COP28 presidency working to drive demand for high-quality carbon credits

COP28 presidency along with the Glasgow Financial Alliance for Net-Zero and the Voluntary Carbon Markets Integrity Initiative have committed to deliver an "end-to-end integrity framework" for carbon offsets by this year's UN Climate Change Conference in Dubai.

The two industry governance bodies and the UAE, the host country of COP28, released a statement Sept. 27 saying they will cooperate to drive demand for high-quality carbon credits.

The voluntary carbon market has been going through a challenging period as recent criticism over the efficacy of some carbon offsets and projects has led to a steady fall in liquidity and confidence.

The Platts CNC assessment -- which reflects the most competitive nature-based carbon credit prices -- reached $2.10/mtCO2e on Sept. 26, up from a record low of $1/mtCO2e on May 29, S&P Global Commodity Insights data showed. Platts CNC averaged $9.55/mtC02e in 2022.

The statement said that confidence and trust in these markets needed to be restored urgently to help combat climate change.

"We need large buyers to help cement emerging voluntary standards, publicly endorse VCMs as a critical tool for net-zero and commit to scaling up purchases," the statement said. "We commit to engaging end-buyers and financiers of carbon credits between now and COP28, to encourage making claims under VCMI, or articulating a commitment to do so publicly, on the COP28 stage and purchase commitments for Core Carbon Principles-approved credits, or a clear timeline for doing so."

The three parties held a roundtable Sept. 19 at the Climate Week NYC event, where they agreed to work with the industry on a number of initiatives to help progress the VCM.

Carbon market progress

COP presidency has also acknowledged the importance of high-integrity carbon credits in accelerating the energy transition.

In an interview with S&P Global on Sept. 18, COP28 Director-General Majid al-Suwaidi said he was hopeful that there would be some positive developments for the carbon markets at the summit.

"We need to get credibility in the market, and we think that it is really important to have progress on carbon markets at COP28," he said. "We think that all of these solutions [carbon taxes and carbon prices] are useful and helpful. The carbon markets, let's be frank, have had a few years of lost time in a way."

Getting clarity around the use of Article 6.2 and Article 6.4 of the Paris Agreement was needed to spur the growth of carbon markets, and the latter will also take centerstage at COP28.

Article 6 sets out the rules for global trade in greenhouse gas emissions reductions and as such has a critical role to play in the development of voluntary carbon credits.

Many key decisions and rules around the use of Article 6 have been pushed back to COP28 in Dubai, though a broad architecture of Article 6 was agreed at the COP26 summit in November 2021 after years of political wrangling.

Under Article 6.4, a company in one country can reduce emissions domestically and have those reductions credited so that it can sell them to a different company in another country.

But the rules underpinning Article 6.4 were still to be approved and the UN has designated a 12-member body to oversee the mechanism. Critical details on what can be traded under this mechanism, particularly on what methodologies and activities can be included, were yet to be decided, though many in the industry have been hopeful that some key decisions would be made before Dubai.

Confidence boost

In late-July, the Integrity Council for the VCM finalized its assessment framework, which helps evaluate whether carbon credits meet its high-integrity CCPs. Meanwhile, in June, VCMI launched its Claims Code of Practice, which outlines guidelines for companies to credibly make voluntary use of carbon credits. The market has been banking on these integrity initiatives to bring much needed clarity and credibility to the markets.

"We now need to coalesce around emerging standards which, alongside target setting and transition planning frameworks, can support a high ambition path to net-zero, where reductions of absolute emissions and compensation for ongoing emissions must happen in parallel, not in sequence," said GFANZ Executive Director for Public Policy Alice Carr.

However, analysts at S&P Global do not expect market activity and prices to see a boost until early 2024.

"Once these developments will be recognized by the market, it is likely that CCP-eligible credits will trade at a premium compared to unlabeled credits from the same broad categories. This may create a two-tier market based on CCP-eligibility," the analysts said in a recent note.