Countries are preparing to start building an international carbon market, having finally adopted the relevant rules at the United Nations climate conference in Glasgow earlier this month.
Under the COP26 agreement, countries should soon be able to buy and sell UN-approved carbon credits from each other, and use them as a way to achieve greenhouse gas reduction pledges under the Paris climate agreement.
But some observers fear that the rules contain significant loopholes that could make it appear as if countries are making more progress on emissions than they really are. Others warn that the agreement could speed up the creation of carbon credits within separate voluntary compensation markets, which are often criticized for overestimating climate benefits as well.
Carbon credits, or offsets, are produced from projects that claim to prevent emissions of a ton of carbon dioxide, or withdraw the same amount from the atmosphere. They are usually awarded for practices such as halting deforestation, planting trees and adopting certain soil management techniques.
A new supervisory body, which should begin holding meetings next year, will develop definitive methods for validating, monitoring and approving projects seeking to sell approved carbon credits. The Glasgow Agreement will create a separate process for countries to obtain credit to achieve their own Paris goals by collaborating with other countries on projects that reduce climate emissions, such as financing renewable energy plants in another country.
Experts differ on what size the UN-backed market will become, what some of the new rules will actually do, and how much details will change as final methods are determined. But this process is “slowly, and in a chaotic fashion, building the infrastructure for more carbon trading as a commodity,” says Jessica Green, associate professor of political science at the University of Toronto, who focuses on climate management and carbon markets.
The United States and the European Union have stated that they do not intend to rely on carbon credits to meet their emissions targets under the Paris Agreement. But countries including Canada, Japan, New Zealand, Norway, South Korea and Switzerland said they would apply carbon credits, according to the Carbon Brief. In fact, Switzerland is already funding projects in Peru, Ghana and Thailand in hopes of counting these initiatives into its Paris target.
Most observers praise at least one major achievement in Glasgow: the rules will largely prevent the double-counting of climate progress. This means that two countries exchanging carbon credits cannot apply climate gains to achieve their goals in Paris. Only a country that buys credit, or holds one of these loans, can.
But some experts fear there are still ways double-counting can occur.
Offset developers have long been able to generate and sell carbon credits through voluntary programs, such as those operated by registries such as Verra or Gold Standard. Oil and gas companies, airlines and tech giants are all buying increasing numbers of compensation through these types of programs as they strive to achieve zero-emissions goals.
New UN rules are taking a hands-off approach in these markets, notes Danny Colinward, policy director at CarbonPlan, a nonprofit that analyzes the integrity of decarbonization efforts.
It suggests that project developers in Brazil, for example, can earn money for offsets that are sold through voluntary markets — while the country itself can still apply those carbon gains in advancing its own emissions under the Paris accords. This means there can still be a double count between a country and a company asserting that the same credits reduced their emissions, says Colinward.
An additional problem is that studies and survey stories have found that voluntary compensation programs can overestimate the levels of CO2 that have been reduced or removed, due to a variety of accounting issues. But the fact that the UN will not regulate these programs could provide market clarity which leads to increased demand for these offsets, spurring the development of more projects with questionable climate benefits.
“It’s a complete green light for continued expansion into those markets,” says Colinward.
Some observers believe that many countries will choose not to apply credits sold in voluntary markets to achieve their goals in Paris. Likewise, some markets are more likely to distinguish between credits that countries have used or not used in this way, with credits being ranked to indicate their relative quality and priced accordingly.
“I was expecting that with growing recognition [corresponding adjustments] There is a need to ensure the environmental integrity of voluntary compensation claims, and then the market will move in that direction,” Matthew Brander, Senior Lecturer in Carbon Accounting at the University of Edinburgh Business School, wrote in an email.
Lambert Schneider, research coordinator for international climate policy at the Oeko Institute in Germany, pointed to another “big hole” in an analysis earlier this month.
Schneider, who was part of the EU team that negotiated carbon market rules, noted that the rules allow different countries to use different accounting methods at different times for the carbon credits that are created and sold. This may also lead to double counting. In one of the scenarios he plotted, two countries could claim half of the emissions cuts from a set of carbon credits.
The results from either of the two accounting methods might balance out over time, more or less, if all countries used the same method throughout. But instead, each country can choose the most beneficial method each time it reports progress, likely distorting the overall carbon accounts.
“It’s a cherry-picking problem,” Schneider says.
questionable climate benefits
Another area of concern is that the rules will allow countries to apply some credits from an earlier UN program known as the Clean Development Mechanism, authorized under the Kyoto Protocol that took effect in 2005.
This system issued certificates of emissions reductions to states that have funded clean energy projects in other countries, such as solar and wind farms, for emissions they may have prevented. It was designed to create an incentive for richer countries to finance sustainable development in poor countries. They produce credits on an ongoing basis assuming that the electricity would otherwise have been generated from a climate-polluting facility, such as a coal or natural gas plant.
Under the rules adopted in Glasgow, countries can continue to apply credits from such projects registered in 2013 or thereafter towards the first set of emissions reduction targets (which in most cases will mean 2030).