COP27: Progress is made, but was an opportunity missed to close the ‘implementation gap’?
By Jakub Hiterski and Peter Albin
The 27th Conference of the Parties (COP27) held in Sharm El Sheikh last month brought together experts from an array of different disciplines from all across the globe. The COPs provide the largest annual forum for deal-making and cooperation in the name of climate action. However, the conclusion of COP27 brought about mixed feelings. Despite the fact that progress was undoubtedly made in some areas, the annual meeting to curb carbon emissions was viewed by many as a missed opportunity. (See the November issue for Contact Magazine’s comprehensive review of COP27).
The headline that generated the most positive publicity was the breakthrough deal on a ‘loss and damage’ fund which aims to compensate the countries that will suffer most from the impacts of climate change.(1)
However, fossil fuel lobbyists, of which there was a record number, also had reason to cheer after a proposal to extend COP text wording to include all fossil fuels in the commitment to ‘phase down unabated coal power’ did not succeed.
Billed by the Egyptian presidency as the “implementation COP”, EU executive vice-president and lead climate negotiator Frans Timmermans stated that its developments do “not address the yawning gap between climate science and our climate policies”.(2)
Post-COP feelings this year contrast with those after COP26 last year, where a year of climate action momentum was boosted further by a host of high profile and far reaching corporate and government commitments signed in Glasgow towards the aim of net zero emissions.
As of today, net zero is in danger of falling further down the agenda at both government and business level as the world continues to grapple with difficult interlinked geopolitical and macroeconomic conditions, in particular those caused by the Russian invasion of Ukraine and the ensuing global energy crisis.
Worse, there have even been calls from some quarters for postponement or even abandonment of key international climate action policies (such as the EU’s plan to reduce emissions by 55% by 2030 and the Carbon Border Adjustment Mechanism, CBAM).
Globally we can ill afford any delay or lack of commitment in the fight against climate change. A slew of reports recently published by bodies such as the UNFCCC (UN Framework Convention on Climate Change) and UNEP (UN Environment Programme) suggest that global warming is not slowing anywhere near quickly enough. It has been suggested that the Paris Agreement 1.5C target is already out of reach.
One of the bigger decisions made in the Paris Accords was permitting international trading of mitigation outcomes (also known as carbon trading and Article 6 trading), with the rules to be determined at a later date. After COP26 produced a finalisation of the Article 6 text it was hoped COP27 would provide progress in terms of Article 6 operationalisation. However, whilst some progress was made on this front, discussions across many topics were left unresolved and pushed back to COP28 next year.
Carbon markets are market-based mechanisms which are utilised to price and thus drive greenhouse gas (GHG) emission reductions. They are tools which can be harnessed towards the aim of meeting the goals of the Paris Agreement, as adopted by 196 parties at COP21 in Paris.
Currently, in the absence of a single global regime, carbon markets broadly split into two categories: compliance and voluntary.
A compliance carbon market is a market or scheme created and regulated by a national, regional, or international body and is mandatory in nature.
Compliance carbon markets are formed by governments and/or regulation in a defined jurisdiction. The largest compliance markets follow a cap-and-trade format whereby ‘carbon allowances’ are created and can be freely traded in markets similar to commodity or stock markets. However, unlike other markets the total amount of product (in this case the number of allowances, or ‘cap’ declines over time in order to produce the required level of carbon reductions from the covered participants. As supply in so-called cap-and-trade markets declines, prices adjust (typically upwards) to reflect scarcity.
The voluntary carbon market refers to the global assortment of carbon credit projects or schemes that reduce GHG and exist outside of laws or regulation. The projects, that can be developed anywhere around the world, create ‘carbon credits’ which are bought and sold in the global voluntary carbon marketplace.
A carbon credit represents the certified reduction or removal of one tonne of carbon dioxide equivalent (tCO2e) from the atmosphere. Carbon credits are certified and ‘issued’ by not-for-profit companies – ‘standards’ – before typically being bought by emitting companies who use them to ‘offset’ their emissions and make carbon neutrality claims.
In terms of carbon market developments, the voluntary carbon market is typically far more affected by the annual COP’s than compliance carbon markets. This is mainly due to its history of being built on principles of channelling green finance across the globe (typically from developed to developing countries) and its inherent need for collaboration.
A major announcement from COP27 was the first co-authorisation of an ‘internationally transferred mitigation outcome’ (ITMO) deal between counties. The governments of Ghana and Switzerland authorised that the emissions reductions resulting from a Ghanaian project to reduce rice farm methane emissions will be transferred from Ghana to Switzerland for use against Switzerland’s Nationally Determined Contribution (NDC) (and will be discounted from Ghana’s NDC).
The voluntary carbon market has been growing precipitously, traded market value has grown close to tenfold in the last five years.(3) At COP27, many initiatives were announced which could drive continued market growth. The Africa Carbon Markets Initiative (ACMI) and the US-led Energy Transition Accelerator (ETA) were two of the highest profile.
Beginning at the end of next November, COP28 will be held in Dubai. It will likely be very well attended but with a relatively low international climate agreement profile, the fear is that the conference may not elicit a meaningful outcome from the gathered nations.
Introducing Redshaw Advisors
Compliance and voluntary markets are fast-evolving and affected by many economic, geopolitical and regulatory factors. Thus, they often prove a difficult space for market participants to understand their obligations and options.
Redshaw Advisors was founded with the aim of bringing simplicity, convenience and transparency to the environmental markets. Redshaw Advisors advises and guides clients through market complexities to enable them to manage their environmental risk and achieve their sustainability goals. It covers the compliance and voluntary carbon markets as well as renewable energy and its unique approach has seen it win awards across all three sectors.
The Redshaw Advisors team is active in helping companies manage their environmental exposure in the European Union Emissions Trading System (EU ETS), which is the largest such scheme in the world. This is particularly important to energy and carbon intensive sectors and countries.
In partnership with British Polish and British Slovenian Chambers of Commerce, Redshaw Advisors organises practical online workshops for corporate businesses interested in setting or reviewing net zero targets. Recordings of workshops held earlier this year are available in English and in Polish on our YouTube channel.
Redshaw Advisors can also help businesses to reduce their Scope 2 emissions – whilst supporting the growth of renewable energy in Poland – via the use of Guarantees of Origin (GO) Certificates.
To follow on from this overview, in future editions Redshaw Advisors aims to publish more detail on topical carbon market discussion points such as:
- Impacts of the Carbon Border Adjustment Mechanism (CBAM) on European industry: help or hindrance?
- 2024: shipping joins the EU ETS
- The race to net zero, how can environmental markets help?
If you have any thoughts on this article or questions on carbon markets or renewable energy, please get in touch. We will be delighted to learn your views and will also appreciate any feedback.
(3) State of the Voluntary Carbon Markets 2022 Q3, Ecosystem Marketplace