Glasgow’s carbon market overhaul is only half done

By and

LONDON, Nov 18 (Reuters Breakingviews) - COP26 has given carbon markets a tangible shove. Last week’s Glasgow summit fleshed out rules for a sector that former Bank of England Governor Mark Carney reckons could grow to $100 billion a year by overhauling the fuzzy accounting of so-called carbon credits. It’s a step forward, but the private sector will need to act as policeman.

Carbon credits allow a heavy emitter like an airline to buy the carbon sucked out of the air by, say, a new forest in Colombia. That balances out the carbon dioxide spewed out by its planes. Most of the $270 billion annual carbon market comes from government-mandated schemes, such as Europe’s vast Emissions Trading System, which makes sectors like power buy permits. Carney focuses on the much smaller voluntary market, worth around $1 billion annually. His hope is that surging demand from companies needing to eradicate emissions by 2050 stimulates offset project supply in developing countries. To work, the setup needs proper accounting and schemes that really do pull CO2 out of the atmosphere.

The Glasgow Climate Pact creates a sheriff. It requires countries to synchronise credits with the decarbonisation targets they signed up to in Paris in 2015. Thus, a country selling a carbon offset and a state or company buying it can’t both include the reduction to burnish their net-zero halos. That sounds obvious, but it wasn’t mandatory before. Another improvement is to incentivise buyers to reduce rather than just offset their carbon, by shaving 2% off the allowed emissions of credits sold.

Yet cowboys could still flourish, thanks to loopholes that still enable some double-counting. And the continued eligibility of some older projects may allow lower-quality credits to linger. Both could undermine a market that features myriad national regimes, with standards set and policed by different non-profit bodies like the American Carbon Registry. Valuing a carbon credit is hard: a plan to save trees might mean more cut down elsewhere, or the planting of shrubs that suck up more water.

A new U.N. supervisory body enshrined at Glasgow may help. But the real onus is on big corporate buyers of credits like Microsoft (MSFT.O) and Royal Dutch Shell (RDSa.L), to refuse to fund flaky schemes. Independent governance champions like the Voluntary Carbon Markets Integrity Initiative can also maintain standards for the claims corporates are making. If Western companies don’t want to be accused of greenwashing, they need to make sure the market is robust.

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CONTEXT NEWS

- Negotiators at the COP26 U.N. climate talks on Nov. 13 agreed new terms for the international trade of carbon credits. Deals were struck on Article 6.2, Article 6.4 and Article 6.8 of the 2015 Paris climate agreement.

- The Article 6.2 deal establishes rules for bilateral trade of carbon offsets between countries, mainly to introduce “corresponding adjustments” of carbon credits to prevent double-counting of climate reductions by buyers and sellers.

- Article 6.4 establishes a framework for the international trade of carbon credits, including a supervisory body to monitor the reduction in carbon emissions of a transaction and ensure that trades do not have other damaging environmental consequences. Negotiators also agreed that 2% of each credit would be cancelled to encourage companies to keep reducing their carbon emissions.

- European carbon credits under the bloc’s Emissions Trading System were trading at 68 euros a tonne as of 1545 GMT on Nov. 17.

Editing by Ed Cropley and Oliver Taslic

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