Carbon Markets: Momentum builds towards integrity and expansion

The blog below is an extract from Slaughter and May’s UK Energy and Infrastructure: What’s to come in 2025 publication. For information regarding other sector developments, please click here. 

2024 ended on an optimistic note for carbon markets, with COP29 delivering long-awaited breakthroughs in negotiations to operationalise Article 6 of the Paris Agreement. Negotiators reached consensus on the core elements needed to operationalise: (i) Article 6.2 (which sets out the framework for country-to-country trading), including how countries will authorise the trade of carbon credits and how registries will track trades; and (ii) Article 6.4 (which sets out the framework for a centralised carbon market administered by the UN), including the standards for the creation of such carbon credits and a mechanism to update such standards. As a result, we anticipate an increase in Article 6.2 deals during 2025, alongside publication of the first methodologies under Article 6.4 as early as mid-2025. This could pave the way for the first registrations of Article 6.4 projects before the year’s end. 

From a UK perspective, another significant milestone was the publication of the government’s ‘Principles for voluntary carbon and nature market integrity’ in November 2024 (Principles). Coupled with the success of COP29, and the growing number of methodology approvals by the Integrity Council for the Voluntary Carbon Market (ICVCM), this represents a significant step forward for voluntary carbon markets (VCMs), particularly in addressing enduring concerns around greenwashing and market integrity. Market participants hope these developments will play pivotal roles in restoring confidence in VCMs. We expect further guidance and consultations on VCMs during 2025, including on implementing the Principles and updated Science Based Targets initiative guidelines on integrating carbon credits into corporate net zero targets. 

Meanwhile, the UK government continues its efforts to expand the scope of the UK Emissions Trading Scheme (UK ETS) to additional sectors—such as the maritime sector and the non-pipeline transport of carbon dioxide—and to integrate GGRs into the UK ETS. We anticipate further changes to free allocation rules, aimed at ensuring that participants ceasing operations do not receive excess allocations in their final year. However, exemptions are planned for operators discontinuing activity as part of decarbonisation efforts, aligning with the UK ETS objective of incentivising decarbonisation. The UK government will also finalise its approach to implementing the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), and its interaction with the UK ETS later in 2025. 

Finally, the UK Carbon Border Adjustment Mechanism (UK CBAM) made significant strides in 2024. The government clarified key aspects of the UK CBAM during 2024, including its sectoral scope (covering aluminium, steel, cement, fertilisers, hydrogen, iron, and steel) and excluding glass and ceramics from its initial phase. Scheduled to launch on 1 January 2027, the UK CBAM aims to address carbon leakage by imposing an equivalent carbon price on imports based on their embedded emissions. 

For information regarding other sector developments, please click here.