Carbon markets are reshaping global climate strategies, but their success depends on clear regulations. Here's a breakdown of the five critical rules shaping these markets today:

• Article 6 Framework: Established under the Paris Agreement, it enables countries to trade carbon credits through bilateral agreements (Article 6.2) or the centralized Paris Agreement Crediting Mechanism (Article 6.4). By 2025, 97 agreements and 155 projects were already in motion.

• Emissions Trading Systems (ETS): These cap-and-trade programs regulate emissions by requiring companies to buy or sell allowances. With 38 systems active globally, ETS frameworks vary by region, such as the EU ETS or China's expanding system.

• Integrity Standards: Independent verification ensures carbon credits represent measurable, additional emission reductions. Technologies like satellite monitoring and blockchain tools are improving oversight.

• Carbon Border Adjustment Mechanisms (CBAM): Led by the EU, CBAM imposes costs on imports from regions with weaker climate policies, leveling the playing field for domestic and foreign producers.

• Cross-Border Legal Frameworks: These systems streamline international credit recognition and prevent double counting, supported by the UNFCCC's International Registry and bilateral agreements.

Each of these rules strengthens the accountability and functionality of carbon markets. For businesses, understanding and complying with these regulations is key to reducing emissions while staying competitive.

Global Launch | Roadmap to Net Zero Aligned Carbon Market Regulation

1. Article 6 of the Paris Agreement

Article 6 provides the legal basis for international carbon trading under the Paris Agreement. Finalized in Baku in November 2024, this framework allows countries to work together to meet their climate goals using market-based mechanisms rather than acting independently [1].

The regulation outlines two main pathways for international carbon collaboration. First, Article 6.2 enables countries to form direct bilateral or multilateral agreements, provided they adhere to shared standards of transparency and integrity. Second, Article 6.4 introduces the Paris Agreement Crediting Mechanism (PACM), a centralized carbon market governed by the UN. This system is managed by a supervisory body tasked with creating standardized rules, methodologies, and procedures to maintain consistent environmental integrity across all transactions [2][4].

Momentum around Article 6 is growing. By March 2025, there were 97 bilateral agreements involving 59 countries and 155 pilot projects under Article 6.2, showcasing the practical adoption of these mechanisms [2]. This progress highlights the increasing readiness for stricter operational requirements.

To participate, countries must establish a Designated National Authority, use approved registries, and comply with UNFCCC transparency standards [2][3][4].

Several major economies are already weaving Article 6 credits into their climate policies. For instance, the European Union is reintroducing international carbon credits to help meet its 2040 emissions targets. Meanwhile, nations like China, Japan, and Brazil are integrating Article 6 credits into their domestic emissions trading systems [2][8].

However, challenges remain. The transition to PACM and the broader implementation of Article 6 face hurdles such as slow framework development, regulatory uncertainties, and concerns around maintaining environmental integrity during the shift from older systems [2][4].

For organizations looking to engage with Article 6 markets, the regulation offers a structured - though still evolving - framework. The transition period for legacy projects will end in December 2025, at which point the PACM system will be fully operational, featuring stricter integrity standards and more predictable processes [2].

2. Emissions Trading Systems (ETS) Regulations

Emissions Trading Systems (ETS) form the foundation of compliance carbon markets, operating under a cap-and-trade model. These programs impose strict limits on greenhouse gas emissions for specific sectors or regions. Companies within the system must surrender allowances - each representing one metric ton of CO₂-equivalent emissions - to match their actual emissions. Failure to comply results in steep penalties, creating a structured approach to emissions management.

The system incentivizes emissions reductions by allowing companies that emit less than their cap to sell surplus allowances, while those exceeding their limits must purchase additional ones. This financial push encourages participating entities to actively reduce their emissions.

Currently, there are 38 ETSs in operation worldwide, with another 20 in development. These systems differ in their design, reflecting regional economic and political priorities. For example, the EU Emissions Trading System, established in 2005, is the largest carbon market globally and often serves as a model for other regions. In contrast, the Regional Greenhouse Gas Initiative in the northeastern United States focuses exclusively on the power sector. Meanwhile, China’s national ETS, launched in 2021, began with power generation and is gradually expanding to other industries.

