COP29’s carbon deal a potential Asian win

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💡This week: The 29th edition of the annual United Nations Climate Summit (COP29) in Azerbaijan started with a bang as negotiators agreed to accept the framework for a global carbon credit market.

Asia is potentially one of the biggest winners of the move, as one of the world’s largest sources of voluntary carbon credits and holding one of the world’s largest stock of Kyoto-methodology credits that could be transitioned into the new framework.

The approval at COP29 lays the foundation to operationalise what is known as Article 6.4 of the Paris Agreement, which deals with a global market for carbon credits, including voluntary ones.

After previous COP negotiations failed to achieve consensus on the standards that will govern the market, the supervisory body that will oversee the market made a strategic pivot. Instead of asking countries at the summit to reach consensus on accepting standards, the supervisory body adopted a version of the standards before the meeting then put it to a vote that now required consensus to reject the standards.

It was a controversial move, taken by some countries and non-governmental organisations as an improper run-around. The Centre for International Environmental Law said the new standards contain language on carbon removals that could open the door to carbon capture and geoengineering projects that are “dangerous distractions” with the potential to weaken climate action.

Despite the protests, the gambit worked, and we now have standards for developing and assessing projects, and requirements for projects that remove greenhouse gases from the atmosphere.

Kyoto’s sunset

The new market that is being created is seen as replacing the problematic Clean Development Mechanism (CDM) credits market set up under the Kyoto Protocol, which was the predecessor of the Paris Agreement.

Among the key elements of the new Article 6.4 standards are rules governing additionality that are widely seen to be more robust than the CDM methodology.

Offsetting works only when the greenhouse gases being reduced or removed are beyond business as usual. Therefore the additionality principle requires that credits can only be issued for activities that would not have occurred if not for the sale of credits.

Unfortunately, many credits issued under the CDM system are no longer considered valid because they fail the additionality requirement. For example, many CDM credits were issued for renewable energy projects, even though those projects could and would have been carried out even without money from the credits.

But there’s another potential issue on the horizon, as negotiators will have to grapple with the question of whether some of the current CDM credits can be transitioned and allowed to trade under the new Article 6.4 standard. Many of those credits that are seeking transition are for renewable projects, a prospect that has drawn sharp criticism from some corners.

Asian potential

Some of the biggest holders of renewable power CDM credits seeking to transition them to the new standard are in Asia, with China and India among the largest sources, according to an analysis by Climate Home News.

Asia also happens to be one of the largest issuers of voluntary carbon credits, based on data by Ecosystem Marketplace. In 2023, Asia-based credits issued for 23 million tonnes of greenhouse gases were traded, representing just under a third of global traded volume.

A new global marketplace for voluntary credits could therefore be a potential boon for Asia, although the extent of the benefit is still uncertain.

One wildcard is the extent to which forestry-related credits can be accepted, since Asia is a major source of Redd+ credits – credits issued for reducing emissions from deforestation and forest degradation. Most Redd+ credits are considered “avoidance” credits, which means that while the projects issued the credit aren’t removing additional greenhouse gases from the atmosphere, they’re preventing the creation of new emissions. For instance, a project that prevents a plot of forest from being cut down for farming could receive Redd+ avoidance credits.

Article 6.4 doesn’t currently allow avoidance credits, Carbon Market Watch has said. That may limit the amount of credits that many of the forestry projects in Asia can claim under the new standards. Cookstove projects would also not qualify.

🌱Top ESG reads:

1. The re-election of Donald Trump as America’s next president could muddle negotiations at COP29, the UN Climate Summit in Azerbaijan.
2. Steel-sector emissions financed by Singapore bank UOB rose in 2023 due to greater use of high-emitting blast furnace plants, based on primarily proxy data.
3. A US$100 million investment by Temasek’s GenZero and commodities giant Trafigura will double the size of the Brujula Verde reforestation carbon project in Colombia.
4. Singapore’s Economic Development Board has launched a grant for early-stage carbon developers that are anchoring their project development teams in the country.
5. The need for blended finance has grown as higher Europe and US returns mean private investors are less willing to invest in developing South-east Asia, say BlackRock analysts.

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