announcement regarding Article 6. During a press conference on Monday, November 18th, COP29 President Mukhtar Babayev revealed that consensus had been reached on the final section of Article 6, specifically paragraph 6.8, which addresses Non-Market Instruments. Despite this breakthrough, there is no sign of complacency. Leaders from the UN and the COP29 Presidency have emphasised the importance of maintaining momentum and continuing intensive efforts to finalise matters within tight schedules.
Carbon markets remain one of the most intricate and challenging areas in climate policy, requiring a delicate balance between competing priorities. These markets operate within two main frameworks: voluntary and compliance markets. As climate action grows increasingly urgent, parties to the Paris Agreement are exploring every mechanism available to reduce carbon emissions.
The dichotomy of climate policies highlights several challenges:
Regulation vs. Innovation: Striking a balance between enforcing regulatory measures and fostering innovation.
Subsidies vs. Taxation: Determining the appropriate mix of financial incentives to drive action.
Intended vs. Unintended Consequences: Mitigating the risk of unintended outcomes from policy decisions.
Complex Multilateral Instruments: Navigating the layered and intricate nature of global policy frameworks.
Additionally, carbon market designs vary widely, encompassing cap-and-trade systems, performance-based markets, and mechanisms like Joint Implementation. COP29 plays a pivotal role in providing much-needed clarity, ensuring that carbon markets and climate policies evolve interactively, orderly, and harmoniously. Most importantly, it seeks to create opportunities and remove barriers to climate action for participating members and the private sector.
Nonetheless, the effective functioning of global carbon markets hinges on collaboration and trust. This trust, however, is being tested by the emergence of new industrial policies that nations and policymakers must carefully navigate.
Moreover, critical gaps in expertise and regulatory capacity, particularly in developing countries, remain a pressing issue. Addressing these gaps will require investment in training a new generation of specialists in carbon reporting, auditing, and market regulation. This highlights the interconnectedness of carbon markets with broader efforts in climate change mitigation and adaptation.
Below, two noteworthy events held at COP29 in Baku offer valuable insights into the intersection of carbon markets and climate policies, providing indispensable perspectives for professionals engaged in environmental and trade policy and showcasing the latest international developments in these fields.
Industrial Policy, Trade, and the Political Economy of DecarbonisationCo-sponsored by the Enel Foundation, Massachusetts Institute of Technology, and Foundation Environment – Law Society, this event brought together leading experts to discuss the spillover effects of international trade, investment, and innovation on climate action, as well as policies to mitigate negative impacts and enhance positive ones.
The speakers, including Daniele Agostini, Head of Energy and Climate Policies, Enel Dr. Chantal-Line Carpentier, Head of Trade, Environment, Climate Change, and Sustainable Development Branch of UNCTAD's Division on International Trade and Commodities; Dr. Michael Mehling, Deputy Director, Center for Energy and Environmental Policy Research, MIT; and Dr. Joyashree Roy, Distinguished Professor and Director of the SMARTS Center, Asian Institute of Technology, moderated by Professor Robert Stavins, A.J. Meyer Professor of Energy and Economic Development, Harvard Kennedy School, explored how industrial policies and international cooperation can shape the global political economy of decarbonisation.
From left to right: Dr. Chantal-Line Carpentier, Daniele Agostini, Dr. Joyashree Roy, Dr. Michael Mehling
A notable contribution to this discussion was Michael Mehling’s paper, "Good Spillover, Bad Spillover: Industrial Policy, Instrument Choice, and the Political Economy of Decarbonisation," presented by the Harvard Project on Climate Agreements in collaboration with the Enel Foundation. This paper served as a foundational reference for the session, providing a detailed examination of the interplay between industrial policy, spillover effects, and decarbonisation goals. The full paper is available for download here.
Spillover Effects and Embedded Emissions
Approximately 25-30% of emissions globally are embedded in international trade flows, where countries consume emissions-intensive goods imported from abroad. This creates both opportunities and challenges for achieving decarbonisation goals:
Negative Spillovers: Issues such as emissions leakage and adverse effects of subsidies.
Positive Spillovers: Innovation-driven benefits that exceed initial expectations and create broader impacts beyond the innovating countries.
