UN carbon markets will create new layer of global climate action; justice will require a 'seller beware' mentality (2)

Reporting and opinion by Mathew Carr

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Dec. 10-12, 2024: In theory, the new United Nations carbon markets — whose rules were made stronger last month at COP29 — should encourage billions of euros of additional clean investment annually in the next few years.

Envoys have said they would not mess with at least some of the rules agreed -- to give the markets under Article 6 of the Paris climate deal a chance to get going in the four years 2025-2028 (global emissions are still rising so the climate crisis has become very acute, indeed). Yet some key decisions have still been left unmade.

Below I set out how this evolution will likely take place, after surveying scores of envoys, lobbyists, lawyers and lawmakers over the past four weeks, including during the COP29 talks themselves.

And it's really not that shrill to say the climate is falling apart. The brutality of the recent storms in Spain is a case in point that backs up that idea. It's still not being reported about properly by the mainstream media.

New layer of action

One piece of good news from COP29 is that the tweaked carbon rules appear to lock in ways for countries poor and rich to collaborate with wealthy corporations on climate action. Those programs will effectively tighten emission-reduction targets set by the nations through 2030 and beyond.

“There is enough in the rules to make a good go of having a functioning market,” said one adviser to big investors. “There is also enough here for people to abuse. Human nature will decide and the track record isn’t good.”

These targets are known as nationally determined contributions (NDCs) because poorer countries didn’t want to be obliged to set carbon budgets or even solid greenhouse gas targets under the UN because they have not caused much of the climate crisis. Global heating is the result almost entirely of behaviour of a large handful of countries and rich people in other nations, to be sure.

That relatively small group of people have been seeking to make the rest of the world pay for their reckless behaviour. The same people hold sway over politicians, industry, finance and the judiciary.

Now, after COP29, it’s clear that the people of a small least-developed country (LDC) will be able to team up with a forward-thinking company based in Germany, for instance, to curb global heating.

The company pays to install an emissions-cutting project in the LDC and creates emission credits (there are at least three ways to do this under Article 6).

If 1 million tons of emissions are cut over, say, five years, they can be sold to the company, which can use them to help meet its voluntary corporate GHG target for 2030.

Under the rules, the LDC would probably then tighten its 2030 target (its contribution) by the same amount. This is known as a “corresponding adjustment” so the LDC and the buyer don’t count the same 1 million tons each — that’s double counting and it would quite rightly be seen as an accounting trick.

The German-based company is buying the 1 million tons of carbon credits to help meet a voluntary target for 2030 that it has set itself. Companies that seek to use carbon credits without cutting their own emissions are criticised by environmental lobby groups.

The corporate target, I’m assuming, will be tighter than the rules and regulations set by Germany and the EU for that company. Otherwise it is not doing anything other than what it’s required to do under the law.

Extra Layer

This is where the extra layer of climate effort comes in.

On the Germany-EU end of the transaction, there would be no corresponding loosening of the government-imposed 2030 emissions limit.

It would be extra effort by the German company. This is known in Paris climate deal terminology as the use of carbon credits for “other international mitigation purposes” and yes, there is an acronym for it — OIMP.

This is how these new markets effectively create a new layer of climate action, over and above the level set by country “contributions” or targets.

This gets a little complicated, so please bear with me.

Should the corporation, shipping company or airline buy the UN carbon credit for other purposes, (OIMP — that is, not for meeting a country target), then the corresponding adjustment only occurs on the side of the country hosting the project — that is, the seller of the carbon credit, said Peter Zaman, partner at law firm HFW in Singapore, who advises companies on commodities, derivatives, structured products and climate finance.

There is no adjustment at the buyer side of the export transaction because the buyer is not a country, he told me in an emailed reply to questions.

The Penalty

“It’s effectively a penalty on the host country,” he said. If the price they receive for their corresponding adjustment is lower than their marginal cost [of cutting emissions to meet their national target] … then this is clearly a loss to the host country,” Zaman said.

That climate justice is seen to be done by the new UN system is crucial — because most of the world has not caused the crisis. See the “seller beware” section below.

To counter disinformation and try to explain more clearly, I created this chart as proxy for how the new system should work.

Credit: CarrZee, Dec. 2024 (updates an earlier chart)

The chart shows how regulation of greenhouse gas might play out over the next 25 years, with all (100% of) GHG effectively regulated by about 2050. The voluntary carbon market (blue) merges with the Article 6 markets (green).

These carbon-reduction projects use profit incentive and innovation to show governments how emissions can be cut and how sinks such as forests and farmland can be enhanced. Over time, the emissions shift from voluntary cuts to mandatory/regulated ones (red arrow), tightening the downward pressure on global heat-trapping gas.

What the chart does not show is how mankind-made emissions fall from about 50 billion tons a year to near zero in that time. So by 2050, any emissions are absorbed every year by enhanced sinks (eg forests, the ocean and carbon-capture projects).

There are thousands of companies that have set 2030 emissions targets and they are looking for ways to meet them.

That’s why demand will probably surge to billions of tons a year on a global basis (HOW quickly this will happen at is still difficult to gauge because the target true-up period will be around 2031-2033 for 2030 targets). It’s difficult to tell how many companies have 2025 targets (more coming on this).

