November 15, 2024
SINGAPORE – A centralised global carbon programme was given the green light to begin operations during the UN climate conference COP29, paving the way for greater cooperation between countries to achieve their climate goals.
Once it is up and running, the UN-managed carbon programme will provide countries with a one-stop shop for eligible carbon credits of high environmental integrity standards. Countries can use these credits to offset their greenhouse gas emissions and help them meet their national climate change targets under the Paris Agreement.
It could take between one and two years for the first credits to come online via this centralised mechanism, as it will take time for projects to be approved by the UN technical body.
Before then, countries will be able to get access to such internationally transferable credits that they can use to meet their climate commitments under the Paris Agreement only by making bilateral agreements with one another.
Carbon credits are generated from projects aimed at reducing or removing greenhouse gases from the atmosphere.
Projects that remove carbon include reforestation efforts or direct air capture and storage technology. Carbon reduction projects include swopping pollutive cookstoves for cleaner ones and switching to electric vehicles.
The Straits Times explains the importance of the carbon markets to countries’ efforts to cut their emissions, and how the new centralised mechanism could impact the growing carbon services sector in Singapore.
Why are carbon markets important?
Carbon markets can benefit both buyer and seller countries.
For buyer countries, carbon markets provide access to carbon credits that they can use to meet their climate change targets under the Paris Agreement.
This means that instead of relying on domestic mitigation measures, such as installing solar panels locally, countries can rely on emissions-cutting measures elsewhere to help them shrink their carbon footprint.
Tapping opportunities abroad could also be cheaper for some countries. For example, highly industrialised nations may be able to cut their emissions only by investing in costly carbon capture technology, so buying carbon credits from projects elsewhere could be cheaper.
For countries that host carbon projects supplying these credits, the carbon markets help to direct finances to sustainable projects, such as forest restoration ones, or efforts to replace open cookstoves with electric ones, for example. In this way, local communities benefit in terms of job creation and access to clean resources, and improve their energy security.
As COP29 lead negotiator Yalchin Rafiyev said: “This (the UN-run carbon mechanism) will be a game-changing tool to direct resources to the developing world and help us save up to US$250 billion (S$336 billion) a year when implementing our climate plans.”
Where does carbon trading fit in under the Paris Agreement?
The Paris Agreement, which was adopted in 2015, allows countries to cooperate with one another to achieve their climate change targets.
Such cooperative mechanisms, such as the international trade in carbon credits, are governed under a segment of the Paris Agreement known as Article 6.
There are mainly two mechanisms for countries to trade in internationally transferable carbon credits.
First, countries can make bilateral agreements with one another. Singapore, for example, is working with more than 20 countries on bilateral carbon agreements – including Ghana and Papua New Guinea – on this front.
This is a decentralised approach, meaning that countries do not need to seek UN approval for such trades to happen, and countries including Switzerland and Singapore have been pursuing such deals since 2021.
The second approach is a centralised one, in which emitter countries buy carbon credits through a UN-managed entity, dubbed the Paris Agreement Crediting Mechanism.
All trades made under this mechanism must fulfil a few requirements.
For example, carbon credit project developers must contribute 5 per cent of their share of proceeds from authorised carbon credits towards the UN’s Adaptation Fund, which developing countries can tap to protect themselves from climate impacts.
Project developers must also cancel 2 per cent of carbon credits at first issuance. This ensures that emissions are gradually forced to taper down over time, instead of just being offset somewhere else.
These two elements are compulsory under the UN carbon mechanism, and are strongly encouraged in the country-to-country pacts.
Unlike the bilateral approach, the UN carbon mechanism has not yet been operational, as countries could not agree on a few aspects of its operation. Some countries had raised concerns that the mechanism drafted was too lax in various areas, including environmental standards.
However, on Nov 11, this gridlock was broken, with a decision made at COP29 to approve two standards that will bring this centralised marketplace one step closer to facilitating the trade in credits.
What was approved at COP29?
