A commentary on COP28 through the lens of carbon markets

As we know, 2023 has been a (very) complicated year for the Voluntary Carbon Market (VCM). Besides global inflation delaying (or deterring) investments decisions, a few scandals emerged through mainstream media and contributed to shine a negative light on entire market segments such as REDD+, rice cultivation, or improved cookstoves. We also observed poor management, bad practice and even wrongdoing by some major carbon developers and intermediaries. Against this backdrop, there was understandably a certain level of expectation for a strong signal on carbon markets coming from COP28, specifically one that would reflect the desire of market participants and stakeholders to acknowledge the issues and provide solutions. Such a signal should also indicate a willingness to improve the VCM rather than watching it collapse, by increasing transparency, governance, oversight, strengthening end-buyers use and claims, contributing to the participation of all countries and territories including those with lesser capacity currently in place, and promoting a just transition.

The short answer is yes, and no.

On the positive side, there is no denying that carbon markets were everywhere, and clearly stakeholders have reacted to a VCM in dire need of a boost of confidence. The announcement of a coalition formed by the main oversight bodies who are involved throughout the whole corporate decarbonization journey (VCMI, ICVCM, WMB, CDP, SBTi and the GHG Protocol) to work towards producing a comprehensive and ambitious corporate climate action pathway is finally putting an end to the ongoing integrity battle and the confusion this had created. In a similar vein, major independent carbon standards (ACR, ART Trees, CAR, GCC, GS, and Verra) joining forces to increase the positive impact of carbon markets and seek collective alignment with upcoming quality safeguards set forth by the ICVCM, is a strong signal towards buyers and investors. Carbon markets also received strong endorsement from a wide range of stakeholders including statements from US’ climate envoy John Kerry (during Finance Day), and EU Commission’s president Ursula von der Leyen.

Another significant delivery for COP28 was the emergence of a new climate finance scheme leveraging the concept of ‘carbon crediting’ to help countries deliver on their coal abatement pledges. The Coal to Clean Credit Initiative (CCCI) proposed a new “transition credit” framework supporting the early phase out of coal plants in emerging markets and replacing them by clean energy sources. A first pilot in the Philippines was announced in parallel. As coal currently accounts for approximately 40 percent of global emissions from fossil fuels, this new mechanism may well represent an important first step in the agreed “transition away” from fossil fuels.

It was around Article 6 (A6) negotiations that things at COP28 turned ugly. And while some may argue that no deal is better than a bad deal (or a flawed text in our case), it is harder to be positive about the lack of final agreement regarding both Article 6.2 and 6.4. Overall, this is a missed opportunity to clarify the rules for (bilateral and international) carbon trading under the Paris Agreement, and the role of the VCM in all of that. It also somewhat comes as a surprise given the general praise the final text for A6.4 had received from the Article 6.4 Supervisory Body (SB) (which has representatives from all the major Parties and negotiation blocks involved) ahead of COP28. This may indicate a deeper divergence among negotiators around the role market-based approaches should play (in relation to NDC achievement), which may be discussed at the next SB meeting scheduled in February 2024.

For the time being, this means another year of uncertainty for the VCM, in absence of guidance regarding A6.4, but also an opportunity to continue shaping the rules for the international trade of carbon credits. On A6.2, things are a bit different and there are enough elements of language in the texts approved through previous COP decisions for these bilateral (Government-to-Government) transactions to take place and the market to continue growing. The sheer number of such agreements between nations, and even the first ever ITMO transfer (between Thailand and Switzerland), announced at COP are a testament to this reality. There is however a downside here, which is that smaller countries lacking capacity, the governance, or the infrastructure to harness the opportunities offered through A6.2, will have to wait another year at least for clarity and implementation of the more “plug-and-play” A6.4 mechanism.

For corporate clients:

After a challenging year, there are positive indicators for a major rebound in the VCM, and an expanded role of carbon credits in corporates sustainability strategies.

Key issues raised in 2023 (or earlier) are being addressed: consolidation of vulnerable methodologies, standardization and publication of integrity guidance and safeguards, enhanced reporting practices and legislations to enforce it. All of this may result in a most needed sense of confidence and market consolidation, for developers and investors alike to engage in the scale-up of the VCM.

Meanwhile, several publications were released showcasing how companies using carbon credits also tend to be front-runners in the global decarbonization journey, essentially contradicting the common perception that financing carbon projects is diverting money away from own value chain decarbonization budgets.

In parallel, a few days ahead of COP, the VCMI published its updated Claims Code of Practice. The guidance comprehensively describes how corporate can nest the purchase and use of carbon credits within their broader sustainability strategy and the credible claims that may be derived. In addition, the VCMI released the beta version of its Scope 3 Flexibility Claim which proposes to offer the possibility, for a limited period, of using high-quality credits against part of a company’s Scope 3 emissions. This indicates that the status quo set forth by the SBTi in terms of corporates use of carbon credits may be challenged, and it will be interesting to follow how these positions are being reconciled under the newly formed end-to-end VCM integrity coalition.

The key takeaway here is that carbon markets are becoming more relevant today than ever. In a race against climate change, KPMG firms are committed to support their corporate clients in figuring out the role they would like to play in achieving the societal goal of global net zero.

For host countries/territories governments and developers in emerging economies:

The absence of clear guidance and agreed rules under A6.4, and a corresponding international registry infrastructure will likely leave host countries in the Global South in a difficult situation. For smaller nations, with limited experience or capacity on international carbon markets, securing finance (under favorable terms) for the implementation of emissions reduction and sequestration projects under A6.2 will prove challenging. Those countries, and developers operating within their jurisdictions, would have greatly benefitted from A6.4, leveraging the UNFCCC registry and broad range of methodologies (transitioned from the Clean Development Mechanism era) for the generation and issuance of credits to be sold internationally.

KPMG realizes the concerns this may cause and stands ready to advise emerging countries’ governments and developers in a course of action to take advantage on the future potential benefits of carbon markets.

Carbon markets are considered a proven, highly scalable, and cost-efficient solution to deliver emissions reduction or sequestration. With a growing attention to the role and rights of Indigenous People and Local Communities (IP&LCs,) these mechanisms can be fair too, as it was recently highlighted in an op-ed co-signed by Kristalina Georgieva (Managing Director of the IMF), Ursula von der Leyen (President of the EU Commission) and Ngozi Okonjo-Iweala (Director General of the WTO). KPMG strongly supports this point of view and plans to engage across its global network to contribute to the carbon markets of tomorrow.