The CCA auction results are sending additional bullish signals for the market after settling at a new high of $38.73 and strong 47-cent premium to the futures settlement price--among the strongest on record. CCA futures moved higher after the auction news, with prices now hovering just under the $40 level. The auction showed that compliance entities are still buying at these higher prices and participation from financial players remains strong (total of 22 financial players in the auction). Speculators bought roughly 20% of volumes on offer (11.3Mt allowances, current vintage), while compliance purchased 80% (46.3Mt) of the current vintage.

COP28 to debate controversial global issues, but will also signal progress on carbon markets

More than 195 nations are preparing to meet in Dubai for COP28. At this annual United Nations climate summit, complex political topics will dominate the agenda, but technical discussions will also provide a strong sense of progress towards a global carbon market.

The main agenda items will be an assessment of the ambition and sufficiency of more than 195 Nationally Determined Contributions (NDCs) – climate pledges – as well as setting a new target for financial support to developing countries that bear the brunt of climate change’s impacts.

This “Global Stocktake” will also provide a basis for all countries to set new NDCs for the five-year period starting in 2025. There won’t be many surprises in the Stocktake discussions – various studies have already analyzed NDCs and found them wanting. Current national targets would lead to a global reduction of 2% in emissions by 2030 compared to 2010 levels, instead of the 43% that is needed, the UN says.

Another major agenda item will be climate finance. Last year, developed countries reached the goal of providing $100 billion in annual climate finance to developing nations, up from $89.6 billion in 2021. The $100 billion pledge was launched in 2009, aiming to achieve this level by 2020, though they have fallen short up until last year. COP28 in Dubai will see the start of discussions on a new global financial goal, which will likely be accompanied by more accusations that developed nations are not taking their responsibilities seriously. Some developing country officials say the current funding gap is closer to $500 billion annually.

The third major topic at the summit will be the operationalization of a fund to compensate climate-vulnerable countries for loss & damage suffered due to climate change impacts. The establishment of a Loss & Damage Fund was the main achievement at last year’s COP and this year the task will be to agree on where that fund is housed – developing countries don’t want it to sit within the World Bank – who pays into it, and how it will pay out funds.

Finally, every COP produces an overarching political statement that sets out agreed positions on the key issues. This year, the statement is likely to include references to the phase-out of fossil fuels, and the discussions around this set advanced countries and blocs like the EU against emerging economies that still rely heavily on coal, oil, and gas. There is an ongoing debate over whether the statement should refer to “fossil fuels” or “unabated fossil fuels,” the latter of which creates space for countries to pursue carbon capture as a way to allow continued use of oil, coal, and gas.

Carbon Markets will also be a featured topic in the negotiations, though with a much lower political profile than at previous COPs. Because Article 6 of the Paris Agreement was fully agreed at a high level at the Glasgow COP in 2021, the focus has since shifted to technical implementation. Expert delegates have been meeting all year as part of Article 6.4 Supervisory Body to draw up draft rules that will govern how the UN will assess and approve methodologies for calculating emissions reductions from projects that generate carbon credits.

The Supervisory Body has fleshed out the criteria methodologies must meet for approval. If COP gives its consent, the first methodologies could be signed off by the UN next year, setting the flow of investment in motion. There are still many legal issues to be resolved, particularly whether and how host countries can revoke the authorization of carbon credits.

There is relatively little in the COP28 agenda that directly impacts the compliance cap-and-trade markets worldwide. Still, progress in developing Article 6 rules is encouraging many countries to set up their own mandatory market systems. Already, a regulated carbon credit market has started in Indonesia, while Malaysia, Vietnam, Brazil, and Japan are also working to set up nationwide compliance markets.

Critically, the key difference between these markets and the likes of RGGI, California, and the EU ETS is that these new markets set up trading in carbon offset credits rather than cap-and-trade allowances. Rather than buy permits from a supply pool that shrinks over time, these new markets allow companies to invest in projects or buy credits from eligible projects and retire them to balance their own carbon footprint. The quality standard for these new national carbon credit systems is highly likely to be set by the UN’s Article 6, which could mark the start of a global market. Projects may have the option to supply credits to their own domestic market or request approval from the regulator to sell abroad.

One major development this year has been the emergence of carbon removal as a technology that can generate carbon credits. This month, the Article 6.4 Supervisory agreed to draft guidelines for removal methodologies. If approved at COP, they could trigger a race to develop new projects such as direct air capture, enhanced rock weathering, or biochar. Because carbon removals contribute to an absolute reduction in the atmospheric concentration of CO2 – as opposed to avoiding additional emissions or reducing emissions compared to business-as-usual – they are seen to be far more attractive to corporate buyers. They are even being considered for inclusion in cap-and-trade markets. As these new markets launch and develop, the legacy cap-and-trade markets must consider how they can exist alongside these new carbon credit systems.

Carbon Market Roundup

The global price of carbon is $49.98, down 1.1% from the week prior. EUAs were flat for the week, at €76.52. UKAs regained some ground, up 9.3% at £46.22. CCAs are up 1.1% at $39.03. RGGI traded in a narrow range, down 0.1% at $14.90. The offsets markets were both in the red, with N-GEOs down 8.7% at $0.94 and GEOs own 16.7% at $0.65.