The level of regulatory stringency varies by jurisdiction. The EU ETS, for instance, encompasses power generation, manufacturing, and aviation, utilizing a mix of free allocation and auctioning of allowances. California’s Cap-and-Trade Program, operational since 2013, demonstrates cross-border collaboration by linking with Quebec’s system. This partnership enhances market liquidity while reducing compliance costs.

Ensuring environmental integrity is a critical aspect of ETS regulations. Rigorous monitoring, reporting, and verification processes ensure that traded allowances represent genuine emission reductions. Centralized registries and periodic audits help prevent issues like double counting and protect the system from manipulation.

The regulatory landscape continues to evolve. Initiatives such as the G20's Common Carbon Credit Data Model aim to create standardized and traceable crediting mechanisms, reflecting the market’s push toward greater transparency and uniformity. For companies operating across multiple jurisdictions, maintaining robust internal tracking systems and staying agile in adapting to new allowance rules is essential.

Market stability mechanisms have also become vital to ETS frameworks. Early challenges, such as overallocation and price volatility, prompted the EU ETS to introduce the Market Stability Reserve, which helps manage surplus allowances. These adjustments highlight the importance of responsive management in addressing risks and adapting to changing market dynamics.

3. Integrity Standards and Verification Requirements

Maintaining strong integrity standards is essential for ensuring that carbon markets function effectively and that every carbon credit reflects a real, measurable, and additional reduction in emissions [3]. These standards are the backbone of trust in the system, helping to prevent issues like fraud and greenwashing. Without them, carbon markets lose credibility and fail to achieve their environmental goals.

A key aspect of these standards is independent third-party verification. This process ensures that projects deliver real, permanent reductions in emissions while guarding against problems like leakage [2]. Such verification acts as the foundation for all other integrity measures within global carbon markets.

Global standards organizations play a central role in defining the rules for credit integrity. Groups like the Verified Carbon Standard, Gold Standard, and CCBS establish rigorous methodologies and maintain public registries to ensure transparency. Additionally, the UNFCCC is instrumental in enforcing standards for credits issued under Article 6.4 [4].

The risks of weak verification systems are exemplified by the Myanmar clean cookstove project, which faced the possibility of issuing 26 times more credits than it should have [2]. This highlights the importance of stringent oversight to avoid over-crediting and protect the market's reliability.

Advances in digital tools are helping to strengthen these systems. Technologies like advanced registries, satellite monitoring, and models such as the G20's CCCDM enhance traceability, reduce the risk of over-crediting, and simplify due diligence processes [4].

The rapid growth of bilateral agreements under Article 6.2 further underscores the need for robust verification mechanisms. By March 2025, 97 agreements had been signed between 59 countries, supporting 155 pilot projects. As these initiatives expand, consistent integrity standards become even more critical [2]. Organizations like Council Fire offer strategic guidance to help companies navigate these complex regulatory landscapes.

Market trends are increasingly favoring rigorously verified, high-quality credits [10]. With the global carbon credit market expected to grow from $1.12 trillion in 2025 to over $2.5 trillion by 2032, maintaining high integrity standards is essential for sustaining investor confidence and ensuring environmental impact [9].

For companies, aligning with these standards means choosing projects certified by reputable organizations, engaging independent verifiers, and maintaining transparent records. Staying informed about evolving regulations, such as those under Article 6 and ETS frameworks, is also critical to achieving both environmental and business objectives [3].

4. Carbon Border Adjustment Mechanisms (CBAM)

Carbon Border Adjustment Mechanisms (CBAM) are regulatory measures aimed at curbing carbon leakage by imposing charges on imports from countries with less stringent climate policies [3]. These mechanisms ensure that foreign producers bear costs comparable to those faced by domestic companies adhering to strict emissions regulations.

