EU and US at loggerheads over plans to launch new carbon credit market

Plans to launch a market that incentivises countries to reduce their carbon emissions have hit a serious roadblock, after the US and the EU failed to resolve a disagreement over how closely the UN should police it.

Climate negotiators at the COP28 summit in Dubai had been expected to endorse standards for the carbon credit market including those proposed by a UN supervisory body. It was widely anticipated that this could kick-start a mechanism for countries to pay compensation for their own emissions by investing in decarbonisation projects abroad.

Carbon credits are tradeable instruments designed to represent a tonne of carbon emissions avoided or removed from the atmosphere. Currently traded by companies, the market has faced criticism for a lack of verification and credibility.

The international framework first sketched out under Article 6 of the 2015 Paris agreement was meant to help expand the roughly $2bn market in carbon credits between companies into a key source of finance for poorer countries to transition away from fossil fuels and protect their forests.

But eleventh-hour negotiations at COP28 on Tuesday stalled over opposition from the EU to measures it perceived as weakening the UN’s proposed system. These measures included permission for countries to introduce confidentiality clauses to bilateral deals and to cancel credits after they have been issued, for instance to meet their own national climate goals. In contrast nations reached an “historic” deal early on Tuesday to transition away from fossil fuels.

The US and other countries including Saudi Arabia had pushed for more flexible UN standards for the carbon credit market, allowing the trade in credits to get off the ground sooner, according to people present during two weeks of negotiations. Representatives from the US state department and from the kingdom’s energy ministry did not respond to a request for comment.

Negotiators from the UK, the EU and from densely-forested countries in Africa and South America had meanwhile been pushing for more stringent standards.

“The EU wanted robust governance, standards, transparency and high atmospheric integrity and the US wanted [an] anything goes [approach],” said Kevin Conrad, a director of the Coalition for Rainforest Nations negotiating bloc, representing states including Ghana, Gabon and the Democratic Republic of Congo.

Jacob Werksman, the EU’s chief climate negotiator, along with representatives from the European Commission and EU member states — attended the late-night carbon market negotiations in a show of support.

“We don’t take hard lines like this lightly,” said a person close to the EU camp. “We need to cut emissions as a priority,” the person said, adding that “terms and conditions” must apply to the global trade in credits.

One benefit of the stalemate is that it will give countries more time to hash out issues that have plagued the market for voluntary carbon credits, including around permanence of carbon dioxide removals.

It also avoids “replicating the errors of the voluntary carbon market and sending the wrong signal to companies and countries seeking to sidestep their climate responsibilities”, said Gilles Dufrasne, policy lead on global carbon markets at the non-profit Carbon Market Watch.

Private sector players including independent registries and standard-setting bodies will continue to fill the vacuum left by the UN in the nascent market.

The International Emissions Trading Association, a trade body for carbon market developers and buyers, said countries should continue to strike deals for future carbon credit trades. It criticised the “politicisation of the [UN supervisory] mechanism and the delays in its operationalisation”.

South Korea, Switzerland, Singapore and the COP28 host, the United Arab Emirates, are among the countries to have struck agreements to buy future credits, while forestry projects in the US are expected to become major sellers into the market in future.

Despite the absence of a formal framework, more bilateral deals were announced at COP28, including between Papua New Guinea and controversial Dubai-based carbon broker Blue Carbon, as well as with PNG and Singapore.

The broader agreement countries at COP28 struck addressed the role that nature protection can play in helping countries hit their climate targets more explicitly than at previous climate summits.

It emphasised for example the need to create resilient food systems, and to protect biodiversity in line with an international agreement in Montreal in December to protect and restore at least 30 per cent of the world’s land and water ecosystems by the end of the decade.

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