The first week at COP28 represented a culmination of the VCM’s main theme for 2023, the ‘push for quality’. The two big days for carbon markets were 3-4 December, starting with vocal support for carbon pricing from Ursula von der Leyen, President of the European Commission. Von der Leyen, Kristalina Georgieva (MD, IMF), and Ngozi Okonjo-Iweala (Director General, WTO) linked “carbon pricing’s growing appeal” to three factors: “it works, (…)”, “it’s the most cost-efficient solution”, and, if designed correctly, “it’s fair”.
Following this strong start, the discussions around carbon markets received another boost with the announcement of the core framework for the Energy Transition Accelerator (ETA), which the US Department of State, the Bezos Earth Fund, and the Rockefeller Foundation aim to formally establish in 2024. The ETA is intended to enable both private sector and government buyers to acquire carbon credits generated through host countries’ energy transition strategies once reductions have been achieved and verified. Buyers will only be eligible if they have committed to Science Based Targets initiative (SBTi)-aligned targets and publicly reported emissions and progress towards their targets; and they will be required to report the use of ETA carbon credits. Conversely, there will also be eligibility requirements for sellers: they must be able to demonstrate additionality, no leakage, good baselines, and alignment with Article 6, Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), and the Integrity Council for Voluntary Carbon Markets (ICVCM) Core Carbon Principles (CCPs).
December 4th saw plenty of support for the VCM from outside parties, as well as the announcement of collaboration between industry players to help push forward 2023’s drive for integrity within the market. Both Ajay Banga, President of the World Bank, and US Climate Envoy, John Kerry, endorsed the VCM, with Kerry stating his belief “in the power of carbon markets to drive increased climate action and ambition”. Additionally, the US commodities regulator, CFTC, approved the Voluntary Carbon Market Proposed Guidance and issued a request for public comment regarding voluntary carbon credit (VCC) derivative contracts. Rostin Benham said that the CFTC will “help shape standards in support of integrity, which will lead to transparency, liquidity, and ultimately price discovery” by pressuring marketplaces to examine the credibility of the projects they offer. The proposal was praised by US Treasury Secretary Janet Yellen as “an important step (…) toward promoting the integrity of carbon credits and enabling greater liquidity, price discovery, and responsible product innovation”.
‘Push for quality’ was a key theme on this second day too, with three integrity-related initiatives announced:
A particularly positive piece of news was the UK Government’s statement that it intends to endorse the outputs of VCMI and the ICVCM, subject to consultation. The Transition Finance Market Review was first announced as part of the 2023 Green Finance Strategy and will consult on how to support the growth of a high integrity voluntary carbon market. The endorsement of the VCM’s two main ‘meta-standards’ by a government would be a big step for the market, which has been trying to improve its integrity through self-regulation over the course of 2023.
During the first week of COP28, negotiations on Article 6 did not achieve material progress. Draft texts of both Article 6.2 (the country-to-country market) and Article 6.4 (the project-based system) could not to be agreed. The second week of the conference equally didn’t yield any results, with parties at loggerheads over specific pieces of wording in Articles 6.2 and 6.4. One of the main issues was the work of the Article 6.4 Supervisory Body (SB), with negotiators undecided on whether to only “acknowledge” or to fully “adopt” the SB’s recommendations on carbon removals and methodologies. Negotiations continued into the final hours of COP28, however, the final draft texts of the two Articles failed to be adopted.
This lack of progress reflects our view that carbon market participants should not hold their breath on the immediate development of an Article 6 carbon market with UN oversight being realised. A key theme for 2024 is likely to be the voluntary carbon market being put to the test. Will the integrity initiatives and ‘push for quality’ be successful as the VCM looks to fill the gap left by the failed COP28 Article 6 negotiations?
