Future of carbon credits post-COP28

Lina Klesper is International Legal Assistant at PKF Malta

Carbon credits play a crucial role in the fight against climate change by providing a mechanism for incentivising emissions reductions and promoting the transition to a low-carbon economy. Many countries and regions have established emissions trading schemes whereas the European Union Emissions Trading System (EU ETS) is the world’s largest compliance emissions trading scheme. While compliance markets, such as the EU ETS or the California Cap-and-Trade Program in the U.S. serve companies for which emission reductions are mandatory by law, voluntary carbon trading markets offer carbon credits for companies or individuals with voluntary emission reduction targets.

The concept of carbon trading gained traction in the late 1990s with the introduction of the Clean Development Mechanism (CDM) and the Joint Implementation (JI) under the Kyoto Protocol. However, CDM credits have long been criticised for failing to result in significant reductions in emissions and violating human rights. The voluntary carbon credit market has faced intense scrutiny lacking integrity and transparency, which a new global mechanism as established in the Paris Agreement is expected to change.  Hence, expectations were running high at the UN’s 28th annual climate meeting COP28 held at the end of last year in Dubai, to negotiate a new global carbon market governed by the UN under Article 6.4 of the Paris Agreement.  The conference is said to herald the beginning of the end of the fossil fuel era setting ambitious goals to reduce greenhouse gas emissions including the establishment of a new UN carbon crediting mechanism for developing countries with collaboration in the voluntary carbon market.  However, an agreement on a new mechanism could not be reached despite lengthy negotiations.  The proposed carbon trading rules were rejected by the EU and allies over concerns of weak checks and balances as well as scrutiny.  The U.S. was negotiating in the other corner defending a “light-touch, no frills” approach, elevating the role of the private sector.

Even though no agreement could be reached yet, COP28 can be expected to have catalysing effects on the development of national and regional carbon credit markets. After all, enhanced global awareness of sustainability and carbon neutrality and pressure from investors increasingly motivate companies to participate in voluntary markets.  Especially in the U.S. great potential can be seen to improve and expand climate action through carbon trading.  The U.S. is a key player, driven by corporate and consumer demand for climate solutions and sustainability initiatives.  In the early 2000s, the first regional initiatives were founded followed by a true break-through in the compliance market with the launch of the California Cap-and-Trade Program in 2013.  After COP28, the role of the U.S. in the voluntary market is likely to expand further with more than 35 U.S. states contemplating adopting cap-and-trade programs modelled after the Californian success story.

COP28’s ambitions align with President Biden’s objective of reaching net zero by 2050 and the Inflation Reduction Act of 2022 offering significant backing for clean energy initiatives. A trend can be expected towards increased federal initiatives with a new push to enact policies incentivising renewable energy projects and technologies. Attention will be on the energy sector with major growth potential in investments and initiatives in renewable energy projects as well as carbon capture technologies, which can be expected to be increasingly integrated into carbon offsetting strategies for carbon credits.

Moreover, post-COP28 development could be crucial to shaping the U.S. legal framework of carbon pricing helping to clear up uncertainties and legal challenges of executive authority that persist on the federal level due to lack of legal clarity. COP28 can therefore be seen as reinforcing commitment to effective federal mechanisms for controlling greenhouse gas emissions.

As the promotion of more credible voluntary carbon markets requires international cooperation between governments, corporations and international institutions, the U.S. plays a crucial role in mitigating climate change, as a strong collaboration partner and driver for carbon markets.  Special attention should be drawn to the U.S. most influential standard bodies, Verra and the American Carbon Registry, hosting projects globally.  As the U.S. is actively participating in international discussions and cooperations, standard bodies will be influential in shaping carbon trading mechanisms. Post COP28 it is hoped that the U.S. can solidify its role in collaborative international climate governance, even though political uncertainties are arising with upcoming U.S. elections.

To conclude, as for every participating member of COP28, it is hoped that governments strengthen regulations for emission reduction whereby the carbon credit market is positioned to play a key role.  This gives a tailwind for carbon credit initiatives and standard setting, especially in the U.S. COP28 can be seen as a catalyser for U.S. climate action putting an enhanced focus on carbon markets to reduce emissions.  However, it is to wait for COP29 to reach an agreement for a new global carbon market with integrity including environmental and human rights as pivotal guardrails.