What's Happening?
Chile is actively working to expand its carbon credit market through bilateral agreements and aims to approve carbon standards and methodologies for its Article 6 agreement with Singapore before COP31. The country has already issued five Letters of Authorisation
(LoAs) under a bilateral agreement with Switzerland and anticipates issuing approximately 18 LoAs across its Article 6 activities by the end of 2026. Projects slated for authorization include battery energy storage systems (BESS), boiler replacements, electric mobility, and waste management. Additionally, Chile has approved rules and guidelines under the Article 6-aligned Joint Crediting Mechanism (JCM) with Japan, facilitating project authorization and the transfer of Internationally Transferred Mitigation Outcomes (ITMOs). The government is also transitioning 30 carbon projects developed under the Kyoto Protocol to the Paris Agreement Crediting Mechanism (PACM) and is open to establishing partnerships with additional buyer countries like Norway and Sweden.
Why It's Important?
This initiative positions Chile as a significant supplier of carbon credits, attracting substantial international investment in carbon mitigation activities. The estimated potential of Article 6-linked investment for Chile is around $6 billion in the coming years, building on the $1.4 billion already mobilized through Article 6.2 activities as of January. For the U.S. and other developed nations, Chile's expanding carbon market offers new avenues for meeting climate commitments through the purchase of ITMOs. The recognition of various carbon standards, including those from voluntary carbon markets like Verra and Gold Standard, could streamline the process for international buyers. This development also highlights the growing global trend of countries leveraging carbon markets to achieve their Nationally Determined Contributions (NDCs) under the Paris Agreement, potentially influencing future U.S. climate policy and investment strategies in renewable energy and sustainable infrastructure abroad.
What's Next?
Chile expects to issue a resolution recognizing certain carbon standards by the end of October under its Article 6.2 agreement with Singapore, with the goal of having standards and project types approved before COP31. Following the approval of JCM rules with Japan, authorization processes for the 17 projects in the JCM pipeline are expected to advance. A second phase of Japan’s City-to-City Collaboration will launch this year, focusing on electrifying freight transport in Chilean municipalities, with the aim of generating credits for sale to Japanese companies. Developers anticipate having an electric mobility methodology ready within a year and exporting ITMOs within two years. Chile will continue to seek new international carbon trading partners, such as Norway and Sweden, further expanding its role in the global carbon market.
Beyond the Headlines
The expansion of Chile's carbon credit market underscores a broader global shift towards market-based mechanisms for climate action. By integrating voluntary carbon market standards and developing bilateral agreements, Chile is creating a flexible and robust framework for carbon trading. This approach could serve as a model for other developing nations seeking to attract foreign investment for climate mitigation projects while meeting their own environmental targets. The emphasis on diverse project types, from battery storage to electric mobility and waste management, reflects a comprehensive strategy for decarbonization. Furthermore, the collaboration with various countries and the recognition of multiple carbon standards highlight the increasing interconnectedness of international climate efforts and the potential for innovative financial instruments to drive sustainable development.
