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Between technical wording and vague commitments, it can be challenging to analyze and understand the decisions that emerged from COP27. In this article, ClimateTrade explains the most relevant carbon market developments from this year’s Conference of the Parties. Two intense weeks of negotiations came to an end on Sunday, and a record 35,000 COP27 delegates have now left Sharm el-Sheikh. It’s time to digest all the information that came out of the summit, and for us at ClimateTrade, that means analyzing the most relevant carbon market announcements and developments. More on this topic: Top 5 expectations from COP27 COP27 carbon market development 1: Article 6 advances While COP26 was seen as a cornerstone moment for Article 6, COP27 was an opportunity to iron out some of the more technical details of the functioning of international carbon markets under the Paris Agreement. For Article 6.2, governing the use of Internationally Transferred Mitigation Outcomes (ITMOs), the text adopted at COP27 clarifies the rules on how to track ITMOs through a registry, what each country’s Article 6 reporting expert reviews should include, and how parties should report the use of ITMO towards the achievement of Nationally Determined Contributions (NDCs). Article 6.4, which governs voluntary cooperation between countries to achieve the goals of the Paris Agreement, did not progress as much as expected, mostly because its Supervisory Body was formed just a few months before COP27 and only had time to meet once before the conference. However, the text approved in Sharm el-Sheikh does bring some clarifications on the transfer of credits developed under the Clean Development Mechanism (CDM) to the Article 6 mechanism. It also gives more details on the type of emissions reductions where the Share of Proceeds (a tax on carbon credit trade under the Article 6 mechanism) should be applied. Carbon market experts, including the International Emissions Trading Association (IETA) that ClimateTrade is a member of, believe 2023 will be a much more productive year in working to define the functioning of Article 6, and that the first credits to be issued under this mechanism should come out in 2025. COP27 carbon market development 2: Loss and Damage Fund This year’s COP was marked by a historic agreement: for the first time, parties agreed to set up a Loss and Damage Fund to help vulnerable countries deal with the consequences of climate change. This is based on the notion that rich countries and their rapid industrial development over the past 200 years are highly responsible for the issues currently affecting the climate, and that the effects of climate change are most felt by countries that contribute very little to global warming. Loss and damage funding, also called climate reparations by some, has been championed by vulnerable countries at climate conferences since before the Paris Agreement was signed, but it took more than a decade – and dramatic climate events like this year’s Pakistan flooding – for this item to be added to the official COP agenda. On the surface, this issue may not seem relevant to carbon markets, but we at ClimateTrade believe that the creation of the Loss and Damage Fund will have a positive impact on the adoption of the carbon market. Some of the developing countries that have been fighting for climate reparation have also been reluctant to adopt carbon finance mechanisms, as they have seen the development of the carbon market as detracting from the issue of loss and damage. For that reason, they may have put off carbon initiatives in order not to weaken their argument for the creation of the fund. Now that parties have agreed to set up the Loss and Damage Fund, these countries are likely to feel more comfortable participating in the carbon market as an additional avenue for climate finance, rather than as an avenue to replace it. This could result in increased carbon credit supply and improved global participation in the carbon market. Of course, the COP27 Loss and Damage Fund announcement was only an outline: ClimateTrade will watch developments closely to detect any further impact the fund, its rules or its functioning could have on the carbon market. COP27 carbon market development 3: African Carbon Markets Initiative Another big piece of carbon market news announced at COP27 was the launch of the African Carbon Market Initiative, which aims to produce 300 million carbon credits annually across the continent by 2030, and 1.5 billion credits annually by 2050. The goal of the initiative is to unlock more financing for Africa’s energy transition – specifically, US$6 billion by 2030 and US$120 billion by 2050, all the while supporting over 110 million jobs by 2050. Several African nations, including Kenya, Malawi, Gabon, Nigeria and Togo, joined the launch event for ACMI, which is supported by financiers such as Exchange Trading Group, Nando’s and Standard Chartered. COP27 carbon market development 4: Energy Transition Accelerator U.S. Climate Envoy John Kerry made headlines early in the summit by announcing the Energy Transition Accelerator (ETA) – a public-private initiative to fund renewable energy projects through carbon offsets, with the purpose of accelerating the clean energy transition in developing countries. More details are expected in the coming months. COP27 carbon market development 5: First ITMO trade between Switzerland and Ghana While Article 6 remains to be fully finalized, Switzerland and Ghana have completed the first ever voluntary sale of ITMOs under Article 6.2. With this transaction, sustainable rice farming in Ghana will help Switzerland lower its national emissions, while giving Ghanaian farmers an extra revenue stream. The trade shows that countries do not need to wait for COP negotiations to end to act collaboratively on climate.
