The United Nations Climate Change Conference (COP29) has approved a new framework to regulate the international carbon credit market. The measure aims to direct resources to climate actions in developing countries. The ratification of these regulations had been pending for a decade.
Carbon markets were first contemplated in Article 6 of the Paris Agreement. The provision establishes the creation of a mechanism that allows nations to establish agreements with their peers to achieve greenhouse gas (GHG) emissions reduction goals and support sustainable development. The United Nations has been working on this issue since 2015.
Carbon credits seek to finance initiatives and projects that promise to reduce the amount of atmospheric pollutants. Each credit is equivalent to removing or containing one ton of carbon dioxide (CO2) to prevent it from entering the atmosphere. The new rules are designed to mainly control the related activities of the countries with the most resources, which tend to be the most polluting. These economies have tried to offset their environmental footprint by purchasing emission reduction certificates in a poorly regulated environment.
The criteria adopted at COP29 standardize the methodology for calculating the number of titles that each project can produce. It also establishes a protocol in case the stored CO2 is lost. Yalchin Rafiyev, COP29 chief negotiator, says that “this will be a game-changing tool for directing resources to the developing world and will help us save up to $250 billion a year in implementing our climate plans.”
Some governments have detected irregularities in the carbon market and have implemented policies to ensure that green transactions serve their purpose. One of the most notable cases is that of the European Union. An investigation by consulting firms Investico and Follow The Money found that 43% of sustainable investment funds in the block allocate part of their capital to fossil fuel companies. Most of these collective institutions dedicate up to 6% of their subsidies to companies that generate income through coal, oil and gas. The figure is equivalent to 6.7 billion euros.
The European Securities and Markets Authority (ESMA) instituted the Sustainable Finance Disclosure Regulation (SFDR) to counter the situation. The instrument asks the funds to demonstrate the level of sustainability of their investments. Despite this, it does not set a maximum amount for investments that green funds can make in entities related to industries considered highly polluting. The European Commission is reviewing the regulation to address these deficiencies. The regulation approved at COP29 is the first that seeks to address similar situations worldwide.
COP29 focuses on carbon markets
Along similar lines, the International Extra-Financial Standards Board (ISSB) announced that 30 countries plan to impose global climate accounting fees on private organizations. These rules were created by the ISSB and standardize the methods that firms use to disclose the climate change risks to which their businesses are exposed. They also standardize the way in which GHG emissions that business entities inject into the environment are accounted for.
Emmanuel Faber, head of the ISSB, revealed during his participation at COP29 that 16 States, including Brazil, Australia, Bangladesh, Singapore, Taiwan, Nigeria and Turkey, are close to completing the process to adopt the regulatory platform. He added that 14 more nations such as Canada, Mexico, Kenya, the United Kingdom, Japan, South Korea and China have initiated the procedures to do so. “Half of these 30 countries are emerging and are in full development. The accelerated adoption of our standards represents a fundamental change. Clear evolutions are observed in the political consensus everywhere,” he celebrated in a statement taken up by the agency. AFP.
The ISSB regime allows investors to access reliable data to assess the level of exposure to climate change of the companies in which they invest. By standardizing carbon accounting and considering direct and indirect emissions, it has the potential to more rigorously verify companies’ pro-environmental measures.
“Value chains are global and certain countries urgently need capital [para cumplir sus objetivos climáticos]. When they embrace our regulatory model, they do so because they think they will be able to attract capital,” Faber concludes.
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