Carbon Industry Hopeful For Constructive Outcomes at COP27

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  • COP27 overshadowed by energy security concerns as winter looms
  • Bans on carbon credit exports have disrupted carbon projects
  • Linkages between voluntary, compliance systems key

The carbon market can still look forward to constructive outcomes for the industry at COP27 despite challenges like declining trade volumes and energy security concerns taking precedence over decarbonization in the short term, executives said at the Asia Pacific Petroleum Conference organized by S&P Global Commodity Insights in Singapore.

Tightening climate targets

However, many countries are still expected to further tighten climate targets under their nationally determined contributions or NDCs at COP27, said Rushan Pandya, Asia Pacific Head of Carbon at commodity trader Trafigura.

He also expressed concern over recent plans by Indonesia and India to ban exports of carbon credits, which have disrupted the carbon market in recent months, and said countries are still trying to refine existing policy frameworks that will be needed for stable carbon policies and clear price signals crucial to developing a liquid carbon market.

“To have a stable carbon market that operates effectively to drive the investments, you need some stable policies as well,” Pandya said.

More countries are expected to impose carbon credit export bans, which already includes Papua New Guinea and Honduras, and it was unclear whether COP27 will provide more clarity on the Article 6 rules that now allow host countries to create their own carbon markets under UN guidelines.

“These countries are trying to understand how much [carbon offset] they need for their own NDCs, which is really good, because what we are trying to address is not the problem of Germany, Australia or the US… We’re trying to address the global problem,” said Anna Ozga, Head of Corporate Solutions and Research APAC at Australia’s Viridios Capital.

“I think the reason behind the bans is they [the countries] don’t want very cheap carbon credits to be bought by other countries, then they’re going to be left with even bigger problems,” said Feng Chang, Managing Director in the Global Sustainable Finance Group, Bank of America.

Chang said clear and strong price signals are crucial to educate emission-intensive entities about their costs of emissions over time, so as to drive decarbonization actions and make capital-intensive projects bankable, like carbon capture, utilization and storage (CCUS) projects.

She said “a very big discussion” at COP27 is going to be how to channel more capital into emerging countries to cope with climate changes.

Convergence of voluntary, compliance markets

An emerging theme in carbon markets has been the amalgamation of what were by definition compliance markets — driven by domestic regulation — and voluntary markets driven by voluntary emissions reduction targets.

But the walls separating these markets have been collapsing and COP27 is expected to provide more clarity on some of these issues, such as how the use of voluntary offsets by corporates and individuals will be treated and what their “carbon neutrality” would entail.

“We are not inventing anything new. We are mirroring what has already happened in other commodities markets,” said Rene Velasquez, Head of Global Carbon Markets at carbon exchange CBL.

Velasquez said carbon futures, for example, are expected to serve as a crucial hedging tool for compliance buyers and aid long-term price discovery, which will boost market confidence and liquidity.

“There’s no one-size-fits-all in terms of carbon,” he said. “What we see today is that wide and diverse carbon market hubs are emerging, in China, Korea, Japan, Singapore,” he said.

He added that it will be crucial to establish the “interoperability” of voluntary and different compliance markets, and countries like China, Colombia and Singapore have already implemented policies that allow the use of voluntary credits to offset tax-eligible, or compliance emissions.

Velasquez cited the example of hybrid market evolution in Colombia, which started with the Colombian carbon tax exceeding voluntary carbon credit prices and companies being the main buyers of credit. Now, Colombia’s nature-based carbon credits are attracting international buyers who are willing to pay at a premium to the domestic carbon tax.

“Ultimately, they [carbon project developers] can choose to sell their carbon credits to the buyer that offers the highest price,” he said, adding that voluntary credits are backed by projects that deliver additional benefits beyond emissions mitigation, which is fundamentally different from compliance markets or tax schemes that are specifically designed to regulate emission-intensive entities.

Viridios Capital’s Ozga said less than 25% of global emissions are covered by emission trading schemes and there are fewer than 50 national jurisdictions participating, so there’s room to converge.

“In the longer term, that would probably happen. In the short term, this convergence is more on a regional basis,” she added.

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Source: SP Global

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