Back from COP29: New momentum for carbon markets
This is the second installment of the Topic of the Month: Building capacity for a sustainable, secure, and affordable world.
On Friday 22 November 2024, the 29th UN Climate Conference ended, leaving most negotiators disappointed about the slow progress and roadblocks in the way of international climate change negotiations. This year’s conference focused on climate finance, aiming at mobilising funds from developed countries to finance the sustainable transition in the developing world. While countries agreed to a broad target of 1.3 trillion US dollars annually to be channelled into developing countries by 2035, only 300 billion dollars include grants and low-interest loans from developed countries. Most of the financing will depend on private investment and alternative sources, which are not guaranteed to materialise.
Common standards for international carbon markets
Nonetheless, one notable achievement of the Conference is a set of rules which is expected to boost international carbon markets, and hence public and private climate finance. After over 6 years of negotiations, the new rules complete the mechanisms sketched out in Article 6 of the Paris Agreement, which aims to enable countries to collaborate to reach their climate targets.
The objective is to reduce emissions in the most cost-effective way globally, and channel funds into developing countries which have the most potential for emission reductions and removals, for instance, through reforestation projects. Previously, the negotiations had stalled due to concerns over the quality of carbon removals and their possible impact on carbon mitigation efforts. The possibility to acquire emission credits is feared to dampen incentives for emitters to reduce their emissions, and rules were lacking to ensure that financed activities guarantee additionality and permanence of emissions credits.
As of 2025, the Article 6 will be operational. Specifically, Article 6.2 will enable countries to trade so-called Internationally Transferred Mitigation Outcomes (ITMOs) bilaterally, and the new rules provide more clarity on how emission credits can be scrutinised, authorised and tracked. In addition, Article 6.4 establishes a centralised UN-managed mechanism for countries and companies to trade carbon credits. The newly adopted requirements for activities involving removals under this mechanism oblige activity participants to comply with UN standards before issuing, transferring, and cancelling units. The standards are to ensure appropriate monitoring and reporting, accounting for removals and crediting periods, management of reversals and leakage, and mitigation of other negative environmental and social impacts. While some stakeholders have voiced their criticism of the rushed adoption of the decisions in Baku, they have been welcomed as a “game-changing tool to direct resources to the developing world” by COP29 Lead Negotiator Yalchin Rafiyev that could help “save up to 250 billion a year”.
The potential of emissions trading systems
The official UNFCC side event on Enhancing NDCs 3.0: The Role of Carbon Markets in Emission Reductions and Removals, which took place on Friday 15 November 2024, and was organised by the EUI, ICAP, Tsinghua University and SILA (Seoul International Law Academy), provided an opportunity to assess the progress in light of countries’ soon-to-be-updated climate action plans. In the introductory and closing remarks, Li Gao (Environment and Resources Protection Committee of the National People’s Congress, China) and Jan Dusik (European Commission) welcomed the rules and emphasised that solidarity and multilateralism remain crucial preconditions for a successful transition.
While international trade of emission credits is expected to increase, it is yet to be seen how this will impact national carbon markets. Domestically, Emissions Trading Systems (ETSs) are set to become a key policy instrument for accelerating emissions reductions in the next years. As Stefano De Clara (ICAP) pointed out, there are currently 36 ETSs covering 18% of global GHG emissions and many more jurisdictions are planning or considering implementing new systems. Considering the fast-approaching climate neutrality targets in many countries, policymakers should clarify if and how ETSs can facilitate the deployment of carbon removal technologies and which role they should play in the net-zero trajectory. Most importantly, it should be ensured that emission abatement is prioritised over offset or removal of emissions.
The call for genuine emissions reduction was echoed by Simone Borghesi (EUI & University of Siena), who pointed out that the current NDCs are insufficient to reach the goals of the Paris Agreement, meaning that countries need to update the level of ambition drastically. To do so, ETSs offer the potential to raise ambition by increasing policy stringency and expanding carbon pricing to new sectors. The analysis of the EU ETS and the recently adopted EU ETS 2 for the transport and buildings sector offers interesting insights into the opportunities and barriers for developing emissions trading in the future.
Climate policies in Asia and the developing world
From a global perspective, the speakers Leticia Guimarães (UNDP) and Xiaolu Zhao (EDF) highlighted that more capacity building was needed in developing countries to share knowledge about ETSs and the impacts, potentials, and conditions of carbon removal projects. While 80% of Parties include carbon pricing in their climate plans, there is some confusion regarding the implementation of these policy tools. Nonetheless, their potential is large as they could unlock finances and set long-term emission trajectories in developing countries.
Suh-Yong Chung (Korea University & SILA) confirmed that international carbon markets will remain crucial to reaching national climate targets in Korea, whose economy relies heavily on energy-intensive textile and steel production.
Finally, the event highlighted the increasingly important role of China in international climate policy. Xiliang Zhang (Tsinghua University) pointed out that by 2030, more than 55% of the energy supply in China will come from nuclear and renewable energy sources and that CCS will play a crucial role in the emissions trajectory. Importantly, the Chinese ETS will increasingly contribute to industrial emissions reductions as its sectoral coverage will expand to six energy-intensive industry sectors before 2030 and the stringency of the sectoral benchmarks will be gradually enhanced. Teng Fei (Tsinghua University) added that in China, much potential lies in covering more non-GHG emissions, such as methane, and exploring biochar for carbon removal.