The European Union has taken the lead in implementing CBAM on a large scale. Its framework targets imports of carbon-intensive goods such as steel, cement, aluminum, fertilizers, electricity, and hydrogen. The transitional phase began in October 2023, with full implementation slated for 2026 [3]. This phased rollout provides businesses with time to adapt as the system becomes fully operational.

Under the EU's CBAM, importers are required to report the carbon emissions embedded in their products and purchase CBAM certificates. The cost of these certificates aligns with the EU carbon price, adjusted to account for any carbon pricing already paid in the product’s country of origin [3]. By doing so, the mechanism ensures a level playing field between imported goods and those produced under the EU's Emissions Trading System.

The ripple effects of CBAM extend far beyond Europe. Countries like Canada and the United Kingdom are exploring similar measures as part of their climate action plans [3]. This reflects a growing global shift toward market-driven solutions for addressing climate challenges.

For businesses in affected industries, CBAM introduces both hurdles and opportunities. Exporters to CBAM-regulated regions must evaluate their supply chain emissions and implement effective monitoring systems. Proactively investing in carbon reduction strategies not only helps mitigate potential costs but can also provide a competitive edge [3]. These requirements are paving the way for more cohesive international legal frameworks.

The EU has designed CBAM with World Trade Organization (WTO) rules in mind, applying equivalent carbon costs to both imports and domestic products to reduce the likelihood of trade disputes [3]. However, concerns from developing nations about possible trade barriers have sparked conversations around offering technical assistance and capacity-building support to help these countries shift toward low-carbon production methods [3].

Council Fire offers expert support to businesses navigating sustainable practices and compliance challenges. As the global carbon market continues to evolve, the importance of precise monitoring and standardized systems cannot be overstated.

5. Cross-Border Legal Frameworks for Carbon Credit Recognition

Cross-border legal frameworks are essential for ensuring that carbon credits from one country can be recognized and traded internationally, removing administrative obstacles. Building on the principles outlined in Article 6, these frameworks establish standardized recognition through bilateral and multilateral trading systems, laying the groundwork for enhanced international collaboration.

By March 2025, bilateral agreements and pilot projects have highlighted the growing momentum behind international carbon trading. These initiatives demonstrate the increasing interest in creating seamless mechanisms for cooperation across borders.

A key player in this process is the UNFCCC's International Registry, which is designed to track and authorize cross-border carbon credit transactions. This system works in sync with national and third-party registries, assigning unique identifiers to each credit and preventing double counting [2][5]. By ensuring interoperability, the registry strengthens market integrity and supports the broader regulatory framework. Countries participating in these systems must appoint designated authorities to oversee transactions and verify that credits meet established standards, such as additionality and permanence.

Efforts to harmonize data and processes across markets have been bolstered by initiatives like the G20 SFWG's Common Carbon Credit Data Model (CCCDM) [4]. This model simplifies administrative processes and enhances transparency for all market participants, making cross-border transactions more efficient.

The European Union serves as a leading example of how international credits can be integrated into domestic policies. By incorporating these credits, the EU gains access to a wider pool of options while maintaining environmental integrity through rigorous verification procedures [8].

For businesses operating in multiple regions, these frameworks offer notable benefits. They provide access to a variety of credits from different geographic areas, which can help reduce compliance costs and support decarbonization across global supply chains. However, businesses must navigate the complexities of differing national implementation frameworks and registry requirements to fully capitalize on these opportunities.

Multilateral initiatives, such as the Carbon Market Coalition, further enhance cross-border cooperation. This coalition, involving 18 countries, works to establish common carbon pricing frameworks and align standards for credit recognition [7]. Such efforts address concerns about credit quality and create more predictable market conditions, benefiting both governments and businesses.

Council Fire assists organizations in understanding and leveraging these international frameworks, ensuring compliance and identifying opportunities within this evolving landscape. As mechanisms for cross-border credit recognition continue to develop, maintaining environmental integrity and transparent tracking systems will remain critical for preserving market credibility.

Conclusion

The five key regulations - Article 6, ETS, integrity standards, CBAM, and cross-border frameworks - serve as the backbone of international carbon markets, driving impactful climate action and fostering global cooperation.

