What could happen at COP 27? Carbon markets: a legacy from the Paris Agreement

Carbon market opportunities, which were revitalised in the period between the Paris Agreement and Glasgow (COP26), shall now be framed by the war in Ukraine and its impacts on the energy sector, along with the growth in greenhouse gas (GHG) emissions. The observed decrease in emissions during the COVID-19 outbreak has been counterbalanced by the drastic rise in global energy-related emissions in 2021.

In its 6th Assessment Report, the IPCC outlined that countries must implement additional policies to meet the 1.5 ºC target. The EU is pushing for more ambitious commitments through its many diplomatic and technical channels and is calling on the world’s largest economies to boost their efforts against climate change while stressing that current efforts are insufficient. This urgency was emphasised ahead of COP27 in the recently adopted conclusions of the European Council, which also stressed the need to implement Article 2 of the Paris Agreement, ‘to strengthen the global response to the threat of climate change’.

COP27’s hot topics include:

• the level of ambition and implementation of the updated Nationally Determined Contributions (NDCs);
• how to determine clear financial targets for mitigation, adaptation and the loss and damage mechanism;
• discussions on public climate funding to be allocated to support adaptation measures in developing countries;
• how to formulate an operational definition of climate finance;
• how to set a new objective on climate finance for the period after 2025.

Even though the topic of carbon markets and related issues do not formally appear in the priority list for COP27 – both in the form of taxes or trading –  it will be pivotal for the COP27 agenda to boost the engagement of countries in reaching a ‘net zero’ target. For instance, carbon pricing solutions can be used to revitalise the decarbonisation of all the sectors of the economy and bridge the gaps between pledges and policies towards the 1.5 ºC target. In 2021, around 22 % of global GHG emissions were covered by carbon pricing programmes, which represent a significant increase from an estimated 15 % in 2020.

However, less than 4 % of global emissions are covered by prices aligned with the Paris Agreement’s temperature goals.

As of April 2022, there were 71 operational carbon pricing instruments, including 37 that were framed as carbon taxes and 34 in the form of emissions trading systems (World Bank report, May 2022)

How to scale up this percentage and how to boost the design and use of measures related to carbon markets? COP27 is expected to strengthen the foundation/structure laid down in Glasgow (with the Article 6 rulebook) through reinforced governance frameworks. Some shortcomings have already been highlighted, for example potential double counting issues.

 For a proper functioning of a global carbon market, it remains pivotal to:

• ensure the alignment of carbon accounting systems;
• guarantee the environmental integrity of the global carbon credit market, in particular the position towards credits issued under the Clean Development Mechanism (CDM);
• define an interface between international and voluntary carbon credit markets; and
• define an interface with compliance markets (i.e the EU passed legislation preventing the use of CDM credits under the EU Emissions Trading System).

Instruments such as the EU Carbon Border Adjustment Mechanism can help in preventing carbon leakage, encouraging climate change mitigation actions beyond EU borders, and might be replicated in other regions.

Monica Bonfanti