Delivery of international carbon market rulebook a key goal for COP26

Agreement on a global carbon market rulebook at the UN Climate Change Conference in Glasgow is a central focus of the talks and would represent a major breakthrough for voluntary carbon markets.

Article 6 of the 2015 Paris Agreement framed how countries could reduce their emissions using international carbon credits, but vital detail on accounting and verification was missing.

Agreement on a rulebook would enhance countries' ability to balance domestic emissions reductions with international offsets, with participation in voluntary markets likely to ramp up dramatically.

S&P Global Platts assesses a wide range of these voluntary carbon credits. The following is a breakdown of voluntary carbon market themes, facts and prices being tracked by our reporters:

PRICES

Carbon credit prices show a clear rising trend in 2021, reflecting growing interest from corporate and government buyers seeking to achieve net-zero emissions targets by 2050.

• S&P Global Platts assessed CORSIA-eligible carbon (CEC) credits at $7.25/mt CO2 equivalent Oct. 28, compared with just 80 cents/mt when the assessment was launched on Jan. 4, 2021.
• Nature-based Carbon Credits (CNC) – which relate to projects which reduce emissions from land-use projects – were assessed at $9.00/mt Oct. 28, compared with $4.70/mt when the assessment was launched on July 12, 2021.

Corresponding Adjustments, made to prevent double counting of credits when countries transfer them, are an important aspect of the Article 6 negotiations.

• The price of credits with a CA are expected to have a premium over other credits due to their perceived higher integrity.
• Project developers and owners of carbon credits with recent vintages were reported to be holding on to credits ahead of COP26 amid uncertainty surrounding the rulebook negotiations.
• Uncertainty also remains on the extent older emissions credits from the Kyoto Protocol era should be recognized under the Paris Agreement.

Meanwhile, the price of carbon allowances in the legally binding compliance markets around the world has also seen an upward trend in 2021.

• Carbon allowance prices under the EU Emissions Trading System rallied to an all-time high of Eur65.77/mt Sept. 28, driven by high natural gas prices and an ongoing tightening of supply of allowances.
• Volumes in China's new carbon market, focused solely on power generators in a first phase, have picked up in recent weeks, with prices relatively stable around $6-7/mtCO2e.
• In the US Regional Greenhouse Gas Initiative (RGGI), the clearing price of CO2 allowances so far in 2021 has averaged $8.29/st as of Oct. 5, 37% higher year on year, with Auction 53 reaching a RGGI auction high of $9.30/st.

TRADE FLOWS

Voluntary Carbon Markets have seen significant growth in recent years as many of the world's largest companies commit to net zero targets. Trade has largely been done over-the-counter via brokers and retailers, but more recently exchange-based trading of some types of credits has emerged.

• The value of the VCM is set to top $1 billion in 2021, according to analysis group Ecosystem Marketplace. The value stood at $473 million in 2020, with traded volumes hitting a record high of 188.2 million mt CO2 equivalent.
• The private sector-led Taskforce on Scaling the Voluntary Carbon Market has said the VCM must grow by a factor of at least 15 by 2030 to play a meaningful role in achieving net-zero emissions goals by 2050.
• In September 2021 the TSVCM announced formation of an independent governance body for carbon markets and credits with over 12 countries represented. Its primary goal is to create Core Carbon Principles ensuring projects have environmental and social integrity.
• Platts publishes a carbon neutral LNG assessment, which measures the carbon intensity of LNG production from Australia to Japan-Korea-China from the well-head to tank. It then uses its CNC assessment (a basket of nature-based credits) to account for the price of offsetting those emissions.
• On Oct. 27 China released guidelines for power generators to open trading accounts for domestic voluntary carbon credits called China Certified Emission Reductions, which can be used to offset up to 5% of excess emissions under the national carbon market.

PROJECTS

Voluntary carbon credits are generated by a wide range of project types, all of which have an impact on emissions through avoidance or through active removal of carbon or other greenhouse gas.

• Projects can range from a wind farm in India, to a community-based project that distributes clean cookstoves to rural communities in central Africa, to a reforestation project in Indonesia that promotes biodiversity and eco-tourism.
• Platts CAC assessment is focused on a basket of avoidance-based projects relating to household devices (clean cookstoves, water access, energy efficiency); nature-based avoidance (REDD+, wetland management, no-till agriculture, forest management); and industrial pollutants (industrial gas, ozone depleting substances, fugitive emissions).
• Platts CRC assessment is focused on a basket of removal projects relating to tech-based carbon capture (direct air capture, mineralization, bioenergy with carbon capture and storage) and nature carbon capture (reforestation, afforestation, soil sequestration, biochar and wetland restoration).
• Environmental services company Vertree Partners expects demand for carbon credits to overwhelm supply as companies come under increasing pressure to reduce emissions. COP26 is likely to deliver increased ambition on emissions reduction targets, increased climate finance and more confidence in the voluntary carbon market, it said.
• African forestry needs $100/mt carbon offsets to preserve and extend carbon abatement projects, president of the Democratic Republic of Congo, Felix Tshisekedi, told US President Joe Biden's Leaders Summit on Climate in April.