Michael Mehling noted that spillover effects lack a precise definition but are critical for understanding the unintended consequences of climate policies. For example, the Carbon Border Adjustment Mechanism (CBAM), while promising, is still untested, and its efficacy in addressing embedded emissions remains unclear. Mehling also highlighted the "green paradox," where fossil fuel investments persist under stable macroeconomic conditions despite climate policies. He emphasized that as renewable technologies mature, their declining costs generate international benefits. Over time, investments in decarbonisation technologies by a few countries will catalyse global progress. However, he warned that trade-restrictive industrial policies could inhibit these positive spillover effects.
international benefits. Over time, investments in decarbonisation technologies by a few countries will catalyse global progress. However, trade-restrictive industrial policies can inhibit these positive spillover effects.
Experience from Global South
Joyashree Roy provided example of performance based market instruments, implemented for decarbonisation process India, and emphasised importance of global collaboration and using global positive experience such as one in India.
Policy Responses
Daniele Agostini (Enel) underlined the importance of regulatory stability, as inconsistent or conflicting policies exacerbate negative spillovers. He advocated for a balanced "carrot and stick" approach, using subsidies and restrictions together, while highlighting the necessity of policy collaboration through "clubs and coalitions" that allow competition and cooperation to coexist.
Chantal-Line Carpentier (UNCTAD) proposed convening stakeholders to address CBAM implementation collectively. She emphasised that many smaller countries lack the capacity to produce renewable energy domestically, highlighting the need for supportive trade and investment policies. UNCTAD’s recently issued guide for trade and investment policy offers a framework for addressing these challenges.
Professor Robert Stavins, A.J. Meyer Professor of Energy and Economic Development, Harvard Kennedy School
Insights on Collaboration
The session concluded with a consensus that international cooperation is paramount. Managing policy mixes effectively, fostering collaboration, and aligning objectives across nations and industries are essential to maximising the positive impacts of spillover effects while minimising the negative.
This event, featuring leading academics, UN representatives, and business leaders, offered exceptional insights into policy aims and outcomes, providing policymakers with an opportunity to delve deeper into the design of multipurpose environmental policies. These policies interact with energy, industrial, and trade policies, creating complex dynamics that require a holistic approach. While empirical evidence sheds light on both positive and negative spillovers, this area remains highly debated and under-researched, underscoring the need for further study.
Environmental policies are history in the making, tightly interwoven with energy policy and, increasingly, with industrial and trade policies. Policy mixes influence each other in profound ways.
The intricate link between trade and environmental policies underscores the importance of events like this. By fostering discussions and sharing insights, such gatherings provide an invaluable platform for exploring the challenges and opportunities of harmonising policies to advance global decarbonisation efforts.
Enhancing NDCs 3.0: The Role of Carbon Markets in Emission Reductions and Removals
Organised by the European University Institute (EUI), Seoul International Law Academy (SILA), and the Global Chamber of Commerce and Industry (GCCI), this event explored how carbon markets contribute to achieving Nationally Determined Contributions (NDCs). The panel focused on domestic and international pathways for carbon pricing, emission reductions, and carbon removals, while highlighting the challenges and opportunities of collaboration in global climate policy.
This event brought together leading experts to discuss the evolving role of carbon markets and their integration into global climate policy. The speakers included Li Gao, Representative of PRC’s National People’s Congress; Dr. Stefano De Clara, Head of Secretariat, International Carbon Action Partnership (ICAP); Professor Xiliang Zhang, Director of the Institute of Energy, Environment, and Economy, Tsinghua University; Dr. Suh-Yong Chung, Founder of Seoul International Law Academy (SILA) and Professor at Korea University; Teng Fei, Associate Professor, Tsinghua University; Xiaolu Zhao, Senior Advisor, Environmental Defense Fund (EDF); and Leticia Guimaraes, Climate Policy Specialist, United Nations Development Programme (UNDP). The event was chaired by Professor Simone Borghese, Professor at the European University Institute (EUI), and concluded by Dr. Jan Dusík, Director for Climate Action, European Commission.
Key Discussions:
Carbon Pricing and ETS Development
Dr. Stefano De Clara (ICAP) highlighted that emissions trading systems (ETS) are becoming pivotal tools in most G20 nations. Recent progress in Indonesia, with discussions expanding to Turkey, India, and Brazil, demonstrates their growing global relevance.
