Climate Finance: COP28 champions carbon markets

The COP28 talks are in overtime as negotiators seek to find a consensus on the future of fossil fuels able to address the concerns of almost 200 different countries.

For me, the most striking aspect of the past few weeks in Dubai has been the unity of purpose and support which has been shown for the role of carbon markets from the public and private sectors.

World leaders are championing carbon credits as a way of mobilising capital to the developing world, while regulators have sought to address the pernicious issue of greenwashing head on.  

From Brazil to Africa, we’ve seen a host of significant announcements which have shown that carbon offsets can be critically important financial instruments which provide much needed sources of blended finance. According to data by Trove Research, over the last two years carbon markets have leveraged more than $36 billion in finance to developing countries.

President Lula of Brazil is keen to see his country which is in dire need of investment as the world’s biggest exporter of carbon removal credits. US tech firm Microsoft announced at COP28 a big move into Brazil’s voluntary carbon market. It’s to buy as many as 1.5 million credits from a large-scale project to reforest degraded parts of the Amazon which will crucially remove, not avoid, carbon emissions.

Kenyan President William Ruto has gone so far as to call carbon markets a potential “goldmine” for his country. The African Carbon Markets initiative hopes to sell $100bn of credits a year by 2050. Set that statistic against the fact that the total annual foreign investment for the whole continent of Africa has yet to have reached the figure of $80bn.

Meanwhile, the UN is expected to announce new rules for voluntary carbon markets that would ensure high quality credits within an internationally agreed framework. Since 2021 9 countries have signed bilateral agreements under the proposed UN system setting up cross-border carbon market exports, promised under Article 6 of the Paris Climate Agreement.

For instance, Ghana is selling credits to Switzerland while the West African country of Gabon has a pilot deal with South Korea. This new UN accounting framework is trying to address the problem of double counting of carbon reductions, which has dogged the sector in recent years.

There’s also been progress in the global co-ordination of setting standards. Six separate carbon credit registries have announced they’re joining forces to provide consistent carbon accounting approaches under the core carbon principles of the Integrity Council for the Voluntary Carbon Markets.

At the same time, the US financial regulator, the CFTC has unveiled standards for carbon offsets futures and derivatives trading. The US Climate envoy John Kerry has made clear at COP28 that he remains a firm believer in the benefits of carbon markets. 

The US financial services sector is lining up to participate in this developing market opportunity which, according to Bloomberg New Energy Finance, has a total market potential value of $1 trillion. Wall Street Banks such as Goldman Sachs, Citigroup, JPMorgan Chase and Barclays have confirmed they are all looking to trade credits and provide clients with advisory and market-making services.

2023 has been a difficult year for carbon markets which have come under sustained media scrutiny and scepticism. Markets are fragmented and carbon prices remain at historic lows. More needs to be done to address issues of governance and transparency.  

Yet as COP28 draws to a close, politicians and the global finance sector seem convinced that carbon markets are vital both to tackling residual emissions in hard to abate sectors and ensuring companies can meet net zero goals.