Carbon Allowances

COP26 Sets New Global Carbon Credit Market in Motion

By Eron Bloomgarden, Partner at Climate Finance Partners (CLIFI).

More than 190 nations took another step forward in addressing the challenge of climate change earlier this month when the 26th Conference of the Parties to the UN Framework Convention on Climate Change approved the Glasgow Climate Pact which is an unprecedented, lengthy and wide-ranging political decision towards a more ambitious climate response.

Countries agreed to ratchet up their emissions-cutting pledges, with more than 150 submitting improved national plans – known as Nationally Determined Contributions (NDCs) – to the United Nations. A raft of bilateral and multilateral initiatives were also announced in Glasgow that target emissions from methane, coal, deforestation, coal, and transport.

These announcements “moved the needle” on limiting global temperature increases. Current policies are estimated to produce warming of around 2.7 degrees Celsius by the year 2100, but after the announcements at COP, the likely figure has been revised to 2.4 degrees.

Several countries also unveiled new net-zero targets, and if all current net-zero pledges are met, temperature increases could be as little as 1.8 degrees Celsius, closing in on the global goal of below 1.5 degrees Celsius.

The meeting also dealt with practical issues relating to how countries will report their emissions, how often they should update their NDCs and critically, agreed on how to structure international trading of carbon credits under Article 6 of the Paris Agreement.

The Article 6 section of COP’s agenda was one of the most closely-watched elements of this year’s summit. Negotiators have been battling for six years to agree on a set of rules governing transactions between countries, and by extension those involving private sector actors, that will assist them in achieving their NDC targets.

Delegates also approved regulations that will govern the registration and creation of tradeable emissions reduction – referred in the Paris Agreement as ITMOs (Internationally Transferred Mitigation Outcomes) – tradable reductions that can be bought by governments to set against their targets.

Under Paris, all countries have an emissions target to achieve, and so transferring emissions reduction credits from one country to another needs to be reflected in its official accounting. For sellers, this means adding to their outstanding balance, while the buyer gets to reduce their “distance-to-target”. Approved trades will require corresponding adjustments in the countries’ UN emissions registry accounts in order to avoid double counting. The UN will build a registry to house the electronic certificates that represent the reductions.

Beyond these key decisions that build the architecture for a global carbon market, there were other notable themes and announcements including:

  • Finance: Progress was made at COP26 to build an architecture for future discussions on scaling climate finance. This followed disappointing acknowledgement that rich countries failed to meet a $100bn annual climate finance target for 2020, which was set over a decade ago.
  • Loss and damage: Developing countries pressed strongly for funding from rich countries to compensate for damages associated with climate impacts. Vulnerable nations want money and support for people threatened by such impacts. However, wealthy countries have consistently resisted this idea.
  • Nature and Deforestation pledges: Some analysts have labeled COP26 the ‘nature COP’ for the strong focus on the role of nature and forests to provide climate solutions. There were a raft of funding pledges and announcements in this regard including the The first, the Glasgow leaders’ declaration on forests and land use, was signed by more than 130 countries promising to “wor[k] collectively to halt and reverse forest loss and land degradation by 2030”.
  • Fossil fuel financing and financial alliances: More than 30 countries and financial institutions signed a statement committing to halting all financing for fossil fuel development overseas and diverting the spending to green energy. Additionally, 450 investment firms across 45 countries representing assets of $130 trillion committed to aligning towards the net-zero transition via the launch of the Glasgow Financial Alliance for Net-Zero (GFANZ). Signatories of GFANZ must commit to use “science-based guidelines” to reach net-zero carbon emissions by 2050 and to provide 2030 interim goals.
  • US-China joint climate declaration: One of the more surprising and positive developments of COP26 is the joint climate declaration between the two largest GHG emitters, China and the US, who committed to “jointly strengthen climate action and cooperation with respect to different national circumstances”. The declaration said the two sides now plan to establish a “working group” on climate action, which “will meet regularly to address the climate crisis and advance the multilateral process”.

The emphasis now shifts to implementation: the COP decisions established a Supervisory Body that will oversee the carbon crediting mechanism, and it will meet at least twice next year, before bringing a set of proposed rules to the next COP, in Egypt.

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