The past 28th Conference of the Parties (COP28) was either a landmark agreement or a failure to deliver on the basics, depending on who you ask. The good news is that fossil fuels made it into the final text this time – but leave it to multilateral diplomats to find a wording that sounds good, and, in the worst case, means little. “Transitioning away” from fossil fuels in “a just, orderly and equitable manner”, as the text puts it, falls very short of the radical measures needed to come remotely close to the 1.5-degree target. Many policy makers I spoke to at COP mentioned they have long shifted the focus on adaptation and resilience. While there is no “either/or”', there remains a bitter aftertaste when looking at the many shortfalls of mitigation.
For the carbon markets and carbon removal in particular, a few concurring themes permeated through many discussions: The market works off little reliable data, quality is converging but far away from being objective, and policy backing of carbon markets is lacking behind. More positively, however, carbon removal is starting to gain the required recognition and financing is becoming more available.
We’re still fishing in small ponds
Everyone asks for transparency and investor-grade ratings, but the truth is, there is little data to go off of. Transactions in the Voluntary Carbon Market (VCM) are few compared to other markets. Every data provider essentially uses the same sources, trying to create insight out of pieces of (publicly available) retirement information, press releases, and ESG reports. Carbon market intelligence is still far away from, well, actual intelligence, especially in the realm of permanent or technological carbon removal. There are hardly 50 noteworthy transactions, all widely publicised and trackable. Yet, what’s truly interesting, such as detailed pricing for larger future removal transactions, often remains roughly estimated.
The race among rating providers continues, fueled by advancements in Measurement, Reporting, and Verification (MRV), improved data, more sophisticated AI, and larger coverage. However, the resulting ratings still show significant discrepancies. As there is no market standard yet, this variance is understandable – also unsurprising from a market maturity standpoint. The VCM is still evolving, grappling with the need for standardization and a more robust framework to ensure that it can effectively contribute to climate action goals. Speaking of standards, at least private quality frameworks announced closer collaboration.
Acronyms alone won't create a market – metrics will
VCMI, ICVCM, SBTi, CDP… In its current, unregulated state, the VCM is steered by an increasing amount of private quality frameworks. COP28 started with the announcement of leading private quality frameworks to collaborate and align going forward. One could argue that the eligibility criteria across all of them are still very fluffy. As more concrete requirement definitions are in the making, it seems timely to align now.
For most of these frameworks, projects must undergo an application process to determine their eligibility. This involves evaluating key criteria such as additionality, permanence, and the assurance of no double counting. Haven’t we heard this before? Basically all of them are, when taking the methodologies and verifications for good, taken care of for existing credits. For quality frameworks to become effective and really take the market to the next level, they need to be based on metric. Whether the announcement to collaborate will indeed go down to the alignment specific, objective criteria remains to be seen. Given that different frameworks effectively compete for market acceptance, it would be a surprise.
Solving the lack of confidence in the market is a major challenge that will take time. There’s the risk of replicating the shortcomings of registries at a new semantic level with new quality standards. The market urgently needs to move to metric-based reporting – so let’s wait for all the acronyms to turn into concrete numbers to measure against. Then, they’ll be able to play a huge role.
It is notable that a number of countries (among them France and Germany) stepped forward towards the end of COP to promise better rules for corporate use of carbon credits. Interestingly, no private quality framework was even mentioned in the text. Also, the proposal fell overall short of any hands-on criteria or rules that would practically help guide corporate buyers towards higher quality. With COP starting with a strong signal for a long-awaited convergence of competing quality frameworks, it ended with another potential level of corporate carbon credit quality guidance: governments. It seems questionable that that will help. Speaking of the countries’ engagement in creating and strengthening carbon markets…
Everyone is waiting for Article 6.4, 6.2, or basically any Article 6.
There was widespread anticipation for progress in how international climate finance will be implemented under the infamous Article 6, specifically how countries trade emission outcomes among themselves (Article 6.2) and how non-governmental emission outcomes could be used by countries to reach their targets (Article 6.4). Article 6 allows for international cooperation and is considered the crucial component for market mechanisms to support global decarbonization efforts, effectively picking up a lot of elements currently featured in the Voluntary Carbon Market.
