The 27th “Conference of the Parties”, or COP 27, starts this Sunday. The event brings signatory governments of the Paris Agreement together once a year to agree on how to jointly address climate change and its impacts.
This COP is expected to be quite different from its predecessors. Whilst last year’s COP in Glasgow was about setting the right ambition, this year’s event has been framed by the Egyptian presidency around implementation, cooperation and the concept of a “just transition”. We are moving from the what to the how. Finance and loss & damage are expected to be major agenda items at COP 27. The event will also be a forum for important decisions and discussions about carbon markets, which is the focus of this article.
Here is our take on four key carbon markets themes to watch out for:
1. How countries intend to use international carbon markets
A recent report from the World Resources Institute (WRI) reported that the number of Nationally Determined Contributions (NDCs) which see a key role for international carbon markets (governed under Article 6 of the Paris Agreement) increased from 99 to 120. This COP will be an opportunity to gain clarity on how countries intend to operationalise mechanisms allowed under Article 6.
- Article 6.2 enables country-to-country trading of carbon credits, where parties finance and agree to develop specific carbon offsetting projects. The climatic impact benefits can be traded and claimed towards one countries’ NDC, and netted out of the other country’s carbon accounting registry.
- Article 6.4 on the other hand creates a market where public and private actors can participate in financing countries' reduction efforts. Some of the carbon credits issued under 6.4 can also be claimed towards the country’s NDC provided they are “authorised”. However, authorisation rules remain country-specific and may see wide country-by-country variations.
So far, only 20% of governments have explicit plans on how they intend to leverage international carbon market mechanisms under Article 6 to meet their NDCs, with more countries expected to come forward with a position on this as part of this upcoming COP.
We will also be paying close attention to how government representatives perceive the interplay between their efforts under Article 6 and the voluntary carbon market (VCM). While actors of the VCM are advocating for the two markets to remain independent, some governments may choose to expand their remit of governance to projects developed under VCM carbon standards (e.g. Verra, Gold Standard). The reasons for wanting to regulate the VCM vary from countries wanting to ensure they meet their NDCs before they export credits, to pushing for fair share of proceeds or high safeguards and controls. Until clarity on the how countries intend to use Article 6 is provided, this could lead to uncertainty for project developers and buyers.
2. The future of forest protection
After almost risking to tank the negotiations during the last COP, negotiators agreed to leave the door open to forest conservation (or REDD+) and carbon avoidance projects more broadly. Previously some negotiations pushed for avoidance projects to be narrowly defined as emission reduction initiatives, in such a way that could have seen forest conservation activities be explicitly excluded under the Article 6 mechanisms.
This year, we expect the discussions on forest conservation and restoration to pick up again with a focus on methodologies and market mechanism fit. We expect intense debate on the merits of sovereign carbon (and the role of the redd.plus platform) against “jurisdictionally nested” activities under the Architecture for REDD+ Environmental Excellence Standard (ART TREES). Discussions will also focus on the appropriateness of different payment mechanisms for forest conservation initiatives, will those fall under the Article 6.2 mechanism, or result-based finance (such as the Forest Carbon Partnership Facility), or through private action support through the existing VCM infrastructure?
3. The end of the Clean Development Mechanism
Activities governed under Article 6.4 are considered to be succeeding the Clean Development Mechanism (CDM), the first international carbon market developed under the Kyoto Protocol from 1997. Extensive research highlighted missteps from a policy design and intrinsic issues of such a system, despite a lot of the learnings over the last 20+ years since the Kyoto protocol.
This COP will be an opportunity for negotiators to agree on the details of the transition of CDM activities to Article 6.4. Whilst the CDM stopped issuing credits on the 1st of January 2021, uncertainties remain around the use and claims that can be made using existing CDM’s Certified Emissions Reductions. We will also be monitoring which criterion and methodologies will be carried over from the CDM to the Article 6 mechanism. A key question is whether certain renewable energy projects will be included. To-date, those projects have raised a lot of questions regarding their current ability to meet robust additionality criteria.
4. Infrastructure, capacity building and further clarity on timelines
We hope this COP will provide further clarity as to when we can expect credits under the Article 6 mechanisms to start being issued and corresponding adjustments applied. The speed of such transition will only occur as a result of capacity building initiatives and the speed of the development and roll-out of a new digital infrastructure or meta-registry which can keep track of countries’ carbon accounting systems and registry. Firstly, most countries have not yet outlined how they plan to leverage Article 6, and building capacity for them on how to go about it, will be key. Secondly, effective international carbon markets depend on effective digital registries and the ability to transfer credits and keep track of corresponding adjustments. Finally, the rules and methodologies for projects under 6.4 are still being drafted by the Supervisory Board. This will take time and COP will hopefully give us a sense of the pace at which these three areas of work are advancing.
Abatable will be represented at COP 27 by our Policy & Strategy Lead, Pauline Blanc. If you would like to set up a meeting, feel free to contact her directly at pauline@abatable.com
