Carbon Markets Mature at COP28

COP28 Created Tailwinds for the Voluntary Carbon Market:  Here Are a Few Highlights. 

There was no shortage of news coming out of COP28 this month. 

Headlines were dominated in the first week of the conference by an early unanimous vote to adopt a new loss and damage fund. Then, a contentious debate and eventual compromise occurred on the language used in the Global Stocktake report regarding the transition from fossil fuels. But beyond these stories, there have been some significant developments in the international trade of carbon credits. These developments create tailwinds for the beleaguered carbon market. 

The voluntary carbon market (VCM) headed into COP28 on shaky ground. 

In 2023, many corporates heeded negative media attention, taking a step back from buying carbon credits to wait for more guidance from standard-setting organizations, such as the Integrity Council on the Voluntary Carbon Market (ICVCM) and the Voluntary Carbon Markets Integrity Initiative (VCMI). Throughout the year, rumors abounded that regulators in the US would soon weigh in on the “wild west” carbon market, but no action had yet been taken. 

That brings us to COP28, where a flurry of new initiatives were announced, many of which should help prepare and scale the VCM for its turn on the world stage. Let’s take a look at some of the most important outcomes. 

COP28 Produced An “end-to-end” integrity framework.

The first significant announcement came from the ICVCM and the VCMI, the Science Based Targets Initiative, the Greenhouse Gas Protocol, and the We Mean Business coalition. These groups came together to announce a new “end-to-end” framework providing clear, rigorous standards for carbon credit suppliers and corporations pursuing climate action. Notably, the new guidance will affirm the role of high-integrity carbon credits as a critical part of the playbook. Interested readers can watch the launch video and read more from ICVCM Chair Annette Nazareth and VCMI Executive Director Mark Kenber here. 

Our take: We are thrilled to see these organizations come together. At times, their guidance has been at odds, particularly concerning the use of carbon credits in corporate net-zero plans. By working together, they will be able to provide much-needed clarity on how corporations can address their carbon footprints, including via responsible investments in the carbon market. 

We pointed out last week that VCMI’s new Scope 3 Flexibility Claim is an essential step toward creating the demand signal the market needs, which is excellent. We believe they need to continue their work and go even further by allowing credits as a flexible mechanism to help companies meet their Scope 1 and Scope 2 targets and extending the sunset for credit use using the Claim beyond 2035.

The credit registries pledge to cooperate.

Another important announcement came from the significant registries, which are the organizations responsible for maintaining the standards and rules that lead to the creation of new carbon projects. In a joint statement, they also pledged to work together, this time on common principles for carbon accounting and on implementing new initiatives to help improve the integrity of carbon credits. 

Our take: Better collaboration among the registries is welcome news, and if they can settle on a set of common principles, it will help simplify this confusing space for credit buyers and project developers. However, these common principles must address some of the shortcomings of legacy methodologies, such as the reliance on static carbon baselines and limiting assumptions regarding the durability of credits, to be fully effective. 

New proposed Federal guidance in the US.

COP28 also saw the release of newly proposed guidelines from the US Commodity Futures Trading Commission for the trade of voluntary carbon credit derivatives. The proposed guidance clarifies CFTC’s expectations regarding the quality of carbon credits eligible for delivery into listed futures contracts. These include (1) establishing clear quality guardrails, (2) maintaining standards for tracking issued credits, (3) third-party verification, and (4) monitoring credits for alignment with certification standards. 

Our take: The proposed guidance for the listed VCM derivatives market extends existing CFTC guidance to CFTC-regulated future exchanges.  The proposed application of that guidance is relatively broad and relies mainly on industry efforts underway, such as the ICVCM, to set the CFTC’s expectations on the quality of the underlying carbon credits.  This precedent is a good sign that it won't become yet another disparate initiative trying to tackle the integrity questions in the voluntary carbon market. The CFTC will hold a public comment period from now until February 2024. We may have a clearer idea of the potential impact on the market when they respond to feedback. 

Article 6 negotiations fall apart.

Unfortunately, the news wasn’t quite so good for another potential COP28 outcome for carbon credits: operationalizing international trade under Article 6 of the Paris Agreement. Negotiators failed to find a consensus on rules governing a new global market and bilateral trade of credits between nations. COP29, which will convene in November of 2024, is now the next opportunity for nations to come together on these issues. This outcome means that the international market many participants have been waiting for now faces an extended, uncertain timeline.   

Our take: The need for more guidance around Article 6 is disappointing, as a  UN-backed carbon market would be a powerful catalyst for new climate finance, especially to the Global South. The lack of an outcome on Article 6 makes the efforts to improve the voluntary market we highlighted above even more critical. The voluntary carbon market must now come together to accelerate ambition on high integrity markets, as it will be at least another year before the UN takes up the rules of the road on carbon trade. Our work in 2024 will be vital for ensuring a better outcome at COP29.