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Murray:
Hi, I'm Murray and this is the Nature-based Solutions podcast. Hello, Ed, how are you?
Ed Mitchard:
Hi, delighted to be here. I'm Ed Mitchard, Chief Scientist for Space Intelligence.
Murray:
Very good. Well, we've decided to reboot the Space Intelligence Nature-based Solutions podcast. We've been absent from the airwaves for a while. When we kicked off our year 2025 in an all team meeting, we talked about what are the big opportunities for forests. And of course, Article 6 of the Paris Agreement has become operational following the COP in Baku. And you said, I feel like I could talk an hour about Article 6. So Snezhanna and I thought, well, why don't we take you up on that offer and do that in the context of a podcast? What do you reckon?
Ed Mitchard:
Slightly regretting saying it now. But yes, we can, we might do 20 minutes.
Murray:
We're at about 20 minutes instead. Okay, so we get one third of the output. So why don't we work on a basis that anybody who has tuned in is listening to this, knows something of the carbon market and is active either as a project developer or maybe as a corporate looking to buy credits, maybe to invest in a project or a portfolio of projects. So if we consider that's a kind of the person we'd imagine is listening in.
How would you position Article 6 as a very, very high level? What does it do? What is it?
Ed Mitchard:
So Article 6 is part of the Paris Agreement, which was agreed at COP15 in Paris in 2009. And it's a bit that discusses basically selling and buying carbon emission efforts in general. It has various different articles, and the ones that really are relevant for us in the forest carbon markets are articles 6.2 and 6.4, which in different ways lets someone pay someone else for some emissions reduction activity, which doesn't have to be forest related. That can be.
converting a power station from a coal power station to solar panels, for example, which is something that is massively needed. The reason Article 6 exists is there's unequal distribution in the world of money compared to easy-to-do activities to reduce carbon emissions rapidly towards to keep global warming to ideally 1.5 degrees, which is the whole point of the Paris Agreement. Article 6.2 was kind of operational for a few years. It's gradually ramping up.
But Article 6.4, nothing has happened on it because a load of work has happened from various subsidiary groups, but nothing was approved at one of these annual COP meetings. The exciting thing that happened at Baku is they gaveled through, just agreed without discussing, a whole set of guidelines about how Article 6.4 could operate. So it exists and we will have genuine Article 6.4 emission reduction units produced during 2025.
which is about 10 years too late compared to the Paris Agreement, but it's great. It's finally happening. So that's exciting thing I guess I'd like to talk about.
Murray:
Okay, well let's zoom back a bit because there's a lot to consume there. Just like the critical differences then between article 6.2 and article 6.4 if you lump them into the two categories.
Ed Mitchard:
Okay, and I'll try and not descend too deeply into the alphabet soup of UNFCCC, as in the UN Framework Convention on Climate Change world, but some will be necessary. There's something called an NDC, a nationally determined contribution, which is something that countries have signed up to as a path of reducing their emissions to get to this 1.5 degree goal. So all countries now have submitted NDCs and they update them every five years. And these ideally see a big reduction in the carbon produced by each country. But as I was saying, there's an unequal distribution of wealth in the world. And also, people are at different stages down their decarbonization journey. So for example, we're sitting in the UK. We have already greatly reduced our emissions since the 1990s. We've closed all our coal power stations. We've built a lot of renewable energy and we've offshored tons of our emissions. Our industrial sector is far smaller than it used to be. A lot of the stuff we use day to day is produced in China and elsewhere in the world. And that means in terms of what we can do, we in the UK should carry on reducing emissions. And we have an ambitious goal in terms of reduction. But also, and a more efficient use of money is to pay other countries to start along that path. A classic example is a big agreement between some countries in South Africa to help it develop away from coal power towards renewable energy much more quickly. Article 6.2 sets out the way in which those transfers can happen. So Japan is paying South Africa to close its coal power stations and develop gas power stations instead. Article 6.2 governs how that can work. In particular, it details how Japan could make that trade and then claim it against its own NDC, which would mean rather than doing difficult things in its own economy, could pay for the reduction in carbons to happen elsewhere and claim it as part of its own success. The kind of thorny issues there is around double counting and the way it's been agreed in the Paris Agreement is that there would then be a corresponding adjustment that would happen and South Africa would not claim that reduction against its own NDC. It would still have to do its own work to produce its less ambitious reduction.
So forest carbon can fit into these articles, 6.2 trades. So the UK could theoretically pay someone like Indonesia to reduce their deforestation rate, reduce their emissions to the atmosphere. They could ask for a corresponding adjustment and use it as part of their own claims. They could not. There's not that much kind of governance of these trades. They're really agreements between two countries or even a country and a company can do this. Sometimes there will be multilateral groups of countries that kind of agree on a rule book.
