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How are Carbon Markets Shaping Governments and Corporations?

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By Antonio Díaz Aranda

· 5 min read

“What you cannot measure, you cannot improve” that was the approach of governments and companies during the last decades. During the industrial revolutions, we lived a systematization of automation in industrial processes in which companies focused on streamline their processes to reduce waste, time, and costs. However, over the past decade, concepts such as Corporate Social Responsibility (CSR) and Environmental Social and Governance (ESG) have become key aspects of governments’ regulations and companies’ operations, making stakeholders reconsider the various implications of the industrial activities and what mechanism could be developed to solve the current climate crisis. The solution that they came up with was carbon markets and they will be a major topic in the next years with governments and corporations looking at them not only to achieve their NDCs, net zero or carbon neutral strategies, but also as a business opportunity.

Carbon Markets as the center

While COP26 focused on setting regulations for international carbon trading, linking multiple trading schemes and promoting accounting and transparency; COP27 was very technical with topics related to interoperability of the mechanism and reporting tables which may make future negotiations very tedious. Nevertheless, there was a very clear message shared at COP, carbon markets are more important than ever. With governments agreeing on new cooperative approaches and companies around the world entering to the voluntary market, they are here to stay, and they will play a key role on the years to come.

The private sector is more than ever interested on the carbon markets, with dozens of them making commitments of achieving carbon neutrality or sharing their net zero plans for the next decade. Unfortunately, most of governments and corporations worldwide are not ready to be part of it. Most countries do not have the infrastructure to track their emissions nor the needed institutional frameworks to request the information to the companies in their territories, while even multinational organizations with millions in revenue do not have a clear sustainability program in place nor a robust tracking of their emissions which will become a competitive disadvantage. In 2023, ESG and Sustainability reporting will become a major topic thanks to the international commitments and the growing interest from corporation to be part of the current and emerging voluntary markets, as well as the increasing pressure from stakeholders to disclose reliable ESG & Sustainability reports. We will a shift of the previous moto of “What you cannot measure, you cannot improve” to “What you cannot measure, you cannot sell nor buy”

Quality over Quantity

With the experience from the last mechanism developed for carbon markets under the Kyoto Protocol, the Clean Development Mechanism, parties realized that is not only about having hundreds of carbon reduction projects out there, but rather about their quality. Assessing it has become a major challenge since it depends on the methodologies used and the accuracy of the information provided. The decision taken during COP27 of requesting an initial report for every cooperative approach will help parties to assess different aspects of the proposed projects including a description of how the cooperative approach ensures environmental integrity, how it is consistent with the sustainable development objectives of the Party, how it minimizes and, where possible, avoids negative environmental, economic, and social impacts, among other key aspects.

Emerging Carbon Markets

New carbon markets will be opened and others will be operationalized in the upcoming years which means the discussions have just started. At COP27, Switzerland and Ghana announced the first authorization of internationally transferred mitigation outcomes (ITMOs), while Switzerland and Uruguay signed in December an agreement enabling additional mitigation activities in which cooperation under Article 6 is included. The cooperative approaches will hopefully include capacity building and technology transfer which will eventually help developing countries to acquire the needed tools and resources to generate their own voluntary markets in the future. Currently, there are at least 14 Emission Trading Systems under consideration and 9 under development which sends a clear message that countries are exploring implementing them to achieve their National Determined Contributions (NDCs) and for other domestical purposes.

The voluntary market will also face major changes as “removals”, one of the most controversial topics, was discussed during COP27. Defined during negotiations as engineered or natural processes that suck carbon dioxide (CO2) out of the atmosphere, removals have been in discussion for years and the recommendation made by the Supervisory Body opened the door to include them as part of the voluntary market under the 6.4 mechanism. However, NGOs criticized that the recommendations could undermine the integrity of the Paris Agreement and some parties expressed their concern that removal engineering solutions may have environmental and social implications that are not yet well studied and there are no methodologies at the moment. Parties agreed that the document needed further work and sent the guidance back to the Supervisory Body, meaning that the document will be discussed again at COP28 in Dubai and is expected to include rules on what should count as a carbon removal, when this could generate carbon credits for sale and how other negative environmental and social impact would be avoided.

New Credits to Come

The Kunming-Montreal Global biodiversity framework was adopted during the 15th Conference of Parties (COP15) to the UN Convention on Biological Diversity (CBD) and for the first time, the concept of biodiversity offsets and credits was introduced in a UN document. They are seen as a stimulating innovative scheme to increase the level of financial resources and they have attracted a rising interest since they will help addressing biodiversity loss that occurs through development projects and activities. There are currently 100 countries that have laws or policies that require or enable their use, or are currently considering them, which means that they will popularize among the different actors, and we will see government and corporations further discuss on them within the next years. This clearly brings the question of how many other types of credits would be created to address the climate crisis we are currently facing and how they will shape the current plans and priorities of governments and corporations around the world.

Future Thought Leaders is a democratic space presenting the thoughts and opinions of rising Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem

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About the author

Antonio Díaz Aranda is an Industrial and Systems Engineer with a passion for ESG and Carbon Markets. He is a lead Article 6 Negotiator at the Mexican Delegation for COP27, Lead Business & Subscriber Development Specialist at Benchmark ESG & 2021 MIT Supply Chain Excellence Award Recipient.

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