Countries at this year's UN climate change conference (COP28) will try to reach details on how to establish an international trade in carbon offset credits. Here’s what you need to know:
**What are carbon offsets?**
Some governments and companies struggle to reduce greenhouse gas emissions to meet their climate goals. Proponents of carbon offsets view them as a key tool to help achieve these objectives. These offsets allow a country or company to compensate for some of its emissions by paying for emission reduction efforts elsewhere. Such efforts may include installing solar panels in rural areas or converting a fleet of gasoline-powered buses to electric ones. Critics argue that “offsets discourage countries and companies from taking stronger action themselves on global warming by allowing them to pay money to circumvent climate goals.” Offsets are collected and traded as credits, with one credit equivalent to one ton of carbon dioxide.
**What has been established so far?**
At the COP26 climate summit in Glasgow, negotiators reached a historic agreement to regulate the trade of carbon credits, envisioned for the first time in Article 6 of the 2015 Paris Agreement. Article 6 outlines two types of trading: bilateral deals where countries have more freedom to set their terms, and trading within a centralized system overseen by a new UN body. The Glasgow agreement provided enough rules to allow for bilateral offsets, known as “internationally transferred mitigation outcomes.” While “these bilateral exchanges have not yet happened, many countries are competing to close the first deal as soon as this year.” The Swiss Climate Foundation stated, “While it would be beneficial for COP28 to more clearly set the bilateral rules, they will continue their plans to purchase internationally transferred mitigation outcomes regardless.”
Establishing a multilateral trading system under the UN framework is more challenging, as negotiators and a newly formed oversight body discuss rules for credit issuance and how they are accounted for in trade. If key points are resolved this year, the system could launch in 2024. However, experts say this seems unlikely, delaying the rollout to 2025.
**What will be discussed at COP28?**
This year's discussions will focus more on establishing the UN-managed multilateral framework, including adopting standardized methodologies for determining how credits are issued. For example, countries will need to decide whether to issue credits only for verified emission reductions or if projects aimed at avoiding emissions should also be eligible. Efforts to avoid emissions may include choices by any country not to extract its oil reserves or efforts by any nonprofit organization to protect a forest from potential deforestation.
Agreement is needed on protocols for countries to issue licenses to sell their offsets abroad, as well as what determines when a country can revoke or revise this license, for example, if a project is found to violate human rights. Negotiators will also explore whether reforestation efforts should be allowed within the multilateral framework and how to deal with issues such as forest burning after credits are sold.
Gill Dufrasne from Carbon Market Watch noted, “It’s unlikely that Article 6 will be at the top of the political agenda this year, even though carbon markets will remain an important issue, especially for the private sector.” However, this might help Article 6 negotiations “avoid excessive politicization,” allowing technical representatives to get the main job done, according to the International Emissions Trading Association's analysis dated November 16.
**How does this relate to current carbon markets?**
Apart from the offset trading envisioned in the Paris Agreement, there are two existing types of carbon markets: compliance markets and voluntary markets. Compliance markets apply to companies and sectors where emission reductions are mandatory under law. They exist primarily in the European Union, California, and some other countries. Rules vary but generally require companies to buy a permit for each ton of carbon they emit, effectively requiring them to incur costs when polluting.
By 2022, the global compliance markets were valued at $865 billion, according to the London Stock Exchange Group. The EU market accounts for the vast majority of this amount but does not allow any international offset credits, like those stipulated in Article 6.
Some companies that are not legally obligated to reduce emissions have set voluntary targets, which they can partially meet by purchasing credits in the voluntary carbon market. In 2021, the voluntary market was valued at around $2 billion globally. It remains unclear how the existing different carbon markets will play a role in the UN-managed trading plan, which will also rely on national laws. Some experts fear that voluntary credits sold internationally outside of the Paris Agreement framework could lead to countries counting the same emission reduction towards their targets.