But fundamentally, it's not governed under the UNFCCC. It just
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kind of happens according to rules. And it tends to be country to country that's envisaged here. It's very exciting. It's the future of REDD+. Lots of these countrywide agreements to stop deforestation or restore forests will happen through Article 6.2. And increasingly, it's obvious that quite a lot of that will happen without a corresponding adjustment. So for example, Norway has for a long time been paying countries to reduce their emissions through stopping deforestation. It will do that through Article 6.2 and it will still work on its own decarbonization. It's not going to ask for a corresponding adjustment. It is happy funding others to achieve their NDCs. Article 6.4 is quite different to that. Article 6.4 is much more controlled. It's run by a supervisory body called the Article 6.4 Supervisory Body.
Murray:
How did they come up with that name Ed, do you know?
Ed Mitchard:
Surprisingly, no idea. They've done a lot of work over the last few years. They've had tons of meetings, there's loads of text online, and they've come up with a set of rules about how you could create carbon credits effectively. Article 6.4, emission reduction units, again, great name, it's A6.4ERs, it's written. These are going to be valuable carbon credits effectively that can be traded between countries or between companies.
They will have real meaning internationally in a similar way to the CDM credits did back in the days of the Kyoto Protocol. These will be much more controlled. And some of the excitement is this rule book that was gaveled through allows a pathway for voluntary credits to become also recognized as Article 6.4 emission reduction units. So for example, a VCS REDD+ project, probably under VM 48, the kind of more rigorous recent way in which red projects are going to be done. It's not guaranteed, but there is a pathway in which you could see those becoming part of an Article 6.4 units and going from the voluntary sector to a proper compliance sector that could be bought by a company to, for example, show that they are meeting their net zero goals partly through carbon credit purchase. And that's very exciting for the world's forest because fundamentally, proper compliance units are going to have a higher price and they're going to bring much more money into conservation, not just because of the higher price, but there should be a higher volume as well. There are lots of companies and countries that are struggling to see how they get to net zero or how they meet their claims on the way towards net zero. And carbon credits can be part of that solution if they're trusted and recognized internationally.
Murray:
Amazing Ed, you should probably take a pause for a moment, some breath, but then at a very, very high level, we should consider 6.2 as a means for trading to occur primarily between countries. And then under 6.4, this is probably rather more going to provide the opportunity for some convergence with the existing voluntary carbon market that we have and a compliance market. So this is really what's happening. And it seems to be really exciting for people because if you're a supplier of credits sitting in somewhere like Indonesia, you might be able to achieve a higher price. And then if you're a buyer of credits, it provides a new compliance and regulated market to buy credits from.
Ed Mitchard:
Yeah, exactly. These people investing in forest carbon projects are crying out for some certainty in the long term. Like if you're going to start a forest protection project or a restoration project, it's a lot of work working out an area that you can work in, sorting out the land tenure, doing the carbon calculations, using people like space intelligence to help potentially, talking to all the communities, and then signing agreements that are really long term, typically 30 years plus. Doing that right now, I'm really delighted and pleased that some of our clients and other people have taken the risk and developed forest carbon projects. But it's very risky right now with the price and volume of voluntary carbon credits changing year on year. No real certainty about what the size of the market will be in the future. I think this Article 6 component, because it's an agreement between governments, because these are going to have a compliance use case, they can go on to a company's accounts and be used as part of their net zero journey.
Hopefully that provides the confidence for a lot more money to flow into developing these projects. And we can go from this world now where I think a bit less than 1 % of tropical forest is within a REDD+ project, a carbon finance conservation project, to where we need to be by 2030 where 20 or 30 % of forests are in those projects. And to be clear, those are the forests that are most at risk of deforestation. That's what we need in these projects.
Murray:
So super exciting for the world's forests. Where do you see the real focus of activity in 2025?
Ed Mitchard:
I think there's such an interest in Indonesia because it's just had a change of government. It's had a very high rate of deforestation over the last 20 years or so, but still has lots of biodiversity intact forests there. And there's a real interest in trying to preserve what's there, restore a lot of the forest that's been destroyed, and just for the same reasons.
Murray:
Well, that's going to be an interesting question for people like they did the split between conservation and restoration. Any view on how that changes or not under an Article 6.4 framework?
Ed Mitchard:
I guess in general, I get frustrated with any of these questions I get all the time about should we be doing A or should we be doing B or what's better to put our money into A or B. We should be doing everything. Climate change is a climate emergency and we need to be restoring forests that are being destroyed clearly. We also need to protect forests that are at risk of being deforested. We have to do both and there's no
either or there. It's both of them. I think in the total amount of carbon going to the atmosphere over the next few years, there is much more potential to make a difference in terms of avoided deforestation, simply because we've tried our hardest, but a lot of tropical forest is still there. About 60% or so of tropical forest is still around. That's a massive store of carbon that we just can't allow much of that at all to go into the atmosphere, even if we're to get to stick at two degrees warming. But yes, we need to restore the other bits as well. And restoration is far more expensive per hectare than protection. So we maybe need a lot more capital going into that to have a similar or even a smaller impact.
