Insights

COP27 just ended, and the dust is finally settling down in Sharm El-Sheikh. Governments and corporations around the world are deciphering Article 6 and its impact on carbon markets and credits. How should governments leverage carbon markets to meet their climate targets.

Written by: David Oliver, Head of Carbon, DevvStream Inc.

Date: November 18, 2022

Early in my career I worked developing the CEN EN50090, the first home and building automation standard in the EU. I represented Spain in long and complex multinational negotiations to reach consensus on how this nascent industry should work across the 27-member bloc. I’m proud of the collective work we achieved which set the groundwork for other regions in the world.

At that same time, one of my colleagues led the work on a global initiative to standardize electrical plugs. As you may know, each region or country in the world has its own unique design/standard. The EU proposed its design, China theirs, US the North american design, and even the Swiss (which have one!) proposed theirs. For years I watched from the sidelines how the committee responsible for this initiative, my colleague included, struggled to reach consensus. Proposal after proposal bounced back, which each country tried to make arguments as to why their solution was the most viable. At the end, a new and innovative ‘T-shaped’ plug that combined power and data was approved, to the dissatisfaction of most. Unsurprisingly, no country ever adopted this incredibly clever universal plug, and never made it to consumers.

How is this story relevant to COP27, Climate Change, or carbon markets? Well, history is repeating itself in Egypt. The world knows the importance of reaching consensus on how to leverage carbon financing, carbon markets, and carbon credits, to accelerate the decarbonization of economies across the globe. Yet, human nature is again getting in the way. Different viewpoints on technical (environmental), commercial, legal and financial aspects, not to mention geopolitics, has continued to drag down delegates from the UN and governments involved.

Despite these challenges, COP27 has been successful in taking some key steps forward. Most notably, the conference has succeeded in agreeing on a rulebook for the implementation of the Paris Agreement. This is a significant achievement, as it provides a clear framework for countries to follow as they work to reduce their emissions. Additionally, COP27 has also seen the launch of several important initiatives, such as the Global Stocktake on Progress Towards the Goals of the Paris Agreement. This initiative will help to track and assess progress made by countries in achieving their emissions reduction goals.

“A genuine leader is not a searcher for consensus but a molder of consensus.”

—Martin Luther King, Jr.

One key achievement of COP27 was the launch of the Carbon Neutrality Coalition, which is a group of countries committed to reaching net-zero emissions by 2050. This is a significant step forward, as it shows that there is political will to take action on climate change. However, there are still many obstacles to overcome in order to reach a global consensus on carbon markets. 

At COP27, negotiations centered around Article 6.2 and Article 6.4 of the Paris Agreement. Article 6.2 concerns the development of international mechanisms for cooperative emission reductions (aka. Rules for two countries trading with each other). Article 6.4 concerns the development of a market-based approach to reducing emissions (aka. A market for countries to trade with each other, or for credits to be used for other purposes). Both Articles 6.2 and 6.4 are important in achieving the goals of the Paris Agreement. However, there is still much disagreement on how these Articles should be implemented.

A majority of countries have publicly signaled their intent to leverage carbon markets to meet their climate goals (NDCs – Nationally Determined Contributions). Japan is leading the way – more than 60 countries have joined Japan’s Article 6 Implementation Partnership to spur credit trades. In fact, the first of such transactions was announced even before COP27 ended; Switzerland will purchase over 1 million credits from Ghana to help Swiss authorities meet their climate targets. Switzerland has signed similar agreements with Morocco, Malawi, Uruguay and Thailand.

So, what does this mean for Canada, and carbon markets in general? The answer, according to most experts, is that we have now entered a new era in carbon markets; one driven by massive demand from countries that compete for credits against corporations. While governments will be compelled to acquire credits to meet their NDCs, corporations will seek them out to meet their decarbonization and net-zero pledges to shareholders and the public. What is clear is that demand for high-quality carbon credits produced under recognized standards and programs is set to explode even further, fueled by demand from countries in urgent need to meet their NDCs as we approach 2030.

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

—Winston S. Churchill

In Canada, several provinces are currently developing new offset programs, or revamping existing ones. It is critical for all levels of government to recognize the need to work in alignment to international quantification protocols, procedures and policies, particularly those under Article 6. Policymakers should avoid the temptation to ‘reinvent the wheel’ and instead focus on developing necessary frameworks to incentivize Canada-based production of avoidance and removal carbon credits that can serve to help governments meet their climate targets.

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As we move forward from COP27, it is important that we continue to build on the momentum that has been created. We must work together to find solutions that will allow us to reach a global consensus on carbon markets. Only by working together can we hope to achieve our emissions reduction goals and avoid catastrophic climate change.

Canada has a once-in-a-lifetime opportunity to be a leader in fighting climate change by developing market-based mechanisms. We must seize this opportunity, our future depends on it – literally.