COP29 wraps up two weeks of global climate discussions and legislations this week as frustrations climb amongst attendees. While a lack of clarity and definitive goals for climate financing and other issues continues, voluntary carbon credit markets received a boon in the form of standardization. The frameworks passed could lay the foundations for a more sustainable buildout of the voluntary market.
Voluntary carbon markets allow buyers to purchase carbon credit offsets from projects that either reduce or capture carbon emissions. Carbon credits remain a fraught arena of climate investing for many, however. Lack of standardizations and regulatory oversight lead to a rise in projects and credits that failed to actually reduce emissions.
COP29: Progress Amidst Division
The question of integrity and validity caused many companies to step back from buying carbon credits. The voluntary carbon market suffered significant drawdowns in the last two years, but COP29 could prove a boon.
“In the opening session of the COP29 summit in Baku on Monday, delegates from more than 190 countries approved threshold standards for methodologies to calculate carbon reductions from projects ranging from biogas capture to forest restoration,” KraneShares explained in the Climate Market Now blog.
Climate summit member countries are currently negotiating on two different agendas related to carbon credits. Article 6.2 tackles building a country-to-country carbon credit trading system, with decisions regarding trading left to individual countries. Meanwhile, Article 6.4 creates regulation for the carbon credit market overseen by the UN’s Supervisory Body.
“Monday’s decision means that the panel that operates the so-called Article 6.4 mechanism can now approve specific methodologies and register projects that may start to generate carbon credits as soon as next year,” noted KraneShares.
While countries appear aligned on many of the technical details of 6.4, the countries giving input and guidance to the Supervisory Body remain divided, reported Carbon Market Watch. Only those countries that are signatories of the Paris Agreement will be allowed to give mandates to the regulatory body. Some countries want a more aggressive approach to climate goals while others push for a more lenient trajectory.
6.2 disagreements stem from the same core issue: the diverging views on climate urgency between countries. Some countries currently push for increased transparency and accountability for carbon credits while others do not wish to ratify such requirements, preferring a flexible system.
What Does This Mean for Regulated Carbon Markets?
KraneShares predicts little impacts to regulated carbon allowance markets in the short- to medium-term. “This is because the largest market – the EU ETS – does not allow the use of carbon credits, while California’s cap-and-trade program allows a very limited use of credits from specific project types.”
That said, regulatory frameworks would only benefit voluntary carbon credit markets, particularly when under the purview of the UN. It’s anticipated that the UN would enforce strict requirements for carbon credits, ensuring offset validity and authenticity. This in turn would elevate carbon credits globally for those seeking to remain competitive.
It would force some existing projects to either upgrade or go back to the drawing board to meet higher quality thresholds. KraneShares noted that “any projects that do not adhere to new and higher quality standards are likely to be priced at a growing discount to the benchmark UN market.”
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