Murray:
It seems to be there, Ed. The false dichotomy is one that we should destroy between either doing conservation or restoration. It's firmly one of both.
Ed Mitchard:
Absolutely. We have to do both. I'd say that if I was forced to choose, I would choose avoided deforestation because that's the most urgent. We have to get deforestation to zero. We are well past the Sustainable Development Goals target of 2020 for halting deforestation and we've missed many other targets. That just needs to happen. If Article 6 was part of the way of funding that, that's great, but that's just a non-negotiable. And we should also be pouring money into restoration. Clearly, there are tons of ecosystems that suck carbon out of the atmosphere, but also protect biodiversity, provide local resilience to climate change and extreme events. We just need to get that going. Again, Article 6 provides a route for that. Article 6 in general is totally agnostic about the mechanisms of how you achieve changes in the carbon dioxide level in the atmosphere. It's about transfers of carbon obligations between people. It doesn't bind between forest protection and forest restoration. Those are all allowed as long as they follow the guidance from the supervisory bodies for 6.4 or two countries come to an agreement in following some broad principles for 6.2.
Murray:
And is this ITMO?
Ed Mitchard:
Right, we haven't got into ITMOs. ITMOs are what actually is the unit in Article 6.2. So these are internationally traded mitigation obligations. And ITMO is what the UK would buy in my theoretical world where they were paying Indonesia to stop deforestation. ITMOs can or cannot come with a corresponding adjustment and they will have a kind of higher value and be more important if they do come with a corresponding adjustment because that means there's no double counting involved and they are being incorporated into the accounts, the carbon accounts of the country purchasing them.
Murray:
Okay, well, there's got to be a question here about, first of all, who's going to regulate this in our carbon market as obviously carbon market standards with associated methodologies? How does the project get governed in the context of a 6.4 eligible project?
Ed Mitchard:
Well, so there's
this Article 6.4 supervisory body which sets the rules. Exactly how this works I think is still being worked out in practice. They don't have a large number of people to go around checking projects. They will create the principles and then different bodies will follow them. So this is where some, there are VCS methodologies and processes may be decided to fit within Article 6.4, but there's gonna be other groups involved in deciding whether or not that approach is suitable. Once an approach is approved in a group, then the projects can go through that approach. So it's going to be quite recognizable from the current system we have for the voluntary carbon market. It's effectively another level of supervision on top of these methods.
Murray:
Perhaps more efficient but a higher price you might expect.
Ed Mitchard:
Yes, and there should be a higher level of integrity in those credits, not necessarily because the methods are any different, but more people will have been checking what's going on. I strongly hope more stuff will be public. I really, really hope there are good registries and so on. know various groups, including Article 6.4 committee, are creating processes to make everything transparent. And if you shine light on these things, it should help.
Murray:
Well, you've been a great voice in the call for more integrity in the forest carbon market that we have currently. And one of the main voices for the use of high quality data derived from satellite remote sensing. So how do you see the role of satellite produced or derived data products in the 6.4 world, which you're sketching out?
Ed Mitchard:
Yeah, well, obviously, I started space intelligence with you back in 2018, partly to try and get these good satellite data sets we knew we could make into markets like this. I'm delighted this exists and gives an opportunity for high quality data that represents what's going on in the ground to be used in part of calculating emissions reductions. That's what has to happen. What I really hope is that there's not just high quality data used throughout these different articles and then the projects below that here's consistent data. And it seems the market is going that way. we look at REDD+ in particular, under the article 6.4 versions, the methodologies that are approved tend to be involving jurisdictional baselines. So you're looking at risk at a country scale. That's also the case under ARTS trees, another jurisdictional method that's had support from FAO and others. And under VERRA's VM0048, their way in which all REDD+ credits are going to be produced going forward under VERRA. All of these require jurisdictional risk max and jurisdictional, so kind of country or region wide independent estimates of deforestation rates. And those are produced independently of the project developers. So companies like us have been producing deforestation data for VERRA for their VM0048. And they hope that similar types of data or equivalent data are used
across these different methods so that there's consistency. That's going to make these units consistent in space and time, which is great between neighboring projects, and also just makes it so much easier to assess the quality of these projects and just trust that all of these units mean there's at least a ton of carbon that would have gone into the atmosphere is now not there.
Murray:
Okay, brilliant. I think that was very, very clear. I'm hoping for anybody listening there, there is some clarity brought to this new and exciting world. So the key messages are that overall, we expect there to be high volumes, higher prices, and we think as well, a higher degree of integrity. And we should abandon this false dichotomy of removals and replanting versus conserving forests. We need to do both of those and high quality data needs to stand behind all of the trading decisions that are made and the decisions around the creation of new projects. Is that a relatively fair summary?
