During COP28, we hosted a climate/carbon investment forum at the Nasdaq Dubai in partnership with Dubai Financial Market (DFM), CFA Society Emirates, Citywire, Climate Finance Partners, S&P indices, and Bloomberg. Industry experts and prominent institutions shared their insights on how they are navigating the energy transition and producing climate-focused portfolios. A replay of the event will be available next week.

The UN climate talks in Dubai are making heavy weather of things, as tends to be the pattern. Nations disagreed over items, such as high-level political references, the phase-out of fossil fuels, and whether the voluntary carbon markets should be left to their own devices or regulated more closely by the UN.

The first week usually involves negotiations among technical experts and junior political staff. The draft texts of political statements or new undertakings are littered with options and contradictory positions. In week 2, ministers fly in and take up outstanding issues to bridge gaps and find common solutions. That said, COP28 has seen some major successes so far. Already, there’s been a historic agreement to “operationalize” a Loss and Damage Fund to compensate vulnerable countries for the impacts of climate change. So far, over $80 billion has been pledged and committed, ranging from loss and damage to health and food systems.

The Global Stocktake (GST), an assessment of where 195 countries stand on their initial pledges to cut emissions by 2025, was a key agenda item during the conference. Of course, they have already completed mathematical and scientific assessments, where experts found limiting global temperature increases to less than 2.5 degrees Celsius will be challenging. The political decision on the Global Stocktake needs to send a strong message that countries have to raise their ambition. The next set of Nationally Determined Contributions (NDC) – countries’ emissions-cutting pledges – for 2025 to 2030 will have to be submitted to the UN next year.

The negotiations over this GST are coming up against arguments over whether there should be a mention of phasing out fossil fuels. Saudi Arabia is leading the resistance, insisting that a phase-out should not be mentioned. Other countries, led by the small island nations and progressive partners, like the EU, are pushing back. We could see a compromise among countries to settle for a phasing out of “unabated” fossil fuels, a reference to using carbon capture to store CO2 underground and prolong the exploitation of fossil reserves.

Voluntary Carbon Markets (VCM) have yet again been the Cinderella of this ball. Even while UN negotiators are bogged down in highly legal and technical language over what seems like microscopic details, stakeholders from the VCM are having a successful COP. Even the UN is taking note: there have been official events addressing the role of the VCM, some governments are now folding VCM quality and integrity standards into their own regulations, and there is even some talk of co-opting the VCM’s main players – the carbon offset standards – into the UN Article 6 carbon market.

The impact of all this on regulated/compliance carbon markets is fairly light; compliance markets like the EU ETS and the California cap-and-trade program are not affected by UN regulations or discussions since they fall within national or jurisdictional control. California’s carbon credit standards are pretty strict, and it would be up to ARB to decide whether to accept credits from new sources, while the EU doesn’t allow any outside credits at all.

However, compliance markets are making waves with the launch of carbon import tariffs. There were a lot of discussions of “unilateral trade measures” here at COP as Europe has kicked off its Carbon Border Adjustment Mechanism (CBAM), which will require imports to pay a European price for the carbon embedded in certain products. Europe may be the first, but already, there are moves in the US, Canada, and the UK to set up similar carbon tariffs to protect domestic industry from the impact of other tariffs.

Carbon Market Roundup

The global price of carbon is $51.84, up 7.7% from the week prior. EUAs were down 1.6% at €69.65. UKAs fell 17.8% at £33.35. CCAs moved mostly sideways, closing at $38.90. California announced that the program's auction reserve price floor will rise to $24.04 next year. RGGI hit $15.00 for the first time this Wednesday, driven primarily by stronger-than-normal volume during its Q4 auction that day. Market observers seem to expect the auction clearing price to be above the trigger price of $14.88.