The two standards for the UN carbon mechanism that were finalised include the ones that govern the requirements for removing greenhouse gases, and for developing and assessing carbon projects.
The standards are important because they define what high-quality carbon credits and projects look like. They help to harmonise the carbon market, which is currently fragmented.
Mr Rueban Manokara, global lead of the carbon finance and markets task force at conservation group World Wide Fund for Nature, said: “What the adoption of these documents means is that methods on how credits are generated can soon be submitted to the technical body overseeing the UN mechanism, and once approved, projects can be undertaken.”
In the two standards approved on Nov 11, the UN technical body laid out guidelines on areas such as ensuring the long-term storage of carbon, notably for forest-based activities and carbon dioxide removal tech, said Mr Olivier Levallois, founder of Hamerkop Climate Impacts.
The standards also laid out guidelines to ensure projects and activities do not harm biodiversity or lead to social inequality, and ways to ensure the accuracy and transparency of emissions reduced or removed.
How soon can credits on the UN mechanism come online?
Mr Manokara, a former carbon markets negotiator for the Singapore Government, said the earliest that the technical body can assess new projects will be around mid-2025. It will take at least a year from mid-2025 before the credits come online.
Other than new projects proposed by developers, Mr Manokara said the technical body is also assessing if ongoing carbon projects under the carbon trading mechanism of the Kyoto Protocol – the world’s climate pact before the Paris Agreement – are eligible to transition to the Paris Agreement Crediting Mechanism.
Such projects will need to be assessed on whether they meet the stricter environmental standards under the new mechanism.
What are other outstanding issues to be worked out?
Mr Manokara said a main outstanding issue to be decided at COP29 is whether revoking carbon credits should be allowed. If carbon project-hosting countries revoke the credits they sell, and count them towards their own reduction goals instead, there is a risk of the same carbon credit being claimed by two parties.
And if credits have to be cancelled – because they violate indigenous people’s land rights, for example – it will raise questions about how environmentally sound the project really was.
“This uncertainty might lead to both host and buyer countries waiting for clarity on this before participating in this mechanism,” said Mr Manokara. Investor confidence could also be affected.
How will these influence carbon trading in Singapore?
Singapore has started carbon trading partnerships with more than 20 countries, of which collaborations with two countries – Papua New Guinea and Ghana – have advanced into pacts.
This means carbon tax-liable companies here can eventually buy carbon credits from projects in Ghana and Papua New Guinea to offset up to 5 per cent of their taxable emissions. In September, Singapore and Ghana opened applications for carbon projects in areas including clean cookstoves and electric vehicles.
In an interview with ST on Oct 30, Minister for Sustainability and the Environment Grace Fu said that while Singapore will continue to pursue bilateral trading, these partnerships will take guidance from the UN mechanism. A consistent approach will give more clarity to the market, she noted.
“I suspect that most parties will say, why don’t we follow the standards that (the UN mechanism) has, even though it’s still bilateral,” she said.
Ms Fu added: “Parties that we deal with recognise that we need the credits to be international and recognised, because that’s how you can get more investors to participate, more buyers of the credits, and that’s how your credits can be worth more in the market.”
Singapore’s carbon trading pacts already take reference from the UN system, with carbon trading implementation agreements requiring a proportion of proceeds to go to adaptation in the host country, and for a fraction of the total credits to be cancelled.
Mr Levallois said the approval of the UN carbon market rules is not an overnight game changer for the carbon services sector, although the UN credits will be more official and credible.
“When (the UN carbon market) is finally ready, we still need to see the market creating a larger source of demand for these credits.
“It will take another few years before a Singapore company falling under the carbon tax has more choice and can take advantage of lower prices for credits,” he said.
Mr Manokara said: “The operationalisation of the (UN carbon market) is a positive development for Singapore’s ambitions as a carbon services hub.”
It is another way for the country and individual companies to access credible and compliant credits to help meet their net-zero goals, he added.