Scaling global carbon markets: insights from BeZero Carbon x ISDA Brussels event

How can we create the incentives needed to scale demand for high-quality carbon credits globally? With agreement on Article 6 being achieved at COP29, the “final piece of the puzzle” for international carbon markets from a supply-side perspective may now be in place. This brings the issue of demand into sharper focus.

Our event last week in Brussels, co-hosted with the International Swaps and Derivatives Association (ISDA), explored this issue from a range of angles. We were honoured to host a number of speakers from the EU Commission, who appeared alongside leading voices from the private sector.

The opening address made by Beatriz Yordi (Director, Carbon Markets and Clean Mobility, EU Commission) highlighted the breadth of market-based climate policies currently operational or being developed by the EU. The EU emissions trading scheme (ETS) remains the centrepiece, but is now joined by a wide set of interlinked interventions. The Carbon Removals & Carbon Farming Certification Framework (CRCF) is defining high integrity removal project methodologies. The Green Claims Directive (GCD) is setting the rules for carbon neutrality claims that can be made by businesses. The Carbon Border Adjustment Mechanism (CBAM) is a pioneering policy that will apply a carbon price to several categories of goods entering the EU from third countries.

Being just days into the mandate of the new Commission, but under the ongoing leadership of Ursula von der Leyen, it is clear that there will be a large degree of policy continuity from the EU, but with an openness to change and dialogue in some areas. At BeZero, we hope to see more pragmatism, innovation and ambition from the EU in their approach towards project-based carbon. In particular, there is an opportunity to unleash demand for carbon credits both within the EU and globally via their integration into the frameworks for the ETS and CBAM. While the EU is rightly cautious about taking these steps, there are tools available to manage the risks involved - this was explored across the various panels and keynote speeches made during our event.

The first panel of the day focussed on how the private sector can be brought to the table to invest in Article 6 carbon markets, now the framework has been agreed and implementation can truly begin. Panellists highlighted the forward-thinking, demand-creating actions taken by countries such as Singapore where Article 6 credits can be used by companies to meet their obligations under the carbon tax. Sebastien Paquot (Head of the Taskforce for international carbon pricing and markets diplomacy, EU Commission) cited the GCD and CRCF as examples of EU policies which offer guidance and guardrails for the private sector on use of carbon credits.

Critically, the panel brought out the perspective of developing countries where carbon crediting projects, Article 6 or otherwise, are vital mechanisms for delivering decarbonisation and creating the incentive to preserve natural assets like forests and mangroves. In this regard, Sebastien Paquot highlighted the important work being delivered by his nascent Taskforce, supporting developing countries to establish effective carbon pricing policies. Reciprocally, we hope to see the EU gaining a new perspective on the positive impact of high integrity carbon projects in the developing world, and using the new Article 6 mechanisms to channel investment into such projects.

The next panel featured Mette Quinn and Vicente Hurtado Roa, Directors of the EU Commission units responsible for EU ETS and CBAM respectively. Both welcomed the agreement reached on Article 6 but were clear that integration of international credits via Article 6 into the EU ETS and CBAM mechanisms is not being considered for the immediate phases of the programmes.

For the EU ETS, Mette set out that the Commission will be considering whether removal credits, specifically from BECCS and DACS projects within the EU which follow CRCF methodologies, will be integrated into the ETS phase beginning in 2026. This is just one of the options the Commission is considering to stimulate the engineered carbon removals market in the EU, the other options being the establishment of a separate removals market or a support scheme for removals projects. With regard to the means by which removals credits could be integrated into the EU ETS, Mette referenced the “one-in-one-out” approach between allowances and credits proposed by the UK Government in their recent ETS consultation as one option being considered.

Vicente talked about the influence of CBAM globally in incentivising other countries to establish or extend carbon pricing mechanisms, though was careful to point out that this is a secondary effect of the policy and not the primary aim. Interestingly, many of the countries which are introducing new compliance markets, such as Brazil and India, will be integrating project-based carbon into their markets to some degree, likely with methodologies defined or approved by the government. Vicente clarified that such “national crediting mechanisms” would be taken into consideration as part of CBAM calculations, but only where credits are used within compliance markets, not on a voluntary basis. While technical and complex, this is an area where the EU’s decision-making will have a tangible impact on demand for carbon credits globally.

The keynote speech given by BeZero’s Co-Founder and Chief Innovation Officer, Sebastien Cross, focussed on the role which risk-based project ratings can play in scaling up demand in carbon markets. He explained that risk exists at a project level, and this has not been captured by carbon markets historically. He urged governments to recognise the inescapable fact of project-level risk, which cannot be eliminated by methodologies, as they design the regulation for the carbon markets of the future. Specifically, he argued that, as credit ratings are used by financial market regulators, carbon market regulators should integrate carbon ratings into regulation - but that ratings must fulfil the key criteria of being independent, public, live and fungible to achieve this.

The remarks from Verena Ross (Chair, European Securities and Markets Authority) discussed the role of financial markets regulators in building trusted carbon markets. She highlighted that any well-functioning market must be transparent, efficient and free from abuse, explaining that carbon markets have too often failed to meet these criteria. IOSCO’s final report on carbon markets, launched at COP29, highlights good practices which financial regulators should be aiming towards when seeking to regulate or create guidance for carbon markets. We were pleased to see several market-led innovations, including ratings, referenced throughout IOSCO’s report.

Building on this theme, the final panel of the day focussed on how a combination of market-led solutions and regulation can build confidence and deliver greater investment into carbon markets. Panellists highlighted the numerous lessons which carbon markets could draw from financial markets to support growth - notably, the need for the market to move towards greater volumes of secondary trading, including via derivative products. This would support price transparency, build confidence and encourage more participants to enter the market. Julien Hall (Climate Impact X) highlighted the importance of ratings in supporting this productisation of the market, by providing a risk metric which can feed into credit specifications.

Overall, the event successfully brought together key players from government, regulators and industry to discuss pathways to growth for carbon pricing and carbon markets globally. It is clear that all parties are aligned around a mutual objective, but that greater collaboration is needed to deliver the structural changes we need to see in the design of the carbon markets of the future. Moving into 2025 and beyond, this is something we hope to see and make a strong contribution to.