Despite progress, challenges persist, such as the integration of carbon removals into ETS frameworks and maintaining environmental integrity. De Clara also discussed the EU’s transition from free allocations to CBAM, efficiency considerations for merging ETS1 and ETS2, and the potential inclusion of agriculture in future ETS expansions.
Dr. Li Gao, Representative of the PRC’s National People’s Congress and Director-General of the Climate Change Department at China’s Ministry of Ecology and Environment, set the scene.
Carbon Markets in Emerging Economies
Prof. Xiliang Zhang (Tsinghua University) provided insights into China’s ambitious goals for renewable energy, targeting 80% of energy from renewables and nuclear by 2060. He emphasized the need for convergence in carbon pricing systems internationally to foster cooperation and avoid fragmentation.
Xiaolu Zhao (EDF) explained the complexities of China’s ETS, which began trading in July 2021, and highlighted ongoing work to improve the system’s design, including the introduction of auctions.
3. International Cooperation and Article 3
Dr. Suh-Yong Chung (SILA) presented South Korea’s unique approach to achieving its NDCs, which includes reducing 37 million tonnes of emissions by 2030 through Article 6 of the Paris Agreement. He noted the need for new paradigms, such as bilateral collaborations and innovations like biochar, to overcome territorial and energy sector challenges.
Leticia Guimaraes Head of Carbon Markets (UNDP) stressed the importance of carbon markets in NDCs, with 80% of countries referencing them. However, she highlighted the confusion surrounding diverse systems and emphasised the need for tailored approaches.
Jan Dusík, European Commission Director General for Climate Action, emphasised the importance of domestic carbon instruments as a cornerstone of the EU’s climate strategy. He highlighted the significant progress made under Article 6 and the ambitious goals set by the EU under its "Fit for 55" framework, which aims to reduce emissions by at least 55% by 2030.
Dusík noted that compliance markets in the EU currently cover 75% of carbon emissions, underscoring their critical role in achieving decarbonisation targets. While international carbon markets play a complementary role, he emphasised the importance of legislation aimed at preventing greenwashing to ensure market integrity.
“Our objective,” Dusík stated, “is to see a proliferation of carbon markets globally, which will help align carbon prices across jurisdictions and drive emissions reductions collectively.” He also stressed that compliance systems are key not only for emissions reductions but also as a tool for generating revenues to support broader climate initiatives.
While avoiding a deep dive into the details of CBAM during his remarks, Dusík reiterated that the EU’s ultimate aim is to foster a global carbon pricing framework that aligns with the collective goals of emissions reductions and climate resilience.
Dr. Jan Dusik's Director for Climate Action of European Commission closing remark
At a press conference on November 18, Wopke Hoekstra, EU Commissioner, addressed questions regarding the EU’s unilateral Carbon Border Adjustment Mechanism (CBAM). He described CBAM as a tool to encourage global adoption of similar climate policies, noting that “the best CBAM is the one that will not bring any money to the EU,” emphasising its intended role as an incentive for decarbonisation worldwide rather than a revenue-generating mechanism.
While the press conference was not directly tied to the earlier side events, Hoekstra’s comments resonated with key themes raised during those discussions. In particular, his optimism about CBAM’s ability to drive global climate action contrasted sharply with the concerns voiced by Prof. Xiliang Zhang (Tsinghua University) and Dr. Suh-Yong Chung (SILA). Zhang critiqued CBAM as a political instrument primarily designed to protect EU industries, warning that it could undermine international cooperation and multilateralism. Chung raised questions about CBAM’s unilateral nature, expressing scepticism about whether it could transition into a truly multilateral mechanism or remain a divisive policy.
These differing perspectives reflect a broader challenge in climate policy: balancing the EU’s ambitious goals with the need to foster inclusive international collaboration. While initial feedback indicates growing resistance to CBAM in some quarters, the global alignment of markets and taxation systems, as noted by Jan Dusík, may help alleviate tensions. Coordinated market movements that drive up the price of carbon globally could reduce competitive disparities and create a more level playing field.
The EU’s leadership in climate policy remains undeniable, but the pathway forward will require careful navigation to ensure that bold actions like CBAM serve as a catalyst for global cooperation rather than a source of division.
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