COP28 Dubai’s mixed record and implications for global carbon markets
Key outcomes were agreed to at COP28 in Dubai, including near universal agreement to transition away from fossil fuels and accelerate the Paris Agreement goals, but countries failed to resolve the issues surrounding Article 6, which sets out the principles governing carbon markets.
Alongside other recent announcements, the 2023 U.N. Climate Change Conference (COP28) has advanced international carbon market standardization and focus on quality, with many global leaders actively recognizing the importance of carbon markets for achieving global climate goals. Article 6 negotiations on international carbon credit trading rules broke down, however, leaving the world to wait at least another year before gaining clarity on these important international cooperation mechanisms. Despite COP-related hurdles, the voluntary carbon market (VCM) remains a critical tool that can facilitate emission reductions while the world navigates difficult, but necessary, international negotiations.
Carbon offset supply chains achieve greater cooperation
Regardless of contentious moments and impasses, COP28 concluded with headline-grabbing announcements and incremental advances that can contribute to keeping global warming below 1.5˚C. Notable achievements included:
- The first global stocktake of national progress against Paris Agreement goals
- The approval of a loss and damage fund to compensate those most affected by climate change
- Billions of dollars for new climate finance commitments
- Recognition that the world needs to transition away from fossil fuels (although less ambitious than the “phase down” language many parties were pushing for)
- A more intense focus on renewable energy deployment
Announcements made around COP28 suggest that 2024 may be a brighter year for the VCM, although certain market issues remain to be addressed. Key net zero, supply, demand, and accounting framework-setting bodies, including the Science Based Targets Initiative, the Integrity Council for the Voluntary Carbon Markets (IC-VCM), the Voluntary Carbon Markets Initiative (VCMI), the Climate Disclosure Project, the Greenhouse Gas Protocol, and the We Mean Business Coalition announced cooperative efforts to provide end-to-end integrity guidance spanning the entire carbon offset supply chain. This coordination among standards setters will help simplify the complex carbon market ecosystem and may lead to greater transparency and confidence in the VCM. These groups have already started to cross-reference each other’s guidance, as highlighted by VCMI’s focus on high-quality carbon credit purchases from registries and methodologies accredited under the IC-VCM’s Core Carbon Principles. We expect the implementation of these coordinated efforts to pick up steam in early 2024, potentially providing a catalyst for further VCM growth.
VCMI expands scope of definition for high-integrity carbon credits
On the demand front, the VCMI announced an expansion of its Claims Code of Practice defining high-integrity guidelines for carbon credit buyers. Here, the VCMI detailed how high-quality carbon credits can contribute beyond value chain mitigation activities for companies, specifically including both avoided emissions and removal credits in its eligibility criteria. The VCMI also expanded its silver, gold, and platinum tiers for credit buyers to include a Scope 3 Flexibility Claim as an entry point for buyers to adhere to more rigorous VCMI integrity principles in the future. We expect these clearer and more inclusive VCMI guidelines to further reduce uncertainty in the market and potentially support increased VCM demand.
Staying on the simplification and coordination theme, another new initiative announced during COP28 was collaboration across six major carbon offset registries that have been approved for the pilot phase implementation of the Carbon Offsetting and Reduction Scheme for International Aviation.1
Specifically, the registries committed to:
1 Continue to learn from each other
2 Continue to support independent and robust assessment of their programs
3 Seek to align their certifications with common principles for quantification and accounting
4 Pursue measures that extend the durability of carbon stocks, such as insurance mechanisms
5 Promote the use of robust and pragmatic indicators for benefit sharing and safeguards
6 Identify and encourage the provision of information on credit use
7 Expand the provision of financial flows to developing countries
Registry collaboration suggests greater interchangeability of rules, consistency of standards, and easier comparison across historically fragmented protocols. In addition, over the past several months, each registry applied independently for assessment under IC-VCM’s Core Carbon Principles that define minimum quality standards. We view registry collaboration as doubling down on their commitment to increased integrity and rigor in the VCM.
The road to reducing risk and uncertainty in international carbon markets
The impasse on Article 6 represents a major setback in defining a global regulatory carbon market and successor to the Clean Development Mechanism (Article 6.4) and bilateral transfers of carbon credits (Article 6.2). The lack of progress at COP28 delays clarity on these rules and mechanisms at least until COP29 in December 2024 and may hinder more ambitious inflows of climate finance. Two issues helped stymie agreement on Article 6.2: the ability for countries to revoke carbon credit trade authorization, which would create significant uncertainty and risk in international carbon markets, and rules governing reporting and transparency. Notwithstanding this—hopefully temporary—roadblock, the influence of the VCM on Article 6 discussions was clear, with removals given particular and unprecedented attention.
Despite COP hurdles to articulating Article 6, the VCM remains an invaluable tool that helps to facilitate the delivery of climate results as international policies become better defined. Our world can collectively address global warming through real, additional, and permanent emission reductions. Coordinated cross-border negotiations and policies are key to ensuring that emission reductions are made with integrity and climate accounting gains wider acceptance. We cannot afford to wait for nearly 200 nations to reach a precise agreement on scaling up ambitious climate action. In short, 2024 presents a unique opportunity for global carbon markets to accelerate, fueled by increased collaboration across stakeholders, greater clarity in governance frameworks, and reduced uncertainty.
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