International carbon market: Key updates you should know

## What is the COP28 policy?

COP 28 refers to the United Nations Climate Change Conference held in Dubai, United Arab Emirates, from 30 November to 12 December 2023. These conferences, known as COPs, occur annually and serve as the primary global platform for making decisions regarding climate change, with nearly all countries participating.

The COP is where nations gather to agree on strategies to tackle the climate crisis, such as capping global temperature increases at 1.5 degrees Celsius, assisting vulnerable communities in adapting to climate change impacts, and achieving net-zero emissions by 2050.

COP28 anticipated over 70,000 attendees, including member states (or Parties) of the UN Framework Convention on Climate Change (UNFCCC), alongside business leaders, youth representatives, climate scientists, Indigenous Peoples, journalists, and other experts and stakeholders.

Formally, COP 28 signifies the 28th assembly of the Conference of the Parties (COP) to the UNFCCC.

## Why is COP 28 important?

COP 28 is important as it focuses on implementing the [Paris Climate Change Agreement](https://unfccc.int/process-and-meetings/the-paris-agreement) and increasing ambition in combating climate change. Recent scientific findings emphasize the urgency of cutting greenhouse gas emissions by 43% by 2030 to limit temperature rise to 1.5 degrees Celsius and mitigate severe climate impacts. This conference aims to identify global solutions, encourage countries to enhance their climate plans by 2025, and accelerate the transition to a green economy, ultimately working towards achieving the goals set in the Paris Agreement.

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## COP28 policy outcomes

COP28 concluded with several significant policy outcomes:

* **Global stocktake:** The assessment revealed that current Nationally Determined Contributions (NDCs) would lead to a temperature increase of 2.1-2.8°C. To address this, calls were made for transitioning away from fossil fuels, increasing renewable energy sources threefold, doubling the rate of energy efficiency improvement by 2030, phasing out inefficient fossil fuel subsidies, and accelerating the adoption of zero and low-carbon technologies.
* **Climate finance:** The Loss and Damage Fund has become operational with initial contributions of USD 792 million. Furthermore, pledges were made to the Green Climate Fund and the Adaptation Fund, amounting to USD 12.8 billion and USD 188 million, respectively. However, these commitments do not meet the trillions required by developing countries to achieve the mitigation and adaptation objectives outlined in the Paris Agreement.
* **Carbon markets:** No agreements were reached regarding carbon market mechanisms. Unresolved issues include defining 'cooperative approaches', determining timing and types of authorizations, sequencing, and regulations for reporting and review, as well as establishing an international registry.

Despite the lack of agreement on certain aspects, COP28 has set the stage for continued efforts in climate action and finance, emphasizing the urgent need for global collaboration and commitment to address climate change.

## Global climate policy update

### In Europe

The European Parliament has adopted the first draft of legislation for the EU Carbon Removal Certification Framework (CRCF), a significant step in combating climate change. This framework establishes a voluntary certification scheme for European carbon removals, categorizing them into nature-based, technology-based (e.g., BECCS, DACCs), and product-based solutions. Notably, it excludes fossil carbon capture, emphasizing sustainable methods.

Trilogues between the European Parliament, Council, and Commission aim to finalize the CRCF by March 2024. This highlights a concerted effort to set clear regulations for carbon removal, aligning with EU climate goals.

Sweden and Switzerland have agreed to pilot removal activities under Article 6.2 of the Paris Agreement, focusing on negative emissions technologies like BECCS. This makes them pioneers in cooperative approaches to such technologies. Their collaboration is crucial as international rules on removal activities faced a deadlock at COP28. This initiative will provide real-world implementation experience to shape UN recommendations on these technologies, with further negotiations expected at COP29.

Turkey is set to implement its emissions trading scheme (ETS) in 2025, focusing on high-emitting sectors like iron and steel, aluminum, cement, paper, chemicals, and power generation. This initiative responds to the EU's Carbon Border Adjustment Mechanism (CBAM) and will operate as a cap-and-trade system. Integration into Turkey's upcoming Climate Change Law is anticipated.

Support from the World Bank's Partnership for Market Implementation (PMI) program follows the readiness phase completion, aiding Turkey's ETS implementation. This move signals Turkey's commitment to addressing climate change and aligning with international efforts to reduce emissions.

### In the UK

On December 18, 2023, the UK Government declared its intention to implement a Carbon Border Adjustment Mechanism (CBAM) by 2027. This mechanism will impose charges on imported goods from sectors like aluminum, cement, ceramics, fertilizer, glass, hydrogen, iron, and steel, equivalent to the carbon price established by the UK Emissions Trading Scheme (ETS). The decision comes after a public consultation on measures to combat carbon leakage from March 30, 2023, to June 22, 2023. Additional consultations will be undertaken to finalize the specifics of the scheme.