Biodiversity credits are the latest tool in the climate action arsenal – but how do they work and what is their role in relation to the carbon market? Biodiversity protection and restoration is one of the key topics at COP27 in Sharm el-Sheikh, and for good reason. Ahead of the UN Climate Change Conference, WWF revealed the catastrophic effect of human activity on biodiversity: according to the Living Planet Report 2022, wildlife populations shrank by an average of 69% between 1970 and 2018. How is climate change affecting biodiversity? Climate change has been identified as one of the most significant threats to biodiversity in recent years. Rising temperatures, changing rainfall patterns, and increased frequency and intensity of extreme weather events such as hurricanes, droughts, and wildfires are already having a significant impact on global ecosystems and the species that inhabit them. Some of the effects of climate change on biodiversity include: Range shifts: species that move to cooler climates as their current habitats have become too warm for them, leading to animal extinctions if they cannot adapt to new habitats. Alterations in migration patterns: Climate change is affecting the timing of seasonal events such as flowering, bird migration, and insect emergence. This can disrupt the delicate balance of ecological interactions and result in cascading effects throughout the food chain. Coral bleaching: Warming ocean temperatures have resulted in widespread coral bleaching, where the colorful algae that live in the coral are expelled, causing the coral to turn white and ultimately die. Changes in phenology: The timing of seasonal events, such as when plants flower and when insects emerge, is shifting due to climate change. This can result in mismatches between species that rely on each other, such as pollinators and the plants they pollinate. Why is biodiversity essential for limiting climate change? Climate change is having a profound impact on biodiversity, and we need to implement strategies to address this urgent global challenge. Reducing greenhouse gas emissions are essential in protecting the planet’s ecosystems and the species that rely on them. If the loss of animal and plant life was not tragic enough, this level of biodiversity loss is hindering our efforts to curb climate change: biodiverse ecosystems like forests, peatlands and oceans are natural carbon sinks, and their efficiency is now at risk. What are biodiversity credits? Voluntary biodiversity credits, including the ones developed by Terrasos and ClimateTrade in May and recently recognized by the World Economic Forum, are economic units representing specific actions for biodiversity protection and restoration. In the case of Terrasos, the credits were generated from the Bosque de Niebla-El Globo Habitat Bank in Colombia, with the support of XM, IDB Lab and Partnership for Forest, with each unit representing 10 square meters of land protected for 30 years. Biodiversity credits are typically created through a certification process that verifies the environmental benefits of the conservation or restoration activities. These credits can then be sold on a market to other developers who need to offset the environmental impacts of their own projects. Biodiversity credits – a new way of funding nature protection The role of biodiversity credits was discussed this week during a World Climate Summit panel on carbon offset markets and their role for biodiversity, held in Egypt alongside COP27. As one of the panel speakers, ClimateTrade CEO Francisco Benedito explained that biodiversity credits are set to allow companies, individuals and governments to go beyond carbon neutrality and become “nature-positive”. “As a former banker I was always worried about how to fund sustainable projects for people without collateral. In a renewable energy project, the collateral is the energy that is set to be produced, for instance. But for biodiversity protection projects there is no collateral. This type of unit – biodiversity credits – is a new way of funding nature protection. Because we need to put money to work to avoid further species extinction,” he noted. Beyond the limitations of carbon markets David Antonioli, CEO of Verra and the panel’s moderator, pointed out that as carbon markets have evolved, their limitations have become clearer. “For instance, to make the REDD+ (reduction of emissions from deforestation and forest degradation) work, you need a plausible imminent threat for the forest, that’s the rationale for providing carbon credits. As you get further away from those threats, these projects still provide sustainable livelihoods but because they’re not located where the threat is, they find it difficult to receive carbon finance,” he said, suggesting that biodiversity credits may be able to fill that gap. Verra itself has started to develop a framework around biodiversity credits to ensure that these units can become complementary to the carbon market. Carlijn Nouwen, Co-Founder of the Climate Action Platform for Africa, gave the example of Gabon, a country with very low deforestation rates that cannot access REDD+ creditsm but is looking to monetize the protection of its biodiverse forest. She also emphasized the need to ensure fair compensation for