COP 27, 6 days to go: will carbon markets get a shake-down in Sharm?

COP 27, 6 days to go: will carbon markets get a shake-down in Sharm?

COP26 had the headline-grabbing agreement on Article 6, but did it really change the direction of carbon markets? While it clarified the use of corresponding adjustments for compliance use, the jury is still out on their application to the voluntary market. However, COP27 in Sharm El-Sheikh could be a more meaningful gathering.

Adaptation and resilience, climate finance, and funding for loss and damage compensation will be key themes discussed at COP27 in Sharm el-Sheikh, but other discussions in Egypt could have more important implications on carbon markets.

The important Supervisory Body of the Article 6.4 (A6.4) Mechanism – the Paris Agreement’s successor to the Clean Development Mechanism (CDM) Executive Board – has held two meetings already this year. It will finalise its proposals during a third meeting just three days before COP begins. While the discussions at this level are often technical, several agreements could be made at COP27 that will shape the role of carbon credits.

We will keep an eye on the following five topics to understand what impact COP27 will have on carbon markets.

  1. Strengthening NDCs after Glasgow – any more signs of countries keeping their word?

Within the Glasgow Pact, countries committed to revisiting and raising the ambition of their Nationally Determined Contributions (NDCs) in 2022.

However, since COP26 only 26 countries have updated their NDCs listed in the UNFCCC registry. That means the overwhelming majority of the 194 parties to the Paris Agreement are yet to submit an updated NDC, supposedly due by the end of the year.

That’s before you address whether all the updated NDC submissions genuinely represent an increase in ambition. Analysis indicates that Brazil’s updated NDC from April, for example, does not increase the country’s ambition or contribute to other pledges or requests made in Glasgow.

  1. The Brazil-Indonesia-DRC ‘pact’ – what will they present?

Brazil, Indonesia and the Democratic Republic of the Congo (DRC) have indicated that they will bring a joint position to COP27 on forest protection, including the use of carbon markets. What precisely the three nations will propose is not yet clear. Still, as these are three of the countries with the largest areas of tropical rainforest, the success of this negotiating tactic could have a significant impact on the role of nature-based credits in country-to-country agreements and the Paris Agreement’s crediting mechanism.

  1. How quickly will the A6.4 Crediting Mechanism process move?

The Supervisory Body for the A6.4 mechanism has laid out its plans through the end of 2023. This timeline is important, as it’s the date by which CDM credits will have to be transferred to the A6.4 mechanism. So, the infrastructure and rules will need to be in place by then, at least sufficiently enough to allow this process to occur.

There is a risk that the CDM can is kicked down the road in the interests of meeting the end of 2023 deadline. This would be a missed opportunity to better align that the A6.4 mechanism with the ambition of the Paris Agreement.

There are requirements laid out from COP26 that were not present in the CDM, such as for credits and methodologies to demonstrate how they increase ambition, contribute to sustainable development, and help to ensure fairness between countries in climate action. Sticking too closely to the CDM’s rules and procedures could make these aims more difficult to deliver.

The Supervisory Body has also outlined plans for capacity-building activities over the next three to five years. One major risk of rolling out an Art 6.4 credit platform in some form by the end of 2023 is that the countries themselves are not prepared. Each country that would ‘host’ projects under the new mechanism needs to be able to account for them, and many are currently a long way from being able to do that

  1. Agreeing on the process to choose eligible credit methodologies

The biggest question yet to be decided about the A6.4 mechanism is what types of credits and projects will be eligible. While we will not get a final answer on that in Sharm el-Sheikh, we will likely get some indication of where things are going.

There will be a review of CDM methodologies and other standards, which could give us a sense of the extent to which the A6.4 mechanism will steer away from the shortcomings of the CDM and build on the lessons learned.

Two proposals for credit eligibility will be put in front of the countries at COP27: (i) how to handle removal credits, and (ii) the criteria for developing and assessing credit methodologies. Key issues that this proposal will cover include:

  • Baselines
  • Additionality
  • Leakage
  • Encouraging increasing ambition and how to assess this
  • Assessing alignment with the temperature goals of the Paris Agreement
  • Assessing alignment with reducing the host country’s NDC
  • Making contributions to the fair distribution of mitigation benefits between countries

So, while an agreement on the assessment criteria will not tell us what the methodologies will be, we may better understand if any project types are likely to be ineligible.

From the proposal on how to handle removals, there will be a decision on the period for assessing permanence, whether the sometimes controversial tonne-year accounting method will be permitted, and what types of removals may be eligible (if they also meet all the other requirements in the primary criteria).

  1. Emissions avoidance and conservation enhancement activities – an old CDM debate returns

Credits from forest protection were largely absent from the CDM. However, no decision was taken in Glasgow on whether to include ‘emissions avoidance and conservation enhancement activities’. This subject may return with countries coming to agreement in Sharm el-Sheikh.

The lack of monitoring of forest cover and of solutions to resolve permanence risks were major barriers to including avoided deforestation credits in the CDM.

The targets under the Paris Agreement are also fundamentally different to the Kyoto Protocol, removing some of the political arguments against including REDD+ projects. With the main technological challenges now better managed via affordable satellite monitoring and greater acceptance of the use of buffer pools to manage reversal risk, it will be interesting to see whether some of the old arguments resurface or if an agreement on the inclusion of emission avoidance credits can be reached.

Finally, it is worth noting that a decision at COP27 to permit emissions avoidance activities like REDD+ will not be a carte blanche for forestry credits in the new mechanism. Restrictions and limitations could still be imposed when deciding how to assess eligible methodologies.

On-the-ground research

So, lots of interesting developments to look forward to! The Trove team will be on-the-ground in Sharm El Sheikh during COP27, and we’ll be sharing our thoughts on all the developments as the process unfolds.

Please reach out to info@trove-research.com if you would be interested in meeting us at COP27.

 

 

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