Companies in the global voluntary carbon market are looking to the COP26 United Nations climate talks in November for clarity on how a new mechanism for trading greenhouse gas emissions reductions will work, according to Hugh Salway, head of environmental markets at standards setter Gold Standard.
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In particular, market participants are keenly watching out for agreement on Article 6 of the Paris Agreement – an unresolved element of the rulebook that will set out the terms of how the global climate agreement will work.
"For us, the main item is the Article 6 negotiations, and we hope to see a conclusion this year," Salway said in an interview with S&P Global Platts Sept. 8.
"It's been a long time coming and this has been an outstanding issue for some time. Reaching a final agreement on Article 6 would bring clarity for markets," he said.
Gold Standard was established by non-governmental groups in 2003 to ensure that greenhouse gas emission reduction projects featured the highest levels of environmental integrity and also contributed to sustainable development.
Article 6 of the Paris Agreement sets out the rules for how countries can reduce their GHG emissions using international carbon markets – part of the wider United Nations Framework Convention on Climate Change's overall goal to limit atmospheric GHG emissions at a level that would prevent dangerous interference with the climate system.
Under the Paris Agreement, governments have pledged to reduce emissions under voluntary targets – so-called Nationally Determined Contributions. The idea behind international carbon markets is to increase flexibility by allowing countries that overachieve on their targets to sell the surplus reductions to those falling short of their goals.
The mechanism aims to achieve two related goals: lowering the cost of meeting the overall emissions reduction target and helping to encourage governments to increase their climate ambition.
"The recent IPCC (Intergovernmental Panel on Climate Change) report shows how fast the planet is warming. It's clear not enough is being done. There's still a gap between what governments have pledged and what is needed, so how we plug that gap is important," said Salway.
Thorny issues need to be resolved
The negotiations on the rules for international emissions trading have thrown up a cluster of thorny issues. For example, countries disagree on the extent to which older emissions credits from the Kyoto Protocol era should be recognized under the Paris Agreement.
"There are understandable concerns about the carryover of large volumes of pre-2020 credits, and what this could do to future ambition. There are though many good existing projects, and when a project is high quality, there should be a route for it to transition," Salway said.
Another crunch issue is the so-called Corresponding Adjustments. This refers to the need for a country hosting an emissions reduction project to make an adjustment to its national emissions tally when the so-called "mitigation outcomes" are transferred across borders and claimed elsewhere.
"Internationally Transferred Mitigation Outcomes" is the UN's term for national emissions reductions that can be exchanged between countries under the Paris Agreement.
Some market participants do not think this corresponding adjustment should be a requirement, so long as the credits are only counted by one government – irrespective of whether they are claimed as part of a company's emissions targets.
However, Gold Standard takes a different view.
"Carbon offsetting requires a unique claim and therefore it needs such an adjustment," said Salway.
"In parallel, there is growing interest in an alternative approach through which companies still take responsibility for their unabated emissions through the carbon market, but focus on supporting climate impact rather than offsetting their own footprint. This would not require a corresponding adjustment," said Salway.
"The overall package for COP26 needs to reflect what's in the Paris Agreement. It needs a strong ambition in the NDCs. Alongside that, we're seeing that developing countries want a clearer answer on finance and the $100 billion per year that's been promised from the industrialized countries," he said.
Strong demand drives carbon credit prices higher
Any final agreement on how a system of international emissions trading will work can only bolster the rapidly expanding voluntary carbon market, Salway said, which is already growing under its own steam, driven by growth in voluntary corporate commitments to reduce GHG emissions to net-zero by 2050.
Emissions offset prices have shown a strong uptrend in 2021, with S&P Global Platts assessing CORSIA-eligible carbon (CEC) credits at $6.90/mt of CO2 equivalent at the close Sept. 7, compared with just 80 cents/mt in January. Meanwhile, Platts assessed nature-based carbon (CNC) credits at $7.30/mt on Sept. 7.
More and more companies are surrendering carbon credits for retirement to demonstrate achievement on their climate goals as momentum around net-zero gathers pace, said Salway.
"Our figures show an increase in retirements and issuances. My sense is that it's being driven primarily by increased interest from corporates. Recent increases in price transparency, I think, could be helping to drive interest from various entities in the market," he said.
"There are several governments who have made it clear they will buy units under a new mechanism [under the Paris Agreement]. Switzerland has entered into bilateral agreements with several countries. Japan has a joint crediting mechanism. Sweden is already active on this," he said.
Japan's joint crediting mechanism involves a partnership with 17 developing countries, with Japan facilitating the spread of low-carbon technologies and emissions reduction activities in exchange for emissions credits it counts toward achieving its national climate target.
"Several governments have plans to buy credits out to 2030. We have seen signs of that already. We see some new investments in big projects around the world," said Salway.