Ed Mitchard:
Yeah, that's exactly it. I think this market often moves very slowly. Changes happen slowly. Sometimes, loss in confidence has been a bit quicker. But it's taken 10 years from the Paris Agreement for us to get to this point of issuing Article 6.4 units. I think, clearly, everything has to speed up. These need to be adopted quickly. The number of units, carbon credits sold under whatever system to protect and restore tropical forests, that needs to increase by tenfold in the next couple of years. It can't just gradually grow. We haven't got time for that. We're behind where we need to be in terms of fighting climate change, and we have to accelerate to get there. I think good quality data, consistent data sets like we produce are maybe part of that puzzle, but there are many other bits that have to go right for that to happen.
Murray:
It's broadly the kind of number which people are talking about the growth rate, an order of magnitude growth in the carbon market this year, really driven by the arrival of Article 6.4 in particular. And we've just seen that the Indonesian exchange IDX has started advertising that they're going to be selling carbon credits, or indeed they are selling carbon credits this quarter. So is that part of the opening up of the market? You mentioned Indonesia in particular.
Definitely as a business, we're seeing a huge amount of activity there. Is that the first step, do you think?
Ed Mitchard:
I think so. think, well, if I was to predict in two years time where most of the credits would have come from, I predict it would be Brazil and Indonesia, partly just because they're really big, but also because they have stable legal systems, lots of forest at risk, lots of areas that have been deforested that could be restored, good access. I mean, Indonesia's been a brilliant place to grow palm oil for the world because it's got loads of ports and loads of access points. That similarly gives access for projects that try to do something to protect or restore ecosystems. So yes, I think this will happen across the tropics, but some big countries where a lot of the gains can be had will lead the way.
Murray:
Okay, well, if you're going to give a couple more final words to somebody on the, let's talk about the demand side of the market. If you're either a large corporate looking to develop a portfolio of carbon projects, maybe you're investing directly or developing a number of offtake agreements, or indeed you're a fund manager with say half a billion dollars under management, you're looking to be active in this space.
What would your message be? Seems like the earlier one was we've got to do both avoided deforestation and restoration. I think your second one was “be bold”. You've got to act fast. Obviously, if you're a fund manager, you'd probably be quite interested in the idea of the prices increasing rapidly over the next couple of years. Any other key messages you would give to people on that buy side?
Ed Mitchard:
Yeah, mean, the price and the volume both have to increase over the coming years. If you look at what we need to do in terms of conservation and restoration, that might not happen. That will be because we failed to get there. But I kind of don't want to consider that alternative. The reality is we need these to work. It's one part of the puzzle for fighting climate change. So volumes and price of carbon credits should increase over the coming years. And that will only happen if people like investment managers and large corporates invest money now in
projects that aren't actually that many carbon credits produced. And carbon credits are always produced ex-posts. So you deliver the benefits, then you can sell. Then you can do all the monitoring, and then you can sell the carbon credit. So in order for that expansion to happen in 2026, 2027, 2028, we need to invest now, or ideally a few years ago, in getting these projects started. There are lots of embryonic projects around the tropics, loads of those project developers in Indonesia. But they don't have the money to develop and scale their projects because there's a lot of money to be spent early on and you reap the rewards in terms of carbon credits later and that's an opportunity. In terms of big corporates, so a lot of them have signed up to policies where they are going to net zero often by quite date, so quite soon, maybe 2030 or 2035. They're doing that by reducing their emissions themselves, but they have this offset bit that they can't reduce because for example, the grid isn't green yet where they are or because
They're using steel and there just isn't a supply of carbon neutral zero, carbon zero steel right now. I would encourage them to buy carbon offsets to deal with that difference. But in particular, it'd be great if they invested in projects for the future or bought carbon credits in the futures market for the future. That will save them money in the long term because carbon credits will be cheaper now. But also, we need that injection of capital into this market now to develop these projects to provide the supply later. Otherwise, a terrible outcome will be if carbon credits are too expensive to be used in 2028. They're hundreds of dollars a tonne because the supply is too small. That's a risk if people wait.
Murray:
So lots of capital now create a high quality, high integrity supply with sufficient volumes to meet the needs in the future. Okay, that's a great way to end it. I think we should end it because I know exactly that we've both got to go to a meeting. So we will leave it there and thank anybody who has tuned in very much for doing so. We're going to be producing more Nature-Based Solutions podcasts in the future. It won't just be you and I, Ed. We'll bring on other people in the coming months produced by our fantastic team in-house here at Space Intelligence. Thanks to Snezhanna for all the fantastic work bringing this together. And at that point, I think we should say thanks for listening.
Ed Mitchard:
Thanks so much for listening and yeah, we'll be back Murray. I'll see you in the meeting.