COP28 is over: What is the state of the global carbon credit market now?
Serena Wong
Abstract:
The global $2 billion carbon credit market appears to be a simple solution to many root causes of the climate crisis. Countries with high emissions can purchase carbon credits abroad that reduce or prevent carbon dioxide and greenhouse gas emissions. Until now, there has not been an established regulatory framework for the market, so private brokers operate freely. The consequences on carbon credit-supplying countries are detrimental, with richer countries snatching up hoards of carbon stock in foreign countries. While negotiators at the recent events of COP28 have yet to settle on a standard for the system, it does not necessarily point to the end of the voluntary carbon market.
Current Figures:
The current market for carbon credits is worth over $2 billion (Bryan, 2023a)
The price of carbon is the lowest it has been since October 2022 at €66 per tonne compared to €71 per tonne before the COP28 summit held in December 2023
Futures contracts that track the world’s biggest carbon trading market, the EU’s emissions trading scheme (ETS), fell by 4% (Bryan, 2023c)
Origins of Voluntary Carbon Markets (VCMs)
The 1997 Kyoto Protocol revealed a new, ingenious way for polluting countries to compensate for their exorbitant emission levels. Carbon credits were introduced as part of the ‘Clean Development Mechanism’ and touted as tradable instruments representing a tonne of carbon or other related greenhouse gas (GHG) emissions that would be avoided, reduced or removed from the environment (Pearce, 2021).
Generally, the governments and corporations of industrialised countries would seek offsets for their emissions, which provided the demand for carbon credits. The developing world would supply carbon credits with their stock of carbon-capturing biodiversity that industrialised countries could pay to grow or conserve. One of the first international frameworks for carbon credit trading was developed in Article 6 of the 2015 Paris Agreement. The 195 countries that signed the Paris Agreement agreed to set emissions targets for 2030, and should they emit less than national goals, they could sell emissions reductions to other countries (FT Editorial Board, 2023).
The VCM ideally provided a platform for financial capital to flow into developing countries that initially lacked the funds to reach their climate targets and support their clean energy transition (Bryan, 2023a). However, the market is voluntary, occasionally resulting in more sellers than buyers. In 2021, the supply was estimated to be roughly 7 to 8 times the level of demand (Pearce, 2021). The carbon credit market has also long faced heavy criticism regarding a need for more verification and credibility of accurate accounting standards (Bryan, 2023b).
Carbon Markets in Practice
Since the beginning of 2021, over nine countries have signed around 95 bilateral agreements to purchase future carbon credits under the UN’s system. Demanders of carbon credits include Singapore, Japan and Switzerland, while suppliers include Ghana and Senegal (Bryan, 2023a).
A farm project developed in the UAE that features vertical farming to grow exotic fruits is called the ‘David and Goliath’ agricultural project. It sold €5 million worth of credits from avoided carbon dioxide emissions, equivalent to 15,000 metric tonnes. The carbon credit purchases form a significant portion of their revenue (George, 2023)
In Brazil, a ‘green agenda’ has been established by the new president, who assumed power in 2023. Lawmakers are passing a bill establishing a system in which projects that actively remove or lower carbon dioxide emissions can sell tradable permits to corporations that need to offset their emission levels. Therefore, companies must either develop strategies to reduce their emissions over time to match the national goals or spend extra money on purchasing these carbon permits. The International Chamber of Commerce in Brazil estimates revenues of $120 billion by 2030 from carbon markets, both voluntary and regulated versions (Harris & Pooler, 2023).
The Darker Side of the Carbon Credit Market: Private Companies and the Land Grab in Developing Countries
In late October 2023, Liberia's national government was in talks to sign over exclusive rights for their land to a private company that had only existed for a little over a year - Dubai's Blue Carbon. Founded by a member of Dubai's royal family, Blue Carbon acquires land to sell the carbon credits related to emissions reduction or prevention via forest conservation in those regions. Blue Carbon is in discussion over the acquisition of the right to develop carbon credits on millions of hectares of African land. The land mass spans over five countries, including a fifth of Zimbabwe and a tenth of Liberia (Bryan, 2023a).
Liberia is estimated to carry over 2 billion tonnes of CO2 in its forests, which equips them with a considerable carbon stock. Blue Carbon's actions to conserve the forest to avoid releasing carbon emissions are worth plenty of carbon credits. However, many of the leaders of Liberia's rainforest towns could barely grasp the concept of a carbon credit even though the relevant land in the agreements belonged to them. Liberia also needs a proper law to govern the sale of carbon credits, putting them in a weaker negotiating position. The memorandum between Blue Carbon and Libera, dated July 2023, stated that Blue Carbon would receive 70% of the carbon credit value, sold tax-free, for over 1 million hectares of Liberian land. Handing over the rights to manage such a large portion of land to a foreign company that existed for only under a year and had no prior track record of carbon trading would be a very risky move for Liberia (Bryan, 2023a).