### In China

China has relaunched its voluntary carbon crediting scheme, China Certified Emissions Reduction (CCER), after a seven-year suspension since 2017. This scheme will complement the Chinese National Emissions Trading Scheme (CETS) by allowing regulated entities to use CCERs to cover 5% of their compliance obligations. Participation is limited to local companies, with eligibility for four project types: afforestation, solar thermal power, offshore wind power, and mangrove cultivation. On the opening day, the volume of CCERs traded reached 375,315 million tonnes at an average price of USD 8.85 per tonne. According to a research report by Minsheng Securities, the spot market could reach a value of USD 20 billion in 2025, driven by the expansion of the CETS.

China's State Council has approved an interim regulation overseeing the national ETS. This regulation holds a higher legal standing compared to the preceding ministerial-level management rules and provides clarity on certain issues identified during the two years of operation of the national ETS. It specifically addresses the property attributes of carbon rights and introduces unified provisions governing scheme coverage, quota allocation, data management, trading operations, and non-compliant penalties.

### In the Asia Pacific

In Australia, the Clean Energy Regulator (CER) has partnered with Trovio Group to develop a unit and certificate register, in conjunction with establishing a national carbon exchange with the Australian Securities Exchange (ASX). This register will initially cover Australian carbon credit units (ACCUs) and later expand to include large-scale generation certificates (LGCs). The launch is expected in the second half of 2024.

Thailand and Switzerland completed the first trading of Internationally Transferred Mitigation Outcomes (ITMOs) under Article 6.2 of the Paris Agreement. This involved the Bangkok E-Bus Program, authorized by both countries in February 2023. Thailand agreed to adjust its national emissions account accordingly, and 1,916 ITMOs were transferred to Switzerland's Emissions Trading Registry in December 2023, contributing to Switzerland's NDC.

Taiwan initiated international carbon credit trading on the Taiwan Carbon Solution Exchange (TCX), with participation from 45 companies in industries such as semiconductors, electronics, finance, and steel. The government is also drafting a carbon tax regulation targeting heavy emitters starting in 2025.

New Zealand published updated emissions forecasts until 2050, suggesting a potential overshoot requiring ITMOs to meet NDC targets. The government coalition's minor Party, ACT, initiated a public consultation on a draft offshore mitigation bill, proposing amendments to the Climate Change Response Act 2002 to achieve emissions targets through domestic and international mitigation activities.

Japan's Tokyo Stock Exchange (TSE) launched a Trial Market Maker Scheme to enhance liquidity for J-Credits. Designated companies such as Sumitomo Corporation, Mitsui & Co, and Mizuho Bank aim to stimulate transactions in the carbon credit market. As of November 24, 2023, the traded volume of J-Credits was considerably lower than China emission allowances (CEAs) and Korean Allowance Units (KAUs).

Starting from January 1, 2024, carbon tax-liable companies in Singapore are allowed to use international carbon credits (ICC) to cover 5% of their taxable emissions. The current list of eligible ICC includes projects implemented in Papua New Guinea certified by the Gold Standard for the Global Goals (GS4GG), Verified Carbon Standard (VCS), American Carbon Registry (ACR), and Global Carbon Council (GCC).

In accordance with Singapore’s Carbon Pricing (Amendment) Act 2022, the carbon tax rate will progressively increase from SGD 5 per tonne to SGD 25 per tonne in 2024 and 2025, and to SGD 45 per tonne in 2026 onwards. This regulatory framework aims to encourage companies to reduce their carbon emissions and invest in sustainable practices while providing flexibility through international carbon credits.

### In the Americas

The Canadian Government has introduced a draft regulatory framework for a cap-and-trade system targeting the oil and gas industry. The proposed emissions cap, ranging from 106 to 112 million tonnes per year, aims to reduce emissions by 35-38% below 2019 levels by 2030. Liable entities can use allocated allowances, domestic carbon credits, and contributions to a decarbonization fund to meet their compliance obligations.

In Brazil, the Chamber of Deputies has endorsed a cap-and-trade bill to establish Latin America's largest carbon market. The bill targets entities emitting over 25,000 tonnes of carbon equivalent annually, though exemptions are provided to the agricultural sector, which accounts for a significant portion of the country's emissions. The bill is pending review in the Senate, where proposed amendments from the Lower House are under consideration.

Argentina's federal government is exploring the implementation of an Emissions Trading System (ETS) through a comprehensive reform bill presented to the National Congress. The reform aims to establish a carbon market aligned with the country's 2030 NDC target, which aims to limit net emissions to below 349 million tonnes in 2030. Despite the target remaining 16% above the 2010 baseline, the provision is part of broader market-based measures intended to address Argentina's economic challenges.

### What were the outcomes of Article 6 Market negotiations at COP28?

At COP28, negotiations on Article 6 of the Paris Agreement aimed to address the urgent need for enhanced global climate action. The first global stocktake (GST) highlighted a significant ambition gap, with current Nationally Determined Contributions (NDCs) projecting only a 5.3% reduction in greenhouse gas emissions by 2030, far below the necessary 43% reduction relative to 2019 levels to limit global warming to 1.5°C.

