July 2025 VCM Updates Section B

This article is an automatically translated version of the original Japanese article. Please refer to the Japanese version for the most accurate information.

Sustainacraft Inc. newsletter. This article is Section B (Trends in major international regulations) of VCM Updates (Voluntary Carbon Market Updates). For inquiries, please contact us here.

This article outlines key developments in carbon-related policies announced from June to July 2025, covering the following topics:

• Paris Agreement Article 6.2 (Bilateral Cooperation)
• Paris Agreement Article 6.4 (Paris Agreement Crediting Mechanism)
• National Carbon Policies
• Developments in Non-State Actor Initiatives

Keywords: Article 6.2, JCM, Article 6.4 Mechanism, PACM, SBTi, GS, ART

Introduction

There has been significant news regarding bilateral frameworks under Paris Agreement Article 6.2. Regarding the JCM, progress has been reported on the conclusion of a JCM partnership with Malaysia, and negotiations with other candidate countries are expected to advance towards COP30. Regarding other bilateral cooperation, Singapore announced the conclusion of bilateral implementation agreements with Thailand and Malaysia, and bilateral agreements were also signed between Sweden and the Dominican Republic, and between Norway and Indonesia. Notably for Indonesia, Norway marks the fourth country to sign, following Japan (JCM), Singapore (MoU), and South Korea. From the perspective of host countries, having multiple options for project development under bilateral agreements means that the competitive landscape for JCM in Indonesia is likely increasing.

Furthermore, there has been significant progress regarding the Paris Agreement Crediting Mechanism (PACM) under Article 6.4. Firstly, Brazil, Cambodia, and Pakistan submitted their participation requirements. These participation requirements declare which sectors the host country will approve for projects under PACM, making this crucial information for assessing the host country's stance on the international transfer of Credits generated from each sector. The 7th meeting of the Methodology Expert Panel was also held, and its key decisions will be explained.

Regarding national carbon policies, we will introduce the treatment of Credit use in the final draft of the EU 2040 target, developments in the UK and Japan's ETS, and the progress of carbon policies in host countries such as Malaysia, Indonesia, Uzbekistan, and Panama. While the carbon market still has some way to go towards maturity, the policy foundations are steadily being established in each country.

Finally, regarding non-state actor initiatives, we will cover two important documents from SBTi to support target updates and Net Zero standards for financial institutions, a new framework for Engineered CDR from Gold Standard, and public comments on ART-TREES 3.0.

Paris Agreement Article 6.2 (Bilateral Cooperation including JCM)

Bilateral cooperation under Paris Agreement Article 6.2 is a framework for international Carbon Credit trading aimed at achieving each country's NDC (Nationally Determined Contribution). The developments observed in the past month are as follows:

Movement towards concluding a JCM partnership with Malaysia (link)

Japan's Ministry of the Environment has reportedly aimed to conclude a partnership with Malaysia under the JCM within the next few months. Looking at Malaysia's Voluntary Carbon Market projects (registered and Pipeline), approximately 80% (4.2M tCO2e) are REDD+, and 13% (0.7M tCO2e) are nature restoration projects. This suggests a significant potential for nature-based projects, and the formation of such projects is anticipated under the JCM as well. Furthermore, in the call for proposals for Synergistic JCM Creation Projects for Reiwa 7 (2025) (link), Malaysia, India, Brazil, South Africa, and Turkey are explicitly named as JCM candidate countries, indicating that negotiations with these nations are also expected to be progressing.

Movement towards Singapore concluding bilateral agreements with Thailand and Malaysia (link)

Thailand and Malaysia are reportedly expected to finalize bilateral implementation agreements under Article 6.2 with Singapore by the end of 2025. Thailand already signed a MoC (link) with Singapore in October 2022, and Malaysia signed a MoU (link) in January 2025. Once these implementation agreements are reached, preparations for concrete project development will be in place. While most of Thailand's Voluntary Carbon Market projects (registered and Pipeline) are energy or non-CO2 gas projects, Malaysia's, as mentioned, are approximately 80% (4.2M tCO2e) REDD+ and 13% (0.7M tCO2e) nature restoration projects.

Movement towards Sweden and the Dominican Republic, and Norway and Indonesia concluding bilateral agreements (link, link)

On June 30, 2025, the Swedish Energy Agency and the Dominican Republic's Ministry of Environment and Natural Resources signed a bilateral agreement on climate cooperation under Paris Agreement Article 6. For the Dominican Republic, this is the second country to sign, following Singapore (MoU). Furthermore, on June 26, 2025, Norway and Indonesia signed a bilateral agreement under Paris Agreement Article 6. For Indonesia, this marks the fourth country to sign, following Japan (JCM), Singapore (MoU), and South Korea. From Indonesia's perspective, having multiple options for project development under bilateral agreements suggests an increasingly competitive environment for JCM. Notably, both of these agreements were supported by the Global Green Growth Institute.

Paris Agreement Article 6.4 (Paris Agreement Crediting Mechanism: PACM)

Brazil, Cambodia, and Pakistan submit participation requirements for PACM (link)

In July 2025, Brazil, Cambodia, and Pakistan submitted their participation requirements for the Paris Agreement Crediting Mechanism (PACM). While Brazil approved all sectors—agriculture, forestry and land use, energy, industry, buildings, transport, and waste—as eligible sectors under PACM, it specified that it would not immediately permit the Issuance of ITMOs when approving activities under Article 6.4, reserving this decision for a later stage in accordance with domestic regulations. It also stated that activities approved under the Article 6.4 mechanism would be carefully selected to complement and support the achievement of its national NDC targets, indicating a stance where the achievement of its own NDC remains the priority.

Pakistan, similar to Brazil, approved all sectors as eligible under PACM, while Cambodia designated only industry, buildings, and transport as eligible sectors, excluding agriculture and forestry and land use. Cambodia has a track record of REDD+ projects under the JCM, and even within the Voluntary Carbon Market framework, it has a potential for REDD+ of over 6M tCO2e (annual ER for registered and Pipeline projects). Therefore, it is important to note what stance it will take regarding the international transfer of nature-based Credits in the future.

7th Meeting of the Methodology Expert Panel (link)

The Article 6.4 Methodology Expert Panel (MEP) held its 7th meeting from July 7 to 11, 2025. During the meeting, the MEP agreed to recommend to the Article 6.4 Supervisory Body the criteria for "suppressed demand" and a concept note for applying guidance on Removal to Emission Reduction activities.

"Suppressed demand" refers to a situation where the essential minimum service demands of people are not met, or are only met at an insufficient level, due to barriers such as poverty, lack of infrastructure, or limited access to technology. The criteria for "suppressed demand" address when and how insufficient local living standards can be used as a basis for artificially elevating a project's Baseline. This allows for the Issuance of Credits while setting emissions at a level somewhat above business-as-usual (BAU). However, this adjustment is only permissible when "basic human needs" are not met.

The concept note for applying guidance on Removal to Emission Reduction activities clarifies how PACM's "Removal criteria" and "Methodology criteria" should be applied in the crediting of Removal activities and Emission Reduction activities. According to the concept note, while "Methodology criteria" apply to all activities including Removal activities, "Removal criteria" target Removal activities and Emission Reduction activities with a risk of Reversal (re-emission of CO2).

National Carbon Policies

Use of Carbon Credits in the EU 2040 Target (link)

The final draft of the EU's 2040 climate target, which was also covered in last month's newsletter, was submitted to the European Parliament and the Council on July 2, 2025. We will explain the treatment of Carbon Credit use, which had been a point of contention.