COP28 Clears Path to Integrity for VCMs

Finalisation of Article 6.2, 6.4 of the Paris Agreement will realise the potential of carbon markets globally, but certainty delayed until COP29.  

COP28 in Dubai has yielded some encouraging collaborative progress to bolster the integrity of voluntary carbon markets (VCMs), but ongoing Article 6 negotiations prompt concern of further delay.  

“We have seen more collaboration, alignment and positive policymaker engagement than ever before, giving us a clearer picture of what the next year or two will look like for the further development of high integrity carbon markets,” Simon Puleston Jones, Co-founder and CEO of specialist climate-focused advisory group Climate Solutions, told ESG Investor. 

“This has unquestionably been the carbon markets COP.” 

New guidance was issued by several influential global bodies to coincide with the climate conference.  

Following a discussion paper published last November, the International Organization of Securities Commissions (IOSCO) published a three-month consultation report outlining its proposed set of good practices for regulatory authorities to “foster sound and effective VCMs”. 

The 21 safety measures aim to improve integrity, transparency and enforcement across VCMs, including recommendations to be consistent across regulators’ respective mandates, provide additional clarity regarding the regulatory treatment of carbon credits, and ensure both domestic and international consistency and alignment when developing a regulatory approach to carbon credits.

“IOSCO can play a pivotal role in regulators reaching global consensus as to what good looks like in carbon markets,” said Puleston Jones. 

Additionally, the World Bank unveiled its ‘Engagement Roadmap for Carbon Markets’, which aims to support countries to generate a robust supply of high integrity carbon credits, better leverage the bank’s operations by designing and implementing large scale programmes to channel climate finance, and ramp up efforts to shape a trusted global carbon market.  

For the latter, the World Bank intends to “unlock the most critical bottlenecks”, including efforts to bring clarity to carbon markets to build trust. 

COP28 has also set the stage for increased collaboration across voluntary initiatives.  

In response to ongoing controversies surrounding the quality, credibility and transparency of VCMs, organisations including the Science Based Targets initiative (SBTi), Voluntary Carbon Markets Integrity Initiative (VCMI) and Integrity Council for Voluntary Carbon Markets (ICVCM) announced plans to demonstrate how their individual work collectively supports companies interacting with VCMs.  

The VCMI has introduced demand-side rules for entities using carbon credits as part of their decarbonisation strategies and net zero pledges, and the ICVCM has developed guidance on the supply side of carbon credit generation.   

SBTi’s Net Zero Standard currently notes that carbon credits don’t count as reductions towards meeting science-based targets and may only be considered as an option for neutralising residual emissions or to finance additional climate mitigation. 

“There has historically been widespread dissatisfaction with the SBTi’s approach to carbon offsets,” said Puleston Jones, noting that the body’s involvement in this new collaboration is “hopefully a sign of increased acknowledgement by SBTi of the role that carbon markets can play”. 

Separately, the US Commodity Futures Trading Commission (CTFC) has also approved proposed guidance regarding the listing for trading of voluntary carbon credit derivative contracts.  

It’s all in the details 

Despite more coordination among VCM stakeholders, they can only make relatively small steps toward increasing the scale and credibility of carbon markets.  

Mark Kenber, VCMI’s Executive Director, told ESG Investor that while voluntary action does have a “vital complementary role to play, it is not and cannot be a substitute for international agreement and robust domestic policy”. 

But there has only been gradual progress in Dubai in negotiations relating to Article 6 of the Paris Agreement, which enables countries to cooperate when implementing their nationally determined contributions (NDCs), including through the development and mobilisation of carbon markets.  

“Article 6 negotiations must give certainty to carbon markets by agreeing the rules for methodologies, authorisations, and the role of carbon removals, based on ambition and integrity,” Kenber said. 

The potential of Article 6 to direct increased capital flows to carbon markets is “enormous”, agreed Puleston Jones from Climate Solutions. 

Discussions on Articles 6.2 and 6.4, which respectively deal with allowing countries to exchange mitigation outcomes bilaterally and the establishment of a mechanism to validate, verify and issue high-quality carbon credits, have been ongoing at COP28. A final text for each has yet to be agreed.

Article 6.2 discussions have been focused on issues including the authorisation of Internationally Transferred Mitigation Outcomes (ITMOs) and countries reporting on carbon credit transactions. The Article 6.4 Supervisory Body has been discussing the operationalisation of the promised international carbon crediting mechanism, including underpinning methodologies and greenhouse gas (GHG) removals guidance. 

Puleston Jones cited his concern that Article 6 negotiations have been waylaid by the complexity of the political process, noting that draft documents have proposed potentially delaying points for discussion until COP29 or even until COP33. 

“Article 6 negotiators only meet a few times a year and, if they can’t agree, then issues get kicked down the road for another year or another five – that’s just not good enough,” he said.  

However, Lina Barrera, Head of Global Policy at Conservation International, said that progress on Article 6.2 up until this point has “done a very good job of creating high-level guidance for countries to adhere to that pushes them towards environmental integrity, but also gives them the freedom to determine the details of their transactions with other countries”. 

“Additional negotiations took place on Article 6.2 on Sunday night (10 December), and these focused on operationalising the market,” she added.  

A crucial agreement made on Article 6.4 over the weekend means that – if adopted – ‘carbon avoidance’ won’t be treated as a third category, but rather can be considered as a reduction or a removal. 

But the latest iteration of the draft Article 6.4 text, issued on 11 December, includes a proposal for the Subsidiary Body for Scientific and Technological Advice to continue its consideration of whether Article 6.4 activities can include emission avoidance and conservation enhancement activities as part of its mechanism. They have proposed that this work will be finalised by 2028.  

“We are in a period of transition for all carbon markets – both voluntary and regulated – and we’re starting to see similarities between then,” Barrera said. 

“As the rules evolve under Article 6.4 and 6.2, we may begin to see VCMs moving in the same direction.” 

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