Top 5 COP27 developments for the carbon market

Two intense weeks of negotiations came to an end on Sunday, and a record 35,000 COP27 delegates have already left Sharm el-Sheikh. It’s time to digest all the information that came out of the summit, and for us at ClimateTrade, that means looking at the announcements and developments most relevant to the carbon market.

Progress on Article 6

While COP26 was seen as a pivotal moment for Article 6, COP27 was an opportunity to polish some of the more technical details of the functioning of international carbon markets under the Paris Agreement.

For Article 6.2, which governs the use of Internationally Transferred Mitigation Outcomes (ITMOs), the text adopted at COP27 clarifies the rules on how to track ITMOs through a registry, what expert reviews of each country’s Article 6 reports should include, and how parties should report the use of ITMOs for the achievement of Nationally Determined Contributions (NDCs).

Article 6.4, which governs voluntary cooperation between countries to achieve the goals of the Paris Agreement, did not advance as much as expected, mainly because its Oversight Body was formed only a few months before COP27 and only had time to meet once before the conference. However, the text adopted at Sharm el-Sheikh does bring some clarification on the transfer of credits developed under the Clean Development Mechanism (CDM) to the Article 6 mechanism. It also provides more details on the type of emission reductions where the revenue share (a carbon credit trading tax under the Article 6 mechanism) should be applied.

Carbon market experts, including the International Emissions Trading Association (IETA) of which ClimateTrade is a member, believe that 2023 will be a much more productive year to work to define the functioning of Article 6, and that the first credits to be issued under this mechanism should come out in 2025.

Loss and Damage Fund

This year’s COP was marked by a historic agreement: for the first time, the parties agreed to establish a Loss and Damage Fund to help vulnerable countries cope with the consequences of climate change. This is based on the notion that rich countries and their rapid industrial development over the past 200 years are highly responsible for the problems currently affecting the climate, and that the effects of climate change are felt most by countries that contribute very little to global warming.

Loss and damage financing, also called climate repair by some, has been championed by vulnerable countries at climate conferences since before the Paris Agreement was signed, but it took more than a decade, and dramatic weather events like this year’s Pakistan floods, to be added to the official COP agenda.

On the surface, this topic may not seem relevant to carbon markets, but at ClimateTrade we believe that the creation of the Loss and Damage Fund will have a positive impact on carbon market adoption. Some of the developing countries that have been fighting for climate repair have also been reluctant to adopt carbon finance mechanisms, as they have seen that the development of the carbon market detracts from the problem of loss and damage. For that reason, they may have postponed carbon initiatives so as not to weaken their case for creating the fund. Now that the parties have agreed to establish the Loss and Damage Fund, these countries are likely to feel more comfortable participating in the carbon market as an additional avenue for climate finance, rather than as a way to replace it. This could result in a greater supply of carbon credits and better global participation in the carbon market.

Of course, the announcement of the COP27 Loss and Damage Fund was just a summary: ClimateTrade will closely monitor developments to spot any additional impacts the fund, its rules or its operation may have on the carbon market.

African Carbon Markets Initiative

Another big carbon market news announced at COP27 was the launch of the African Carbon Market Initiative (ACMI), which aims to produce 300 million carbon credits a year across the continent by 2030 and 1.5 billion credits a year by 2050. The initiative aims to unlock more financing for Africa’s energy transition, specifically, US$6 billion by 2030 and US$120 billion by 2050, while supporting more than 110 million jobs by 2050.

Several African nations, including Kenya, Malawi, Gabon, Nigeria and Togo, joined the ACMI launch event, which is supported by financiers such as Exchange Trading Group, Nando’s and Standard Chartered.

Energy transition accelerator

US climate envoy John Kerry made headlines early in the summit when he announced the Energy Transition Accelerator (ETA), a public-private initiative to finance renewable energy projects through carbon offsets, with the aim of accelerating the clean energy transition in developing countries. More details are expected in the coming months.

First ITMO trade between Switzerland and Ghana

While Article 6 has yet to be fully finalized, Switzerland and Ghana have completed the first voluntary sale of ITMO under Article 6.2. With this transaction, sustainable rice cultivation in Ghana will help Switzerland reduce its domestic emissions, while providing Ghanaian farmers with an additional income stream. Trade shows countries don’t need to wait for COP negotiations to end to act collaboratively on climate

Source: Climate Trade