Currently, as the activation of Article 6.4 is still a distant prospect, there's growing momentum for allowing corporations to purchase Internationally Transferred Mitigation Outcomes (ITMOs) under Article 6.2. Now, will this solve fundamental quality issues? Not really. Will it make access to reliable negative emissions easier for enterprises? Maybe. In the middle of COP, excitement of proponents rose as discussions around a corporate entry in the 6.2 markets seemed to become more concrete. The 6.2 mechanism, already in force, foresees such engagement but there are no to very few examples of corporates actually following through.
A persistent risk is the possibility of repeating the pitfalls of the Clean Development Mechanism (CDM) which Article 6.4 is destined to replace. While UN approval might seem enticing and appear trustworthy to corporate buyers, past experiences have shown that this alone does not ensure quality and effectiveness. The idea of abandoning Article 6.4 altogether could be seen as pragmatic, yet it's still unclear how effective a system would be with both mechanisms operating concurrently.
In that context, the maybe most prolific shortfall of COP28, the lack of progress on Article 6, could turn out to be for the better on a policy level. That said, multiple large buyer organizations mentioned to be waiting with further engagement in the market until Article 6’ implications are clear. Further delay in investment due to policy uncertainty will not help achieve targets, either. Enterprises should hence focus on continuing de-risked engagement in the VCM to support measurable impact - as the outlook on private-sector implications of Article 6 remains foggy to say the least. Particularly the role permanent removals will play in a future Article 6 world is highly anticipated, as their use is finally gaining recognition.
Carbon removal is here to stay
The mantra that carbon removal is not at odds with heavy decarbonization is still repeated like a broken record, but it seems to be finally resonating within the echo chamber of COP. Scientific consensus on the necessity for scaled carbon removal is widely accepted by industry players and nations alike. Removal also made it into the final text for the first time (read our Chief Impact Officer’s COP28 report to learn more). That said, global commitments to this initiative remain low compared to what is required.
Post-COP, BCG announced a 15-year offtake for Direct Air Capture. British Airways has revealed a landmark deal for carbon removal, and Microsoft expanded its investment in biochar. While this news is encouraging, it remains just that – news. The vast majority of companies have yet to start defining their strategies for participating in carbon removal, which will need to be preceded by strategy definition, budget rounds, and board approvals. Not a sign of immediate action. A crucial piece to the puzzle will be easy, derisked access to removal based on actual volume and price data. If purchasing significant amounts of removal remains a luxury for the few, the market will not scale. It was a good sign of this COP that larger banks finally seem to shift gears.
Big money enters the scene - finally
Just a year ago, many global investment banks appeared somewhat hesitant about participating in the carbon markets. Carbon credits are “weird” from a traditional financial perspective. They are standardized contracts, if you will, but do not really fit in any existing asset category. And while they seem all “commodity” on the outside, they are, in fact, hugely different in terms of characteristics, risks, and implications. With underlying projects often coming from the Global South with weak financial and legal robustness does not help.
This year, however, it seems that banks have since made significant progress. Many are now actively preparing for full-scale involvement, with most larger banks establishing dedicated trading desks and developing more specific financing and debt solutions. While carbon projects are still hard to finance in many instances, there is definitely a maturing community of experts and financiers no longer working for project developers or niche players, but global investment banks with a strong mandate to deploy capital.
Building the financial infrastructure is crucial for three reasons:
- The financing gap of projects remains high as projects start to cost money years before a potential credit can be purchased.
- Buyers requiring larger volumes over the next few years often need to pre-pay to “create” supply. In taking a stake via prepayment, they need strong partners to share the risks that come from that approach.
- CFOs are increasingly looking at an overall carbon budget. While buyers need to focus their financial investments on decarbonization of their own value chain today, they, at the same time, need to secure prices of future negative emissions. Banks can play a crucial role to allow for both, offering to finance debt and the net-zero transition to distribute cost burdens over longer time periods.
As the carbon markets evolve, the financial sector’s more systematic and standardized approach to risk can play a crucial role to build a solid foundation for market growth.
Magnus Drewelies is Founder and CEO at CEEZER, and remarkably well-versed in covering COPs. CEEZER connects carbon credit buyers and vetted global climate project developers to efficiently manage credit portfolios for optimal impact. To explore how our platform can enhance your climate strategy, connect with him on LinkedIn or drop him a message here.
