The climate summit presents an opportunity for more convergence in the rules for voluntary and regulated carbon markets.
Following the eleventh-hour agreement on Article 6 of the Paris Agreement at COP26, it is hoped that COP27 will provide further momentum toward establishing a coherent and credible framework for carbon trading.
“A number of countries are interested in accessing the opportunities offered by carbon markets,” Mark Kenber, Executive Director of the multi-stakeholder platform Voluntary Carbon Market Integrity initiative (VCMI), told ESG Investor.
Consensus on the rules for trading carbon credits is seen as vital for scaling up carbon markets and increasing investment flows to developing countries with strong sequestration potential and urgent climate adaption needs.
However, it’s unlikely that big strides will be taken at COP27, he said, noting that groups tasked with setting out the framework for global carbon trading are still in the early stages of their work.
In early November, just before the commencement of COP27 in Sharm El Sheikh, one of these groups – the Article 6.4 Supervisory Body – will be conducting its fourth meeting.
Article 6.4 provides a framework for a multilateral carbon credit market, which will be overseen by the 12-member body. It will serve as a centralised project authorisation system, responsible for approving high-quality carbon credits from projects around the world. Credits that are approved are labelled as A6.4ERs and can be sold to countries, companies or individuals.
The group has been identifying and developing the procedures necessary for this kind of market mechanism, including administrative infrastructure and guidance for existing registries.
“The Article 6.4 Supervisory Body has a lot of work to do,” said Kenber. “And they have politics as well as the technical side of things to deal with.”
Kenber also hopes to see more clarity at COP27 around how the Article 6.4 system will interact with voluntary carbon markets (VCMs).
VCMs facilitate the trading of carbon credits that don’t count towards mandatory decarbonisation targets. They are separate from regulated carbon markets, such as the EU’s Emissions Trading System, meaning that VCMs have grown largely without governmental or regulatory oversight.
“What remains to be seen, once Article 6.4 is up and running, is whether governments looking to attract carbon market investments into their countries to meet their nationally determined contributions (NDCs) will prefer to use [A6.4ERs] or be prepared to use VCMs as well,” he said.
Kenber noted that, while governments are unlikely to make declarations or new policies regarding VCMs at COP27, there will hopefully be side discussions debating how regulated markets and VCMs can work together.
“One would assume that governments will want to make use of the methodologies and all the lessons learned from VCMs because, since the Clean Development Mechanism (CDM) slowed down, most of the innovations in methodologies and technologies have come from VCMs. Voluntary markets are a big driver of innovation.”
However, countries have had a mixed experience in their interactions with VCMs, particularly emerging markets looking to utilise voluntary markets as a source of climate finance.
“Since COP26 there has been an explosion in demand for VCM projects but limited success in the implementation of new, high-quality projects,” said William Chignell, Chief Commercial Officer of ESG at Apex Group.
VCMI and the Integrity Council for the Voluntary Carbon Market (ICVCM) are both in the process of introducing new guidelines for the supply and demand sides of VCMs.
On the demand side, VCMI is currently going through feedback to its draft claims code of practice for scrutinising companies’ carbon credit claims, with plans to publish its next version of the code early next year.
On the supply side, ICVCM’s consultation on its draft Core Carbon Principles (CCPs), which will set threshold standards for high-quality carbon credits, is open until the end of this month. The final CCPs and assessment frameworks will be published by the end of this year.
“So far, it appears there may be a willingness to voluntarily implement certain rules into VCMs that emulate the Paris Agreement, that will help to safeguard the legitimacy of carbon markets overall,” said Rob Macquarie, Policy Analyst and Research Advisor to Lord Nicholas Stern at the London School of Economics Grantham Research Institute on Climate Change (LSE GRI).
Gunning for convergence
VCMs and regulated markets face many of the same challenges, which will hopefully allow for convergence over time, VCMI’s Kenber said.
A key area requiring further clarity is double counting and the application of corresponding adjustments, he said.
Double counting refers to instances where two entities count the same carbon credit towards their decarbonisation process. The introduction of corresponding adjustments would mean that, if one country purchases carbon credits from another, the country selling those credits cannot count them towards their own decarbonisation goals. However, questions remain around how to enforce these rules and how to keep track of carbon credits to avoid double counting.
Kenber said: “Countries will be looking at what the authorisation of corresponding adjustments requires in terms of legal infrastructure. What does it mean for them? Is it a benefit or a cost?”
One way in which countries can include carbon markets in their domestic climate policies is through jurisdictional-level carbon credits.
A recent report by the World Economic Forum (WEF) outlined the positive impacts of jurisdictional carbon credits targeting the restoration of the world’s natural carbon sinks (REDD+ projects). Through this approach, governments can use their authority to enforce land use, introducing policies such as subsidies, spatial planning and infrastructure development, WEF said.
Jurisdictional REDD+ projects could also attract more investment, the report added, noting that between US$100 billion to US$369 billion of investment will be needed annually by mid-century to save sufficient forests to keep the world on a 1.5°C pathway. However, just US$20-24 billion of public finance was committed to REDD+ activities between 2008-15, it added.
“I’m not sure whether it’s my expectation or hope, but by the end of this decade, I would expect VCMs and Article 6 mechanisms – particularly Article 6.4 – to converge,” said Kenber.
“If they don’t converge institutionally, the rules will converge significantly, because there will be no interest in those who are purveyors of high integrity to be seen undermining the Paris Agreement.”