COP26 finally set rules on carbon markets. What does it mean?

After six years and many late nights haggling, a deal has finally been struck on the rules governing global trading in offsets. The details are arcane and complicated but here’s a look at what it means for the planet, companies, and countries.

1. How does it cool the planet
One of the biggest challenges in the fight against climate change is the cost. Carbon markets can help lower the bill, attract investment in clean innovation in developing countries and accelerate emissions cuts. The agreement in Glasgow set the rules for trading emissions in bilateral deals and in a United Nations-supervised marketplace. By some estimates it could be worth $100bn.

The idea is this: countries where it’s difficult or expensive to cut greenhouse gases can buy credits representing emissions reductions from nations that already lowered pollution more than they pledged. There’s also a possibility for public institutions and private companies to invest in projects that cut emissions in developing countries, where costs are usually lower. Such projects — for example replacing coal with renewable energy — would generate credits that can be traded further.

“Today’s agreement on Article 6 provides the rules necessary for a robust, transparent and accountable carbon market,” said Kelley Kizzier, vice president for global climate at the Environmental Defense Fund and a former negotiator.

2. Why are the rules an improvement?
The Paris Agreement already paved the way for the use of markets, but detailed technical provisions were needed for the new mechanism to start operating. The COP26 decision creates unified and internationally-controlled standards, and includes provisions to avoid a situation where the same emissions reductions are claimed by multiple companies or countries.

The deal may also bring transparency and rigour to voluntary carbon markets that are growing in a messy sprawl across the globe, leaving room for abuse. Low-quality offsets, or emissions reductions counted twice, do little for the planet — and can even hinder the fight against climate change.

Demand is booming for offsets: more credits changed hands in the first eight months of this year than in all of 2020, according to BloombergNEF, as corporations and governments spend billions of dollars to meet their net-zero targets.

There’s also an element that will turn the new United Nations carbon market mechanism into something more than just an offsetting programme. Under the deal, 2 per cent of newly issued carbon credits will be canceled, a move that translates into emissions cuts.

3. How can countries use this
Countries are already trading emissions in bilateral deals but now all those exchanges will be subject to the same standards. Until now it was up to individual governments to decide on the stringency.

The first deal under the Paris Agreement was signed in October 2020 between Peru and Switzerland and won praise from environmental activists for its design. Switzerland will invest in the “Tuki Wasi” programme in Peru, which helps households in remote areas buy energy-efficient cooking stoves. This prevents deforestation and cuts carbon thanks to the increase in biomass.

4. How do companies use it
Business are keen to use offsets to garnish their green credentials or as an opportunity to make it cheaper to reach their targets. While not all countries allow for imported credits to be used toward their own climate goals – and the Science-Based Targets Initiative frowns on the use of offsets except as a last resort — there are sectoral programmes that rely on them.

One example is a global offsetting system for airlines, known as CORSIA. There, airlines need to submit emission-reduction credits to offset any growth in CO2 discharges above 2020 levels.

The Glasgow deal will make the CORSIA programme stricter, according to Laurent Donceel, senior policy director at the Airlines for Europe industry association.

“This is a significant clarification in the business decision-making of airlines,” he said. “It will influence their investments in sustainable aviation fuels and their fleet renewal.”

5. Is there a catch?
There are two concerns. First, environmental activists are worried that the consent by negotiators to allow transfer of some credits from the old market will undermine the rigour of the new programme. The more credits out there, the more wiggle room for polluters. Carbon Market Watch called it a “travesty” that will dilute the positive impact.

Second, while the deal sets rules to avoid double-counting of emission cuts, implementing that will require scrutiny. It’s not clear there’s enough formal scrutiny in place.

“That will be the jobs for the civil society to create the norms and for national governments to create the regulations to make sure that those emissions-reduction claims are appropriately accountable,” Kizzier said.