Carbon credits will be a key focus at the upcoming UN climate talks, COP28, in Dubai next month. These credits are purchased by companies to offset their carbon emissions, allowing them to consider their consumption of goods and services as “carbon neutral.” Carbon credits come from various projects that either absorb or store carbon, such as anti-deforestation efforts, the replacement of coal-fired power plants with renewables, and the use of energy-efficient cookstoves. Each credit represents the reduction or removal of one tonne of CO2, enabling businesses to offset their carbon footprint.
The use of carbon credits has grown since their integration into the 1997 Kyoto Protocol. However, their credibility has faced significant scrutiny this year due to scientific studies and investigative reports casting doubts on the voluntary carbon market (VCM), which operates independently of the UN process. At the COP27 climate summit last year, the UN Secretary General expressed concerns about the lack of standards, regulations, and rigor in the VCM.
At COP28, the talks will aim to clarify the complexities surrounding the participation of nations in carbon offset markets and renew credibility in the carbon credit market. The United Arab Emirates, as the host of COP28, has expressed hopes for advancements during the Dubai summit to strengthen the credibility of carbon credit markets. A study focusing on averted deforestation raised concerns about exaggerated emission reductions and project benefits, as well as the lack of independence among project inspectors and lenient practices of carbon credit certifiers. The study also highlighted the abundance of carbon offsets with minimal actual reductions achieved.
While the study primarily focuses on nature-based projects, there are many other carbon reduction initiatives. A comprehensive report produced by research firm Sylvera and Pachama at the 2023 Carbon Markets Summit in July delved into the present complexities and future potential of carbon markets. One of the findings revealed that carbon credits should be a last resort and not a replacement for actual reductions. Companies can buy carbon credits throughout their journey to achieve net-zero emissions, but they should prioritize reductions over offsetting. Corporations are increasingly becoming involved earlier in projects and focusing on the “contribution” approach rather than offsetting, indicating a flight to quality to secure high-quality credits.
Despite criticisms of quality, the pricing of carbon credits for nature conservation projects has experienced a significant decline. Prices dropped from $18 per tonne in January 2022 to $6 in January 2023, and eventually fell below $2 by mid-October. However, credit retirements remained strong in 2022 and are on track to break records in 2023. According to a report by Bloomberg with support from Carbon Growth Partners, there has been a remarkable 350% increase in annual retirements since 2016. Carbon credit issuance reached a peak of over 350 million in 2021 and slightly decreased in 2022 and 2023. Bloomberg projections indicate that the carbon credit market could reach $8 billion by 2050.
It is not only corporations that rely on carbon credits to achieve carbon neutrality goals. Article 6 of the Paris Agreement allows countries to collaborate in meeting emission reduction goals, including the transfer of carbon credits, known as “Internationally Transferable Mitigation Outcomes” or ITMOs. This opens avenues for significant state investments in carbon credits, with developing nations relying on them for critical climate funding. Oil-producing countries view carbon credits as a cost-effective means to achieve net-zero emissions. Saudi Arabia, for example, is introducing a national offset scheme for corporations aligning with Article 6 of the Paris Agreement.
The upcoming COP28 in Dubai presents a significant opportunity for the world to come together and make progress in keeping global warming within the target of 1.5°C. The UAE, as the host, will lead a process for all parties to develop a clear roadmap that will accelerate progress towards a global energy transition through inclusive climate action. The conference, taking place at Expo City in Dubai from November 30 to December 12, will convene over 70,000 participants, including heads of state, government officials, industry leaders, the private sector, academics, experts, youth, and non-state actors.
While the climate agenda encompasses various topics, discussions about carbon credit markets will undoubtedly be a significant part of the COP28 summit. As the talks intensify, there is a growing push for greater transparency and regulatory standards in carbon credit markets. The convergence of global leaders and stakeholders at COP28 provides an ideal opportunity to address concerns and challenges related to carbon credits at the highest level.
