World leaders have pledged to set up an international carbon market that could finally have enough teeth to force polluting companies to pay.
Negotiators at the COP29 climate summit in Azerbaijan agreed the new trading rules in a decision that would enable the host, the United Nations, to administer a global carbon market – although details remain thin on the ground.
“The impact and ultimate success of this agreement will depend on what the carbon credits are used to incentivise in the first place, for example, more renewable energy or energy efficiency initiatives,” said Sonya Bedford, a partner at law firm Spencer West.
“It also depends on whether there is then a market for the carbon credits which then drives more renewables and decarbonisation. If these conditions are satisfied, then the agreement is ultimately a good thing.”
She said “more policy and criteria for the carbon credits” is needed to avoid ‘greenwashing’ and “a regulatory market will need to be in place”.
The world is headed for a 2.7 C rise in global temperatures by the end of the century, nearly double the limit agreed at the Paris talks in 2015, if existing policies are not changed, according to the latest Climate Action Tracker.
To that end, UK Prime Minister Keir Starmer also unveiled ambitious new emissions-reduction targets in Baku, aiming to cut the country’s emissions by 81% from 1990 levels by 2035.
This will put mounting pressure on the power sector to decarbonise, which the government wants to achieve by expanding offshore wind and investing in carbon capture capabilities and nuclear.
It is widely accepted that for carbon markets to be effective, robust verification processes and universally accepted standards are essential.
“The approval of carbon credit trading rules at COP29 marks a significant step in addressing climate change, but challenges remain,” said Caroline Grey, the co-founder of UK-based artificial intelligence data reporting start-up Treefera.
Grey said that years of regulatory uncertainty and unclear standards around measuring emissions have fuelled concerns that carbon credits may be “simply shifting responsibility” rather than driving real-world emissions reductions.
© Shutterstock FeedRobust pricing
World leaders agreed to a mechanism to implement new global carbon credit trading standards under Article 6.4, one of the key provisions made in the Paris agreement in 2015, as a way to implement nationally determined contributions.
“Parties reached consensus on the standards for Article 6.4 and a dynamic mechanism to update them,” said COP29 lead negotiator Yalchin Rafiyev.
“This will be a game-changing tool to direct resources to the developing world and help us save up to 250 billion dollars a year when implementing our climate plans.”
The whole of industry would “self-organise if we could agree on a carbon price”, said Eugene McKenna, the managing director of sustainable hydrogen at Johnson Matthey.
“Capitalism would make us all find the lowest-carbon way of doing things.”
Speakers at Global Energy Week in October said “the CO2 price is not forcing” industries such as shipping to use hydrogen as an alternative to diesel and that a high carbon price is needed.
Carbon markets work by forcing companies to cough-up for the emissions they produce by buying and selling carbon credits.
Until now a major stumbling block of existing carbon markets is that they have been disparately spread throughout the world, with little to no consensus on price.
This has made it difficult for companies in the UK to trade carbon emissions in mainland Europe and the rest of the world, due to differences in pricing mechanisms.
It also makes carbon trading less effective, as not all countries have had an effective tax on carbon by having a sufficiently robust price.
Most governments set a limit on the volume of emissions that individual companies can produce.
The UK Emissions Trading Scheme (ETS) replaced the European Union ETS in 2021, making energy-intensive and power generating businesses apply for a permit to report emissions and trade allowances.
Carbon reporting is now standard in the UK under the Greenhouse Gas Emissions Trading Scheme, formed in 2020, and a price floor was set in 2013.
If companies exceed their emissions allowances, they have to buy credits which offset their emissions, for example by investing in credits from a project focused on the planting of new trees.
Enabling countries to trade carbon credits in a single market could ensure developing nations where modern industrialisation poses climate risks are included.
Alternatives come at a cost. World leaders at COP29 are expected to agree on a £1 trillion a year contribution to mitigate climate disasters such as wildfires and flooding in developing countries.
“If we can establish a transparent, accountable framework for carbon as an asset, we will rebuild trust and unlock the full potential of carbon markets to drive long-term sustainability in climate, supply chain security and investments,” said Grey.
© Shutterstock Feed‘Credible’
Grey said a credible carbon market requires verifiable evidence of emissions reductions through data that could be collected by satellite monitoring, artificial intelligence, or blockchain technologies.
Making carbon credits credible by assessing the real-world impact of projects on emissions would make the credits more reliable financial assets, she argued.
“Without reliable tracking systems, these markets miss the point of becoming respected financial assets to manage climate risk,” said Grey.
The UK Space Agency, chair of the Committee on Earth Observation Satellites (CEOS), said in Baku that “reducing methane emissions requires information from a number of different satellites – both publicly and privately owned”.
The UK Space Agency’s head of climate, Beth Greenaway, said satellites have detected methane leaks, monitored deforestation, temperature trends, sea level rises and melting of polar ice caps, as well as extreme weather events and ocean health.
© Shutterstock FeedSetting up for ‘failure’
The UK government’s clean power goals have faced criticism from activists who have called for the need for a more detailed action plan.
Panmure Liberum’s energy resources analyst Ashley Kelty told Energy Voice that the government’s ambition to decarbonise the power sector by 2030 is setting the country up for “failure” without an overhaul of planning rules.
“All we are going to see is failure because it’s not possible to do it,” he said.
About 35 GW of new installed offshore wind power capacity is required to meet targets under the government’s clean power mission to decarbonise the grid by 2030, according to the National Energy System Operator.
The Climate Change Committee estimated last year that 125 GW of offshore wind would need to be installed by 2050 to meet emissions goals, nearly ten times existing volumes.
“Britain’s clean power targets are achievable but demanding,” Keith Anderson, chief executive of ScottishPower, said in a statement.
National, economic and global security are under threat “without climate security”, Starmer said in his speech at the talks, describing the energy transition as a “huge opportunity” for investment. He is expected to call the green transition a $7tn investment opportunity.
As part of the energy transition, the government will issue “no new North Sea oil and gas licenses” while the new National Wealth Fund will “invest in tomorrow’s key industries”, the prime minister confirmed. New coal licences will also be banned.
Starmer has promised to “create 4,000 new jobs – using the skills of oil and gas communities” on the path to net zero.
In Baku, he unveiled the Global Clean Power Alliance, a clean industry bonus scheme to invest in offshore wind manufacturing and ports, and the Climate Investment Funds (CIF) capital market mechanism to raise $75bn through bonds for climate initiatives in developing nations.
Despite these goals, this year’s COP29 climate talks have been fraught with controversy.
The UN conference came under scrutiny this month after an undercover investigation by Global Witness revealed that one of the chief organisers, Azerbaijan’s deputy energy minister Elnur Soltanov, used the conference to attempt to facilitate new fossil fuel deals.
Azerbaijan’s president Ilham Aliyev told delegates on Tuesday that oil and gas reserves were a “gift of God”, pointing to the country’s undeveloped oil and gas fields.
The Organized Crime and Corruption Reporting Project and campaign groups have raised concerns that state oil company Socar could use its role as host of this year’s climate talks for “greenwashing” as it does fossil fuel deals.
A report by Transparency International concluded that the UN framework convention on climate change lacks sufficient “guardrails against corporate and fossil fuel influence in the host country’s organization of COP”.
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