ecosystem services such as biodiversity conservation in the development of these credits: “As we look at paying for biodiversity and ecosystem service credits, we want to make sure we go over and above the financial recognition of carbon credits. We need to innovate with integrity and hold those two things in the right balance to make sure we get equitable compensation for all ecosystem services.” Regulation and education to push demand When it comes to the sources of demand for biodiversity credits, regulation and education are pushing more and more companies towards this offering.” We know about the Task Force on Nature-related Financial Disclosures, 40% of which is about biodiversity. This is one example of how regulation and education are pushing more and more companies to care. People are starting to see that the biggest climate threat is around biodiversity loss. In fact, in this COP I have seen more people than ever trying to get involved in biodiversity conservation,” said Benedito. As to when the biodiversity credit market will reach the maturity of the
What exactly is a climate club, and how can the one recently announced by the G7 influence the world’s decarbonization? At the end of the G7 meeting in Germany last week, Canada, France, Germany, Italy, Japan, the UK and the US announced the formation of a climate club aiming to “advance ambitious and transparent climate change mitigation policies towards climate neutrality”. But what exactly does a climate club consist of, and how will it influence global decarbonization? What is a climate club? Though this is a relatively new concept, a climate club generally consists of a group of countries committed to climate action, who take measures together to fight carbon leakage from countries outside the club. As a reminder, carbon leakage is when production is moved from a country with a strict carbon policy to a country where it is cheaper to pollute, and therefore no emissions reduction is achieved. The idea is to create a low-carbon market big enough to incentivize companies to reduce their emissions and improve their climate performance. Who is in the G7 Climate Club? The G7 Climate Club is formed of all the countries included in the Group of 7: Canada, France, Germany, Italy, Japan, the UK and the US. In 2020, these countries accounted for over 50% of global net wealth (US$418 trillion), 32 to 46% of global GDP, about 25% of global emissions, and approximately 770 million people or 10% of the world’s population. Needless to say, the G7 Climate Club is big enough and economically powerful enough to make a difference in the global fight against climate change. Three of these countries (France, Germany and Italy) are part of the European Union, which has a mandatory carbon market (the EU ETS) in place and is already planning to implement a Carbon Border Adjustment Mechanism – effectively a carbon tax for products entering the EU – to fight carbon leakage. Of the other four, Canada has a carbon tax set at C$50 per ton of CO2-equivalent and due to increase to C$170 by 2030; Japan has a carbon tax of around US$2.80 per ton, but is looking at implementing a US$56/ton tax on the shipping industry starting from 2025; the UK has an emissions trading system similar to that of the EU; and the US currently has no federal carbon tax. However, the G7 Climate Club is not closed: instead, founding members are inviting other countries with strong climate ambitions to join by the end of the year, when the G7 expects the club to be fully established. More on this topic: EU ETS reform: What’s to come for the mandatory carbon market? SEC proposes landmark climate disclosures for US companies What will the G7 Climate Club do? According to a G7 statement on the Climate Club, it is built on three pillars: 1) Advancing ambitious and transparent climate mitigation policies to reduce emissions intensities of participating economies on the pathway towards climate neutrality, by making policies and outcomes consistent with the club’s ambition, strengthening emissions measurement and reporting mechanisms, and countering carbon leakage at the international level. 2) Transforming industries jointly to accelerate decarbonization, including through taking into account the Industrial Decarbonisation Agenda, the Hydrogen Action Pact, and expanding markets for green industrial products. 3) Boosting international ambition through partnerships and cooperation to encourage and facilitate climate action and unlock socio-economic benefits of climate cooperation and to promote just energy transition. Members of the Climate Club would share best practices and work together to compare the effectiveness and economic impacts of each of their mitigation policies, such as explicit carbon pricing, other carbon mitigation approaches and carbon intensities. They would also use their influence to incentivize developing countries to increase climate transparency and decarbonize their energy and industrial sectors, including through financial, technical capacity support and technology transfer development and deployment. How will the Climate Club shape carbon markets? The biggest impact the Climate Club is expected to have on global carbon markets is by setting a minimum carbon price, below products imported by club