These regulatory structures are fueling remarkable growth in carbon markets. Currently, there are 38 operational emissions trading systems (ETSs) worldwide, with another 20 in development, reflecting a rapid expansion of regulatory frameworks [6]. The finalization of Article 6 rules in November 2024 marked a major milestone, paving the way for broader participation and boosting market confidence [1].

The evolution of integrity standards and ETS regulations highlights the need for markets to stay responsive. Adapting to new scientific insights, addressing emerging risks, and learning from pilot projects are essential steps forward. The shift toward high-integrity credits underscores this progress, as buyers increasingly prioritize transparency and environmental reliability. This demand for trustworthy carbon credits strengthens the overall system, ensuring that credits represent genuine, additional, and lasting emissions reductions.

As countries integrate international credits into their domestic climate strategies, market liquidity and trust grow. The European Union’s decision to reintroduce international carbon credits for its 2040 targets exemplifies this approach, creating larger markets while maintaining strict environmental oversight through thorough verification processes [8].

For businesses navigating this dynamic landscape, the regulatory framework presents both opportunities and challenges. Companies can tap into diverse credit portfolios across regions, potentially lowering compliance costs and advancing supply chain decarbonization. However, they must also navigate varying national frameworks and registry systems to fully seize these opportunities.

Council Fire supports organizations in managing these complexities, providing strategic insights to ensure compliance and uncover opportunities in this evolving market. Together, Article 6, ETS, integrity standards, CBAM, and cross-border frameworks not only showcase the progress made but also provide a roadmap for scaling carbon markets to meet global climate goals and facilitate the transition to a net-zero economy.

While the foundation has been laid, the true measure of success will depend on the effective execution, strict enforcement, and continuous improvement of these frameworks to uphold market credibility and environmental impact.

FAQs

What is the role of Article 6 under the Paris Agreement in shaping international carbon markets, and how do Article 6.2 and Article 6.4 differ?

Article 6 of the Paris Agreement is a cornerstone for fostering international collaboration on carbon markets. It provides a system where countries can trade emission reductions, helping them achieve their climate targets more effectively. The frameworks established under this article are designed to uphold transparency, ensure accountability, and maintain the integrity of environmental outcomes in carbon trading.

Article 6.2 supports bilateral or multilateral agreements, allowing countries to exchange Internationally Transferred Mitigation Outcomes (ITMOs). This approach encourages flexibility and cooperation among nations. Meanwhile, Article 6.4 introduces a centralized system, managed by the United Nations, to certify emission reductions from specific projects or programs. This mechanism ensures standardized processes and makes participation more accessible globally. Together, these provisions strengthen international climate action while supporting sustainable development initiatives.

What challenges do companies face with Emissions Trading Systems (ETS) regulations in different regions, and how can they address them effectively?

Companies face hurdles with Emissions Trading Systems (ETS) because of the varied policies, compliance rules, and market frameworks across different regions. These discrepancies can complicate efforts to maintain consistent compliance when operating in multiple jurisdictions.

To overcome these obstacles, businesses should focus on thoughtful planning and deep policy knowledge to align their practices with local regulations. Collaborating with consultancies that specialize in sustainability can offer customized solutions, enabling companies to navigate these complexities effectively. This approach not only ensures compliance but also supports environmental goals while delivering financial benefits.

What are Carbon Border Adjustment Mechanisms (CBAM), and how can businesses prepare for their impact on global trade?

Carbon Border Adjustment Mechanisms (CBAM) are policies crafted to tackle the issue of carbon leakage. They work by applying tariffs or adjustments on imported goods based on the carbon emissions tied to their production. The goal is to ensure domestic industries that comply with strict climate rules aren't disadvantaged while encouraging international producers to embrace cleaner production methods.

For businesses, preparation is key. This involves evaluating their carbon footprints and emissions across the supply chain, adopting more sustainable production practices, and staying updated on regulatory changes. Building relationships with stakeholders and seeking partnerships to integrate cleaner technologies can also reduce risks and help maintain a competitive edge in the global marketplace.

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