The fast pace of dealmaking between countries that carry stocks of carbon-rich biodiversity and private brokers like Blue Carbon has highlighted a severe need for more structured frameworks and guardrails for the system. Any emissions reductions sold within a country's borders must be added to the carbon footprint to avoid double counting. However, that means that each carbon credit sold makes it harder for the government to hit their climate target. Host countries need more time to develop suitable strategies around revenue sharing and land rights that promote fair trade in the carbon markets and avoid foreign governments hoarding their carbon-rich land. Even if the terms of an agreement are far from fair, poorer countries are continuously drawn to such carbon credit deals because of the lack of other financing options for progress towards climate goals (Bryan, 2023a).
Additionally, scientists have pointed out the issue of tenuous accounting standards, where Verra, the most prominent established accreditation body for voluntary carbon credits, has over-credited specific projects. This means that companies like Blue Carbon are creating carbon credits based on over-inflated projections of deforestation rates and scenarios that overestimate the level of carbon that can be removed from the atmosphere alongside its permanence (Bryan, 2023a).
The Events of COP28:
Due to the instability of the current system, the UN supervisory bodies that oversaw the international carbon credit market had hoped that climate negotiators at the summit could finally agree on a suitable common standard. The finalised framework was supposed to kickstart the new VCM, but the plans faced severe obstacles when the US and the EU disagreed over the stringency of conditions (Bryan, 2023b).
The EU highlighted that the new measures appeared to weaken the UN's VCM system. Climate negotiators from the EU, UK and carbon credit-supplying countries in Africa had been pushing for more stringent regulations, saying that new measures such as being able to cancel credits after meeting national client goals were too relaxed. In contrast, the US and Saudi Arabia were opting for greater flexibility. A director of the Coalition for Rainforest Negotiations representing Ghana, Gabon and the DRC said that the EU wanted more transparency and robust governance compared to the US's 'anything goes' approach (Bryan, 2023b).
What happens next?
While the stalemate from the COP28 summit is ultimately not the ideal result, it does not mean it is the end of a new and reworked voluntary carbon market. It provides countries more time to work out the minute details, especially regarding how to factor carbon dioxide removals' permanence, or lack thereof, into the accounting standards. This is an issue that has plagued VCMs for decades (Bryan, 2023b).
It also avoids replicating some of the biggest mistakes from earlier versions of VCMs, namely presenting it as a panacea which sends a signal to governments and corporations that they can continue to pump out any level of emissions given that they pay for a sufficient level of carbon credits in a currently unregulated market, ignoring the true root of the problem. Emissions reduction projects should focus on the permanence of carbon dioxide and GHG removals, emphasising tech-based carbon removal. For this to be successful, consistent accounting standards that appropriately monitor how initiatives perform in absorbing pollutants are crucial. The host countries where the projects are based should also receive a more significant proportion of revenues, which can be invested into long-term sustainability efforts (FT Editorial Board, 2023).
Until a new VCM framework is agreed on, standard-setting bodies and independent carbon offset programmes will have to fill the gap left by the UN. Countries continue to engage in deals for the future purchase or sale of carbon credits (Bryan, 2023b).
References
Bryan, K. (2023a, December 6). The looming land grab in Africa for carbon credits. Www.ft.com; Financial Times. https://www.ft.com/content/f9bead69-7401-44fe-8db9-1c4063ae958c
Bryan, K. (2023b, December 13). EU and US at loggerheads over plans to launch new carbon credit market. Www.ft.com. https://www.ft.com/content/c544a92d-143d-4f71-a581-e34212bbd099
Bryan, K. (2023c, December 14). Carbon price tumbles as investors fret over “weak” impact of COP28 deal. Www.ft.com; Financial Times. https://www.ft.com/content/c01d1a97-2b06-4e45-abf4-f2eb9b663833
FT Editorial Board. (2023, December 10). The flawed carbon credit trade needs fixing. Www.ft.com. https://www.ft.com/content/5f425777-1c2a-4002-ad44-2a304bf2186d
George, V. (2023, December 28). UAE Farm Cashes In $5.53M From Carbon Credits. Carbon Herald. https://carbonherald.com/uae-farm-cashes-in-5-53m-from-carbon-credits/
Harris, B., & Pooler, M. (2023, December 29). Brazil to launch regulated carbon market. Www.ft.com. https://www.ft.com/content/0a7b017a-c54e-48e8-8c86-0654ed63979b
Pearce, F. (2021, March 9). Is the “Legacy” Carbon Credit Market a Climate Plus or Just Hype? Yale E360. https://e360.yale.edu/features/is-the-legacy-carbon-credit-market-a-climate-plus-or-just-hype