members will be submitted to an adjustment tax. This will allow climate leaders to move ahead on policy and accelerate global decarbonization, even if no consensus can be found amongst all Paris Agreement signatories – as was observed at COP26 on the topic of coal. In fact, the Climate Club is intended to compensate for the lack of enforcement mechanisms in the Paris Agreement: “We note with concern that currently neither global climate ambition nor implementation are sufficient to achieve the goals of the Paris Agreement by reducing greenhouse gas emissions. We aim to establish a Climate Club to support the effective implementation of the Paris Agreement by accelerating climate action and increasing ambition,” says the G7 statement on the topic. What are the challenges? In pushing for the global implementation of the Paris Agreement, and considering the G7’s economic power on the global stage, the Climate Club must ensure it takes the basic principles of climate justice into consideration. While all countries must take action to combat the climate crisis, differences in levels of economic development and historical carbon emissions must be recognized, and “punitive” mechanisms like carbon taxes and carbon border adjustment mechanisms must come with financial and other forms of support for developing countries’s net zero transition. Let’s remember that developed economies’ 2009 pledge to provide US$100 billion of climate finance to developing countries every year by 2020 was never fulfilled. The best way for the Climate Club to address climate justice would be to dedicate revenue from the Carbon Border Adjustment Mechanism to climate finance, both for developing countries and for communities within its own countries that are most vulnerable to the effects of climate change.
Confused about the EU Carbon Border Adjustment Mechanism? We tell you everything you need to know in this article. (Edit: this article has now been updated in our 2023 version: How the EU’s Carbon Border Adjustment Mechanism – CBAM is Evolving) In a bid to accelerate European decarbonisation and meet the EU’s target to cut emissions by 55% in 2030 compared to 1990 levels, the European Commission has proposed several measures to incentivize producers to pollute less and remain on EU soil. One of them is the Carbon Border Adjustment Mechanism, which would place a carbon tariff on electricity, cement, aluminium, fertilizer and iron and steel products imported from outside the EU, thus leveling the playing field for European producers and avoiding “carbon leakage”. How would it be priced? The price of the tariff would depend on the amount of emissions generated by the product and on the price difference between carbon in the EU and in the country or region the product comes from. It would be paid by EU importers of non-EU products. It is initially focused on direct emissions from production (scope 1), but could be extended to scopes 2 and 3 after a transition period. When would it be implemented? The Carbon Border Adjustment Mechanism would come into force in 2026 after a three-year transition (but proposed changes would move this date forward to 2025). The implementation of this mechanism would coincide with the phasing out of free allowances under the EU ETS, meaning that EU polluters would be forced to truly reduce or offset emissions, since moving production elsewhere would not spare them from the carbon price. Who would be most impacted? Within the EU, Bulgaria, Ireland and Greece are the countries most reliant on non-EU imports in sectors included in the mechanism: if it were implemented today, more than 50% of their imports would be subjected to the tariff. In Spain, this number would be close to 40%. Research suggests that the majority of products included in the Carbon Border Adjustment Mechanism come from Russia, Turkey, the UK and China. Countries that have their own carbon price in place could be partially exempted from the mechanism, as importers would be able to deduct the exporting country’s carbon tax from the EU tariff. These include the UK, China and South Korea, though the level of exemption would depend on the carbon tax in place and the sectors covered. What has been the global reaction? Several countries have criticized the EU proposal, including Russia, India, Brazil and China, and some have threatened to denounce it to the World Trade Organization, which could lead to litigation. Some European industry groups have argued that the legislation would undermine the competitiveness of EU companies. The proposal was announced in July 2021, and is currently being debated at the European Parliament. Interestingly, the proposed changes would make the Carbon Border Adjustment Mechanism more radical, with an earlier implementation date and more products included in the scheme. The proposal now has to be debated among member states. How can ClimateTrade help? As a European-based blockchain marketplace for climate, ClimateTrade is deeply connected with the EU carbon market. Contact our team if you need help to understand how this measure would affect your company.
The voluntary carbon market could be one of the most critical tools in the fight against climate change. However, it has faced several challenges and a lack of trust in recent years.