UAE presidency sees carbon markets playing a key role

IETA international policy director answers ESG Clarity's questions on the place of VCMs at COP28

With recent announcements such as the claims code for voluntary carbon market leading to greater transparency and standardisation in the market, Andrea Bonzanni, international policy director at the IETA, discusses their role at COP28 this year and what policies he is expecting to see come out of the conference.

With announcements from IOSCO and others making headlines at COP27, voluntary carbon markets seemed to play a big role in last year’s negotiations. What role do you think they will play at COP28?

Despite featuring prominently at COP side events, voluntary carbon markets (VCMs) are yet to be an agenda item in official UNFCCC negotiations.

In recent years, and as these markets have experienced spectacular growth, the use of cases for offsetting, net zero and carbon neutral have been challenged. Inconsistent definitions across the board have led to confusion.

In 2015, the Science Based Targets initiative was launched to support companies in their efforts to reduce greenhouse gas emissions in line with the latest climate science. In February 2020, plans for the ISO to launch a carbon neutrality project were also approved. Later, in March 2022, the UN established a High-Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities to develop stronger and clearer standards for net-zero emissions pledges.

These initiatives, among a number of others, designed to boost climate action, led to a lack of standardisation around definitions.

The last year, however, has seen the debate become more balanced, with governance initiatives aimed at increasing the integrity and transparency of the market launching.

The UAE presidency sees carbon markets as playing a key role in both offsetting large emissions from hydrocarbon in the short term and delivering investment in carbon dioxide removals and stores in the longer term. Hydrocarbons play a critical role in the UAE economy and leadership recognise the potential of carbon markets in shifting the needle.

We’ve also seen the tightening up of VCMs since COP27. What do investors need to consider when thinking about this area?

According to Ecosystem Marketplace, VCMs have tripled in size from 2019 to 2021 and price growth has been robust. More recently, markets have softened and investors are more wary. Negative press coverage has only exacerbated this uncertainty. As we approach COP28, investors should look to the work of IC-VCM in bringing an aligned view on a threshold quality standard. The Core Carbon Principles, due to be finalised later this year, will be critical in rebuilding trust around the quality of carbon credits.

Over the coming year, the market will continue to evolve as corporate claims and products are standardised. Investors must recognise that, over the long term, carbon market mechanisms will remain an effective tool to channel finance into emission reductions and removals and that, moving forward, they will play a vital role in achieving global climate goals.

What else should investors be on the lookout for at COP28 this year?

Investors should be on the lookout for a successful completion of the Global Stocktake, which will push parties to increase ambition in their climate commitment. It should acknowledge the role of markets in unlocking cheaper abatement options and therefore deliver faster mitigation for the same resources.

Progress on high-ticket political items, such as the loss and damage fund, will be necessary to ensure all countries continue to trust the process and will translate this into ambitious commitments at home.

What do you hope will come out of the discussions at this year’s COP and what do you realistically think will be achieved?

It’s too early to predict the outcome of COP28, but we are confident outstanding rules on the operationalisation of Article 6.2 cooperative approaches and the 6.4 crediting mechanism will be adopted. IETA is tracking the progress of the talks closely.