[Article 6 of the Paris Agreement](https://unfccc.int/process-and-meetings/the-paris-agreement/article-64-mechanism#:~:text=Article%206%20of%20the%20Paris,financial%20support%20for%20developing%20countries.) offers avenues for crucial partnerships to accelerate climate investments:

* **Article 6.2:** This decentralized system allows countries to exchange internationally transferred mitigation outcomes (ITMOs) if one country surpasses its NDC targets while another falls short. This mechanism encourages cooperation and facilitates the transfer of emission reductions between nations.
* **Article 6.4:** Establishes a centralized market system with an international crediting mechanism governed by the UNFCCC through a supervisory body. This mechanism aims to replace the Clean Development Mechanism (CDM) under the Kyoto Protocol, providing a framework for generating and trading emissions reductions.
* **Article 6.8:** Provides opportunities for countries to collaborate on non-market approaches (NMAs) related to mitigation, adaptation, finance, technology transfer, and capacity building. These non-market approaches complement market-based mechanisms and support comprehensive climate action.

To close the ambition gap in tackling climate change, we need to speed up our efforts to reduce emissions within our own countries. At the same time, we need to work together with other nations in areas such as climate finance, technology transfer, and capacity building for developing countries. The mechanisms outlined in Article 6 are crucial in facilitating this cooperation and helping us achieve our global climate goals.

## Global carbon market outlook 2024

**Policy:** Carbon markets are undergoing significant changes in 2024. Carbon border adjustment taxes are gaining support, tightening supply, and including more sectors as economies move towards net-zero targets. Market reforms in the US and Australia are boosting allowance prices, while interventionist measures in the European Union may lead to subdued prices. New markets and expansions are anticipated, including linkage between states in the US, cap-and-invest schemes in New York State, and the inclusion of additional sectors in China and direct air capture in the EU.

**Price:** California's carbon price is forecasted to rise to $42 per metric ton in 2024 and $46 per ton in 2025, supported by financial intermediaries, with the potential to reach $93 per ton by the decade's end. In the EU, carbon prices are expected to average €71 per ton in 2024, decreasing from €85 per ton in 2023 but projected to increase towards €149 per ton by 2030. Carbon markets offer investment opportunities to track low-carbon technologies and may attract investors seeking to hedge against high-interest rates and inflation.

**Industrial sectors:** Economic challenges and inflation risks impact European industrials, leading to decreased activity, emissions, and demand for carbon allowances. Declining emissions in the power sector across the EU and US regional markets will also limit demand for allowances. In California, budget cuts for energy transition projects could delay emission reductions. Mainland China is expanding its market to include additional industrial sectors in 2024, increasing emissions covered by its mechanism.

**Offsets:** The price of carbon offsets depends on agreed standards. Without rigorous standards, offset prices may remain low, trading around $13 per ton by 2030 due to greenwashing and integrity concerns. However, with a robust definition of 'high quality,' prices could reach $20 per ton by the decade's end. Prices could surge to $146 per ton by 2030 if the market focuses solely on carbon removals, such as direct air capture technology.

## Key trends in Global carbon markets in 2024

* **New markets taking shape:** Expectations are high for new carbon markets emerging in 2024, such as Washington's cap-and-invest scheme and Mexico's transition to a full-fledged emissions trading system.
* **Reforms to steady prices:** Existing markets like California are finalizing reforms to align with ambitious climate targets, potentially leading to higher carbon prices in the coming years.
* **Shipping sector enters carbon market:** Including maritime emissions in the EU Emissions Trading System will initially oversupply the market before transitioning to a deficit, impacting carbon prices.
* **Carbon tariffs go global:** European importers face new carbon tariffs, and similar measures are anticipated from the UK, Canada, and Australia, signaling a global trend towards carbon border adjustments.
* **Criteria for offsets set by regulators:** European and US regulators are expected to establish criteria for carbon offsets, influencing the development of the global offset market.
* **Rise of carbon nationalism:** Governments are increasingly asserting control over carbon offsets within their borders, leading to policies restricting private sector participation.
* **EU power sector emissions to slightly increase:** After a significant drop in 2023, power sector emissions in the EU are expected to marginally increase in 2024 due to a slight recovery in demand and fossil fuel generation.
* **Shift towards gas:** Coal-fired power generation in the EU may decline as the carbon price incentivizes switching to gas, compounded by coal plant retirements.
* **Hydro impact on US carbon demand:** Variations in snowfall affect hydro generation and carbon demand in California, with lower snow water equivalent potentially impacting demand in 2024.
* **Investors Eyeing Reform Implementation:** Investors are diversifying into carbon markets beyond the EU ETS, seeking opportunities while considering policy risks and market-specific factors.

COP28, held in Dubai, focused on implementing the Paris Agreement and addressing the climate crisis. Key outcomes included the Global Stocktake, revealing a need for greater ambition, and the operationalization of the Loss and Damage Fund with initial contributions. Discussions on carbon market mechanisms advanced but left several issues unresolved. The conference emphasized global cooperation to enhance climate action and finance.

International carbon market: Key updates you should know

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