Conversations at COP28

Conversations at the ongoing UN COP28 Climate Change Conference in Dubai are contentious, with the last few Conference of Parties meetings having left industry participants wanting more clarity on the future functioning of the voluntary carbon market.

This time, market participants are hoping for improvements around the pace of negotiations, bringing much needed certainty as to how the VCM will align in practice with global climate goals. But many have also acknowledged that tensions continue to dominate, particularly around the baseline factor for assessing emission reductions, as well as replacement of the UN’s Clean Development Mechanism, and a new methodology for forest-based carbon credits.

Much of the discussion ahead of the COP28 meeting centered around Article 6 of the Paris Agreement, which establishes the framework for international cooperation on emissions trading. In July, some progress was made with an initial agreement on Article 6.4, which allows for a company in one country to reduce emissions domestically and have those reductions credited so that it can sell them to a different company in another country. The international carbon market envisaged under Article 6.4 is set to replace the Kyoto Protocol’s Clean Development Mechanism.

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Market players have said subsequently that many factors remain unclear.

"The rules are still not entirely clear to project developers and States Parties, which generate high uncertainty in the market," said Alexis Leroy, founder and CEO of ALLCOT, a large-scale VCM project developer. "At the Bonn conference in June, the issue of methodologies has given rise to numerous discrepancies among both delegates and the Article 6.4 Supervisory Body."

He added that one of the main points of contention in the negotiations expected at COP28 is the inclusion of the so-called baseline contraction factor – a measure of the performance of an activity over time designed to encourage greater emissions reduction ambitions. Developed countries support the inclusion of the baseline factor, while developing countries are against it, arguing that it could interfere with their nationally determined contributions.

An overly stringent baseline contraction factor, if eventually implemented, could significantly discourage investors, Leroy added.

Article 6 discussions at COP27 were not as prominent as had been during COP26 in Glasgow, analysts at S&P Global Commodity Insights have said.

"Delegates focused on more technical details of how to operationalize and implement the mechanisms. Some points proved too tricky to resolve and were passed onto work programs scheduled in 2023-24," analysts said in S&P Global’s Road to COP28 report published in June.

Project developer South Pole said COP27’s progress on Article 6 was incremental at a time when it needed to be exponential.

"We need a concerted effort in the months leading up to COP28 to clarify technical aspects, such as the principles guiding Article 6.4 methodologies, and the role of removals in the mechanism," Ritika Tewari, senior managing consultant for climate policy and carbon pricing at South Pole, told S&P Global. "Guidance and clarity on both are critical for project developers to want to pursue opportunities."

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Other market sources indicated they were stuck in a zone of confusion about how to proceed further regarding credit development.

"We’re helping our projects eligible for transition into Article 6.4, and keeping a track of the minutes from the Article 6.4 Supervisory Body for now," said Jatin Kapoor, climate transactions head at Emergent Ventures India. "There’s nothing much to strategize until there’s complete clarity on what needs to be done, and what are the expected timelines."

On the lack of clarity on the inclusion of forest-based carbon credits in the Article 6 mechanism going forward, South Pole Director for Climate Policy, and Carbon Markets Asia Karolien Casaer-Diez said in August that "there have been requests from various fronts calling for REDD+ [Reducing Emissions from Deforestation and Forest Degradation] activities to be considered emissions reduction or removal activities instead of avoidance, and thus, be included within the scope of Article 6.4."

Casaer-Diez added that if REDD+ was included, then it was likely that nested or jurisdictional methodologies would be applied.

Meanwhile, developer Ecosecurities is less optimistic.

"I believe the landscape is not promising and there may not be a decision at this COP28," said Pedro Carvalho, head of portfolio at Ecosecurities, adding that even if there were a decision, it would likely not be positive for REDD+ projects.

Carvalho said Ecosecurities is also preparing for Article 6.2 credits, referring to the mechanism through which countries can trade emissions reductions bilaterally or multilaterally while working towards meeting their own NDCs.

"Planning is done by reviewing country NDC, doing your homework, engaging with the country/government and local communities, and then going to the market to close a transaction. Not the other way around," Carvalho said. "The Supervisory Body meetings have been delivering significant and important regulatory framework to support the mechanism. However, despite the intense work, the mechanism is not yet operational."

Conversations with multiple sources have shown that COP28 will be crucial in determining the fate of the VCM, especially amid recent concerns over the quality of credits being traded.

Strong and clear direction would set the grounds for a more liquid market, along with a wider boost in confidence among participants.

Ambiguous regulations and a lack of clear direction, on the other hand, would keep players in a slump, confused about whether to invest or to lay low while waiting for the next COP meeting.

A version of this article was first published in the October 2023 issue of Commodity Insights Magazine(opens in a new tab).