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Lacklustre COP27 fails to bring clarity to carbon markets

The Sharm el-Sheikh climate conference’s final agreement on Article 6 opens the door to secret carbon market deals between countries with little oversight. On a positive note, a new type of carbon credit could help spell the end of offsetting, but the agreement falls far short of what is needed. This glacial progress occurred against the backdrop of continuing emissions growth, a landmark decision to set up a Loss and Damage Fund to support vulnerable countries affected by the climate crisis, and human rights violations in the host country.

The world must halve carbon pollution within just eight years to keep temperature rises within the relatively safe 1.5°C margin, yet, as countries attending COP27 in Sharm el-Sheikh learned last week, global emissions are set to rise by 1% this year.

This news should have focused the minds of the heads of states and delegates attending the climate conference on the urgent need to speed up deep and meaningful emissions reductions, yet there was little to no movement on reducing humanity’s collective carbon footprint.

Carbon Market Watch came to Sharm el-Sheikh to ensure that the carbon markets under Article 6 agreed on at COP26 in Glasgow are designed and governed in such a way that they help tackle the climate crisis and benefit local and indigenous communities.

Two weeks of international talks at COP27 in Egypt delivered glacial progress on global carbon market rules, with major sticking points relating to transparency, carbon removals and the risk of opening up the new global markets to corporate greenwashing through double-counted offsets.

“Instead of agreeing on carbon markets with exemplary transparency, robust governance, and stringent accounting provisions, governments did not rule out arbitrary secrecy and weak oversight,” said CMW’s Policy Director Sam Van den plas. “The carbon market spirit of Glasgow turned into the offsetting ghost of Sharm-el-Sheikh, which risks haunting effective climate action for years to come.”

Shrouded in secrecy

One area of serious concern is that the rules agreed will allow countries to designate any type of information as confidential, without even requiring a justification. This is a licence to keep market activity secret for the least ambitious actors who seek to meet their climate targets with accounting tricks rather than real action.

While countries will take this up next year again, they will likely be limited to talking about how to review confidential information. This is a far cry from actually limiting the amount of information that can be deemed confidential.

“Rather than clarifying the ambiguity surrounding conditions for ‘confidentiality’ in country-to-country carbon credit trades, the poor outcome at Sharm el-Sheikh failed to establish any meaningful guardrails,” said Jonathan Crook, a CMW expert on global carbon markets. “This transparency loophole risks being exploited by countries seeking to shroud their emission trades in secrecy. If a country wants to be clandestine about their engagement in Article 6.2 bilateral agreements and carbon credit trades, they now have a free pass to do so.”

The spectre of double counting

In a bid to tame the Wild West of voluntary carbon markets, which are rife with cheap low-quality credits, negotiators at least agreed to establish a new type of Article 6 carbon credit known as a “mitigation contribution” unit, i.e. one that is not directly recognised as a sale of an emission reduction by a country, and hence not accounted for as such by the country. These credits represent emission reductions (or removals) that are counted towards the host country’s climate target, and using these credits towards any other emissions target would amount to double counting.

“COP27 has given an official status to the concept of a ‘contribution’ to climate action. This is a real alternative to using carbon credits to offset emissions. This decision is a clear signal that when emission reductions are counted by a country, they should not also be claimed by a company through the purchase of a carbon credit.” said Gilles Dufrasne, CMW’s lead on global carbon markets. “Companies could frame their purchase of these credits as contributions to domestic mitigation, but must not make misleading offset claims.”

When a removal is not a removal

The Supervisory Body charged with designing and regulating the global carbon market governed by Article 6.4 set out to define carbon removals for their future eligibility as credits. However, it defined them so vaguely that, had this definition been adopted, it would have enabled approaches that do not remove greenhouse gases from the atmosphere or that store them temporarily – such as carbon capture and storage, carbon capture and utilisation, or a broad category of products – to be erroneously classed as removals.

Thanks to concerted and determined pressure from civil society, governments relented and decided to delay discussion of removal activities to next year’s COP28. This is a welcome outcome, since the body that came up with the definition did not have sufficient time to devote to the very complex issue of removals. However, countries rejected an earlier proposal to include a clear reference to human rights in the mandate for future work, which is troubling and a step back from last year’s agreement.

“Creating carbon credits from removal activities is a major risk, and it is not surprising that the body tasked with providing guidance on this failed to do so in the few weeks they had to work on the issue,” noted Dufrasne. “It is a wise decision to take a step back and rework the proposed text. Had it been adopted, it would have opened the door to the unbridled creation of dodgy carbon credits from removal activities that might not create any removals at all. The work on this is only starting, and there will be many hurdles to overcome before any activity can credibly generate carbon removal credits under the UNFCCC.”

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