Lynn Strongin Dodds looks at the developments at the COP 29 summit for carbon markets and ISDA proposals for a voluntary market
On day one, countries at the recent COP29 climate summit gave the green light to carbon credit quality standards which are critical to launching a UN-backed global carbon market that would fund projects that reduce greenhouse gas emissions (GHG).
The ruling, which refers to article 6.4 of the Paris Agreement, establishes a UN-backed standard-setting body to assess carbon-credit programmes and how they can be used. Although it was first proposed in 2015, negotiations have seemingly rambled on for almost a decade, with disputes over quality and regulation stalling the talks.
At this year’s COP, host Azerbaijan, made passing Article 6 in its entirety one of the key targets for the event. Discussions are still needed in terms of how countries can trade the carbon credits between each other, as well as be embedded in their nationally determined contributions to reduce emissions.
In theory, carbon credits allow countries or companies to offset their emissions by paying for projects anywhere on the world that reduce or remove CO2 emissions from the atmosphere. They range from the cultivation of CO2-absorbing mangroves to distribution of clean stoves to replacing polluting methods of cooking in poor rural communities.
In general carbon credits have not been an easy sell because of a series of scandals that included credits being issued for projects that either didn’t meet required standards, deliver the promised reductions, or even exist. Unsurprisingly, market participants became wary with Greenpeace dubbing carbon offsetting “a scammer’s dream scheme.“
Yalchin Rafiyev, lead negotiator at COP29, however, believes the approval of the standards is a “critical step towards concluding Article 6 negotiations. This will be a game-changing tool to direct resources to the developing world and help us save up to $250 bn a year when implementing our climate plans.“
There is also hope in some quarters that the standards could provide an avenue for US companies to continue participating in global efforts to address climate change. This is because they would be able to buy credits from the UN-backed market to meet their voluntary climate targets even if President-elect, Donald Trump withdraws from the Paris accord as he did in November 2020.
The establishment of a UN carbon market is also expected to influence standards in voluntary carbon markets (VCM). In the run up, the International Swaps and Derivatives Association (ISDA) published a paper outlining its clear plan and the role they can play in the climate change landscape.
The first step was to create a globally consistent definition of a ton of carbon that is adopted by all market participants and aligned with Article 6. It should be aligned with a robust, independent system that uses scientific evidence to verify and audit the integrity of voluntary carbon credits (VCCs). “These are non-negotiable prerequisites for an effective carbon market – there can be no shortcuts if the market is to work effectively,” the trade group said.
Second was a sound legal framework to create greater certainty and confidence in the trading of these products. ISDA said it has explored the key legal issues relating to VCCs in several jurisdictions and has set out the precedents in several white papers as well as developed standard documentation, published in late 2022, to establish a single contractual framework that can be used for any carbon standard or registry.
This should be followed by greater transparency on the accounting treatment for VCCs. Currently, there are no specific provisions relating to carbon credits under US Generally Accepted Accounting Principles or International Financial Reporting Standards.
Next ISDA calls for a liquid forward market which would send valuable price signals to buy- and sell-side firms, enabling them to gauge supply and demand and manage their risk. ISDA added that “vibrant secondary market will help to secure long-term investment in carbon removal technologies and nature-based solutions, while also facilitating greater pricing transparency.”
Last but not least, is the development of a global regulatory framework. “There is no need to reinvent the wheel – policymakers should be mindful of existing rules for trading in the secondary market, which are sufficiently robust and fit for purpose,” it said.
ISDA also noted that the industry must be ready for the big future policy measures, such as the EU’s Carbon Adjustment Mechanism, which will introduce a levy for carbon emitted during the production of certain goods imported into the bloc. This will be a transformational change, putting carbon pricing right at the centre of global trade policy.