The bottom line is that once corporates see a clear direction of travel for global policy, they will buy UN carbon, according to my survey of carbon-market traders and experts. So 2025 might be a busier year for global greenhouse gas markets.

Existing voluntary markets have very low prices because buyers have pulled out partly due to unfair news coverage demonizing carbon markets, said one key broker.

While outlets including the Guardian deserve praise for pointing out flaws in the markets, their conclusion that the markets should be avoided is wrong, he said. (I’ve contacted the Guardian for comment.)

Because there isn’t that much trading, it would probably have a big impact on prices if buyers such as oil companies and airlines that have all-but abandoned the market return to it, he said.

While article 6 credit supply increases, there are already standards that have gained some acceptability such as Core Carbon Principles, and carbon adhering to these could become demanded while Article 6 fires up, he said.

What might cause prices and demand to surge in 2025 is the worsening of climate change itself, which will probably include devastating floods, droughts and price inflation. There are alarming reports that some of the Antarctic ice might slip off its shelves as warmer-ocean waters warm it from underneath…which could cause 1 meter of sea-level rise, according to some.

“Inflation is the least-worse option and, at some point, solutions such as carbon pricing that have been seen as unappetising won’t be seen that way, any more,” the broker said.

“2025 can’t be less busy than this year,” he said.

See this from Sustainable Views and Bain & Co.:

I’ve surveyed more than 10 people familiar with the Baku talks (while I was there at COP29 and since) and Article 6 transactions might become super important to global climate action during the next few years — and decades.

The COP29 rules on how projects can be authorised and made transparent will give confidence to shift money away from fossil fuels. The Article 6 supervisory body published a cache of forms this week that will be used by participants.

Global corporations genuinely have an interest in avoiding catastrophic droughts, storms, flooding and massive price inflation. COP29 created and clarified rules that will probably help incentivise better behaviour in markets that steers the world away from those disastrous things.

Yet it’s true companies are being slow to act on that interest so far.

See this from Climate Action 100+ (a program to push the biggest GHG companies on earth to cut emissions):

Only 7 of the 150 biggest-emitting companies have fully quantified how they will meet their targets. 93% have not set out how they will use offsets (carbon credits) — see top row, column that’s second from the right.

Theoretically, small countries most vulnerable to climate change can now strike deals with the 240 buyers of carbon credits that really matter -- about 40 wealthy countries mostly to blame for the crisis and the 200 biggest-emitting large companies. This buying has already been happening to a small extent, according to my survey.

These groups should be substantial buyers because they have a lot to lose if the climate falls apart. And they will be interested in a UN stamp on their carbon credits (known as an internationally transferred mitigation outcome or ITMO) because it shields them from reputation risk - they can blame the UN if carbon projects turn out to be flawed.

The UN wording from COP29 will give government and private parties the ability to make deals that suit them. The flexibility provided by the UN guidance may not always be ideal, but should create innovation.

Deals can be done under Articles 6.2, 6.4 and 6.8 of the Paris climate deal and companies can also strike deals for “mitigation contribution” carbon credits under 6.4 — this might become popular because of less-complicated accounting requirements.

Seller beware

As stated above, another key finding of my survey was that developing nations will need to be acutely aware of the value of carbon credits that they decide to export. IE - how much it costs to create each one of them.

Otherwise, they will face high costs when limiting their own greenhouse gas. They should mainly export expensive carbon credits and keep the cheaper credits for themselves and for their own “contribution” or target (NDC).

See these from the World Bank pre COP29:

And this from LinkedIn, citing this World Bank chart:

If a corporate helps itself to carbon credits at a marginal cost of E in the chart above, that might be seen as exploitative of the supplying nation. Yet, if a corporate helps the selling nation expand its target (NDC) into the realm of H or I, it’s adding real value to the selling country and can make a suitably lustrous climate claim.

Injustice will remain a key risk of the system.

Climate justice requires that the transition away from fossil fuels is cheaper for people and countries that have not used a lot of coal, oil and natural gas and/or have not made a lot of money exploiting those fuels.

Yet the pervasive attitude among business is firmly that there is no crime when stealing others’ carbon budget because there was no law against it … (yet the Paris climate deal did create that law in 2015 in my opinion).

The risk of continued injustice is acute because the people striking carbon-credit deals on the sales side probably won’t be in their jobs when the true-up periods take place after 2030, 2040 and especially 2050.

The exemption from the complicated accounting associated with the “corresponding adjustments,” known as a “mitigation contribution Article 6, paragraph 4, emission reduction” carbon credits (another mouthful — apologies) still needs some of its rules fixed.

These “mitigation contribution carbon credits” do not require an authorisation that sets out how the UN carbon credits can be used and they are not exported. (Zaman)

Avoiding the penalty

These types of contribution transactions, if deemed good enough by host countries and corporate buyers (and the public), might actually become the most popular form of delivering carbon finance to the Global South because of the avoidance of a penalty on the host country. (Zaman)

(Updates with Mr Zaman, others, charts, context.)

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