Sep 21

COP26 Sets New Rules For Carbon Markets

Dimitri Frolowsckii
Nov 18, 2021
Image: Nick Sorockin via Unsplash

Six years after pledging carbon reduction goals in the Paris Agreement, global leaders at the COP26 climate summit have finally adopted a framework for rules to govern global trading in carbon offsets. The deal could be a significant step towards achieving carbon neutrality goals and addressing climate change issues.

Carbon markets can help lower costs and attract investment into clean innovation and renewables in developing countries. The COP26 agreement sets the rules for trading emissions via bilateral deals and a UN-supervised marketplace that could be worth $100 billion, according to Bloomberg. The agreement could also boost confidence in the voluntary market for carbon credits. 

Carbon credits, or offsets, allow businesses that pollute domestically to invest in green projects elsewhere. Voluntary markets are currently something of a “Wild West,” with no unified standards or governance.

The lack of oversight in voluntary markets creates opportunities for abuse. Low-quality offsets, or emissions reductions counted twice, hinder the fight against climate change.

The agreement in Glasgow outlined unified and internationally-controlled standards and included provisions to avoid previous confusions over levels of emissions reductions.

According to the deal, nations where it’s difficult or expensive to cut greenhouse gases can purchase emissions credits from countries that have already lowered pollution more than they pledged. Furthermore, public institutions and private companies can invest in projects that cut CO2 in developing countries, usually at lower costs.

The 2015 Paris Agreement paved the way for the use of such markets. However, it lacked the detailed technical provisions that were needed in order for the new mechanism to start operating. The COP26 agreement addresses this issue by adding clear regulations and transparency provisions to combat abuse in reporting emissions.

Today, demand is booming for offsets: more credits changed hands in the first eight months of 2021 than in all of 2020, as governments and corporations globally spend billions of dollars to meet climate targets.

The new agreement will continue to push for emissions cuts to the United Nations carbon market. Under the current deal, two percent of newly issued carbon credits will be cancelled – a move that translates into emissions cuts.

Today, nations are already trading emissions in bilateral deals, but now those exchanges will be subject to unified standards. Previously, it was up to governments to decide on the levels and stringency of such rates.

A 2020 deal under the Paris Agreement between Peru and Switzerland won praise from environmental activists for its design. Switzerland pledged to invest in the so-called “Tuki Wasi” programme in Peru, which helps households in remote areas buy energy-efficient cooking stoves that help to increase biomass.

Businesses are keen to use offsets to garnish their green credentials or as an opportunity to make it cheaper to reach carbon neutrality goals. Although not all nations allow imported credits toward their own climate goals, sectoral programmes rely on them.

One example is a global offsetting system for airlines, known as CORSIA. According to this mechanism, airlines need to submit emission-reduction credits to offset any growth in carbon dioxide discharges above 2020 levels. The COP26 agreement pledges to make the CORSIA program more strict.

While overall a positive step, the latest deal also raises some concerns. For instance, environmental activists worry that required consent by negotiators to allow the transfer of some credits from old markets could undermine the new framework by supplying more opportunities to polluters. Furthermore, setting rules to avoid double-counting emission cuts will require scrutiny, which might not be enough.

Leaders will have to remain committed and active to press ahead and succeed with carbon reduction plans and meet climate change mitigation goals. The COP26 summit pledged to keep alive the chance of limiting global warming to 1.5° Celsius from pre-industrial levels in a draft agreement.

“This is a fragile win,” COP President Alok Sharma said in a concluding address to media. “We have kept 1.5 alive. That was our overarching objective when we set off on this journey two years ago, taking on the role of the COP presidency-designate. But I would still say that the pulse of 1.5 is weak.” 

The COP president pledged to ensure that the commitments that have been set out are being delivered by countries.

“The hard work starts now,” Sharma said.

Dimitri Frolowsckii

Dimitri Frolowsckii is a political and energy analyst with over 15 years of experience in journalism.

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