COP26 agreement on carbon markets is a welcome boost for market integrity
CARBON markets recently received a long-awaited boost at Glasgow. Towards the close of the 2021 United Nations Climate Change Conference (COP26), more than 100 negotiators hammered out an agreement on a broad framework to enable governments and companies to enter bilateral deals to swap and trade carbon credits, which are seen as essential in the race towards net-zero emissions.
The development - after some 6 years of negotiations - is significant for a number of reasons. One, it introduces a set of standards in the current sprawl of carbon trading markets. Two, it paves the way for United Nations (UN) certification of credits, which would inject much needed credibility into markets. Three, it reflects a strong consensus on the need for carbon offsets, and a transparent pricing mechanism that should elicit confidence.
There are currently 2 types of carbon markets: a compliance-driven cap-and-trade market, and a voluntary market which allows businesses, governments and even individuals to offset emissions through the purchase of carbon credits. The voluntary markets in particular have been described as a "wild west" where methodologies and the provenance of carbon credits were seen as questionable, creating a landscape ripe for greenwashing.
Still, carbon markets are an essential enabler in the race towards net-zero emissions. They enable participants to ascertain a carbon price which serves as a tax on high emitters, even if prices vary widely globally. They provide an opportunity to channel capital towards climate-friendly projects. And, given the current limits on the extent to which decarbonisation can be achieved, they are a lifeline of sorts for countries and companies which will need to purchase carbon offsets in order to meet net-zero targets.
By most measures, even in a highly fragmented marketplace, demand for carbon credits is growing and cannot be ignored. Ecosystem Marketplace reported in November that the trading volume for credits in 2021 has hit a record US$1 billion for the first time, with carbon-credit projects struggling to keep up with demand. The Taskforce on Scaling Voluntary Carbon Markets has estimated that to support rapid decarbonisation, demand for carbon credits could increase 15-fold by 2030 and 100-fold by 2050 from 2020 levels. In terms of value, McKinsey estimates that the market for carbon credits could be worth over US$50 billion by 2030.
However, the broad framework hammered out at COP26 is just a start. As the saying goes, the devil is in the details. On the plus side, the agreement patched a loophole that has dogged voluntary markets - that of double counting of credits, which occurs when 2 parties claim the same credit for same climate action or emission avoidance.
The agreement makes a step forward in 2 other respects. A share of the money from carbon trades is to be channelled towards climate change adaptation. And, the deal provides for the cancellation of a small proportion of new carbon credits to ensure an overall reduction in emissions. There remains, however, no guidelines for the voluntary markets, and as The Wall Street Journal has pointed out, there is no enforcement mechanism.
Still, the agreement is a step in the right direction and should further spur the growth of carbon markets. Over time, as improvements accrue and transparency is enhanced, it will also beef up the integrity of carbon markets - which is no small feat.
