Abatable is at the end of its first in-person COP experience, and what a week! Presidential addresses, official UNFCCC negotiations, 100 pavilions running events… cutting through the noise wasn’t easy.
Our main takeaway is that regulatory clarity and certainty will take time and we can’t afford to wait for it. The private sector will need to get used to navigating uncertainty and developing innovative ways to mitigate risks.
Four takeaways for the voluntary carbon market
1. The voluntary carbon market is here to stay
One message was clear during the first week of COP 27. Public finance will not be enough to reach societal net zero by 2050. We need private capital (lots of it), and the voluntary carbon market (VCM) is one of the vehicles to channel it. A government representative from Singapore noted during a side-event on Article 6 and the VCM that “We need early action and international negotiations take time. We should not let them [negotiations] hinder investments. The private sector should leverage the VCM.”
Another key message we heard loud and clear is that the corresponding adjustments (CAs) will not apply to companies (corresponding adjustments means transferring a credit from one countries’ NDC inventory to another).
This means that when a company purchases a carbon credit, that emission reduction will contribute to its NDC even after it is cancelled. Negotiators argue that there is no double accounting as corporate claims using carbon credits will not be reflected in the buyers’ national NDC inventory. This is a positive clarification as corresponding adjustments are expected to trade at a premium and potentially pose administrative hurdles. Nevertheless, if a company wants to buy a credit with a corresponding adjustment and transfer the credit from the host country to their country of operation, they should have the possibility to do so.
2. Clarity on Net Zero and cracking down on greenwashers
Several net zero guidance came out last week, including the High-Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities report and ISO’s Net Zero Guidelines. Both recognise the role of carbon credits and emphasise the need to disclose the credits purchased, in addition to the claim against which they are used. On the ground this was received very positively as transparency naturally pushes for integrity. We now have a framework for companies to be scrutinised against.
The publication of these guidelines make the rules of engagement of companies clear, making it easier to spot greenwashing and hold companies accountable. While we hear a lot about integrity on the demand side during this first week of COP 27, things were a bit quieter on the supply side and the integrity of credits themselves.
3. Almost every country is thinking about regulating carbon markets differently
Governments are navigating uncharted territories when creating the rules to regulate carbon markets, whether the VCM or international mechanisms such as Article 6.4. The only thing that is clear is that we will see a plethora of approaches. We are seeing governments who have been historically large issuers of VCM credits (e.g. Indonesia, Papua New Guinea, Peru) rush to set rules, often leading to confusion and pauses of issuances in the market.
In the short term, VCM stakeholders can expect at least two things. First, host governments will expect closer collaboration and reporting from project developers. Mr Mbaye, a member of the Article 6.4 Supervisory Board put it this way: “parties of the Paris Agreement need to report all mitigation activities happening in their country, in and out of their NDC. The VCM has been working very independently but that has to end. Governments need to know the activities that are being carried out and the emissions that are being reduced.” Second, more and more governments will start regulating and taxing activities being carried out under the VCM. This is already happening in Indonesia, Zambia, Tanzania, Peru, Singapore, Ecuador, Papua New Guinea and Costa Rica and we expect more to follow.
4. Progress on Article 6.2 and 6.4 is going slowly
According to negotiators, Article 6.2 and 6.4 progress is going slowly, with some key disagreement points. For Article 6.2, (the mechanism that enables country-to-country trade of credits) authorisations are the main point of contention with some countries pushing for the right to revoke authorisations. This would put at risk bilateral deals that are already happening. For Article 6.4 (the mechanism replacing the CDM), the discussions are getting very technical, focusing on the operationalisation of the mechanism’s registry and the transfer of CDM credits.
The feeling on the ground is that it won’t be until the end of 2023 at the earliest until the rules are agreed on and credits are traded under Article 6.2. It will take even longer to see credits issued under 6.4. On Saturday night the UNFCCC Executive Secretary Simon Stiell told the delegates that “Everyone, everywhere must do everything possible”. The second week of COP 27 starts today and we’ll be keeping a close eye on how the negotiations unfold.
We will continue to monitor the negotiations and developments of the second week of COP 27. Look out for our blog next week!