COP28 can strengthen the impact of carbon markets

• The climate conference comes at a key moment for carbon markets, as growth is stalling and new rules are due to be introduced
• It is important not just to improve the integrity of carbon credits but also to acclaim the role of the non-state actors participating in them
• There is huge potential for Africa, if the carbon market ecosystem can be strengthened, encouraging project originators and buyers of credits

Ahead of the Climate Change Conference in Dubai, the COP28 Presidency has made carbon markets a priority. Recognising their importance for mitigating climate change, the question of how to build the capacity of carbon markets and scale them up will be a key theme.

This underscores the valuable role of carbon markets in channelling climate finance to developing countries. As they do so, they reduce emissions in these economies and, equally importantly, raise living standards.

Yet carbon market expansion is stalling, giving COP28 an opportunity to help address the issues needed to return it to growth. These include developing the ecosystems surrounding carbon markets, improving the markets’ integrity and, generally, acting to increase the capacity of project originators and buyers of credits. Doing so could unlock far more climate finance, especially for developing markets.

This a key moment for the evolution of carbon markets because the UN is finalising the rules and methodologies for Article 6.4 of the Paris Agreement, governing the voluntary carbon market’s regulatory framework. This will define the eligibility of projects, offering greater certainty and paving the way for growth.

Speaking on the LSEG Sustainable Growth Webinar, Chandra Shekhar Sinha, Global Lead for Carbon Markets and Finance at The World Bank, expressed his support for voluntary carbon markets. The World Bank is the largest provider of climate finance – committing approximately $35 billion to $40 billion annually – and views carbon markets as central to its climate action strategy.

According to Mr. Sinha, it is important for Article 6.4 voluntary carbon markets to work alongside the Article 6.2 carbon markets that allow countries to trade emissions reductions and removals with each other. “The Paris Agreement allows a range of ways for [carbon market] implementation and we think the voluntary market and the participation of non-state actors, particularly the private sector, is going to be critical in making the Paris Agreement become successful and for us to address the challenge of climate change,” he explained.

COP28 comes at a time when Article 6.4’s voluntary markets face economic and geopolitical headwinds, as well as concerns about the quality of some carbon credit projects. Meanwhile, Article 6.2 market growth has been slow due to countries finding it difficult to value projects and to account for carbon credits against their Paris Agreement ‘nationally determined contributions’.

Focusing on the challenges experienced by voluntary carbon markets, Mr. Sinha called for work to improve the quality of projects, as well as measures to alleviate concerns that companies are buying carbon credits to avoid cutting carbon emissions in their own operations. He also highlighted the need for carbon markets to have strong regulatory frameworks, standardisation and transparency.

What would Mr Sinha like to see from COP28? “Recognising the role of non-state actors in contributing to the challenge of climate change, and acclaiming those who take early action through the voluntary markets rather than shaming them for being proactive,” he said. “We need to recognise that those who take the risks and participate in the carbon markets are likely to be those who decarbonise faster.”

Carbon markets have huge potential for Africa, helping not just to cut existing carbon emissions but also to avoid them as economies expand. Yet Africa's share in the voluntary carbon market is currently less than 15%, while its presence in the compliance market is under 3%, according to Bogolo Kenewendo, Special Advisor and Regionalization Director for the UN High-Level Climate Champions Team.

She explained to webinar viewers how carbon markets could be used to drive a just energy transition, providing finance for improving energy access, delivering clean cooking solutions and building sustainable livelihoods, as well as enhancing the environment through land restoration, forestry and agriculture.

But Ms. Kenewendo noted the need for measurement, reporting and verification technology that can prove an activity has avoided or removed carbon emissions, as well as capacity-building in African countries and other regional considerations. She also emphasized the importance of stability in regulations, taxes and support mechanisms for allowing companies to originate projects.

What would she like to see from COP28? Actions to encourage the private sector to help originate and buy African credits, as well as initiatives to improve the carbon credit project ecosystem. “It’s about stimulating the right finance and capacity building, to ensure that projects get off the ground and that credits are properly bought at a price that can stimulate development,” she concluded.