At the 27th Conference of the Parties (COP27) of the United Nations Framework Convention on Climate Change (UNFCCC), world leaders, environmental advocates, and associated stakeholders came together in Sharm El-Sheikh, Egypt to discuss global climate-related goals.

The annual conference has been responsible for past landmark decisions, like the 2015 Paris Agreement, in which leaders around the world agreed to limit global warming below 2 degrees Celsius, and ideally 1.5 degrees Celsius, compared to pre-industrial levels.

At COP27, after tense discussions, the parties agreed to keep that 1.5 degrees Celsius goal alive, though not everyone thinks enough was done to make that a realistic target.

“Attempts at the climate talks to get all countries to agree to phase out coal, oil, natural gas and all fossil fuel subsidies failed. And countries have done little to strengthen their commitments to cut greenhouse gas emissions in the past year,” notes a Salon article by Peter Schlosser. So, Schlosser adds, the world seems to be on track to overshoot 1.5 degrees, “likely by a large amount.”

Others, however, are more optimistic.

As John Kerry, the U.S. Special Presidential Envoy for Climate, noted in COP27 closing remarks, projections from the International Energy Agency (IEA) found that warming could be limited to 1.8 degrees Celsius if all commitments from last year’s COP26 were upheld. And after COP27, “the IEA now tells us that if the new commitments and actions announced here are fully implemented, we can limit warming to 1.7 degrees,” said Kerry.

Getting More Private

While COP27 might not have resulted in as strong commitments as all participants would have liked, it’s possible that the world can at least stay below the 2 degree threshold from the Paris Agreement. And perhaps additional commitments in the near term would make 1.5 degrees more feasible.

Getting there, however, likely requires more action from the private sector.

“It’s becoming clear from COP27 and other recent events that we can’t entirely lean on governments to take climate action. One of the big takeaways seems to be that we need to lean a little bit more on the private sector, which in my opinion is definitely not a bad thing,” says Christopher Ruck, “director of environmental commodities trading at Terrapass

As Ruck explains, even though companies might face relatively limited climate-related regulation, customers and investors generally want to see stronger sustainability commitments. “If your customers want it, and if your shareholders want it, those are your two main bosses, so you better do it,” he says.

Improving Climate Financing

Governments seem to be recognizing the importance of the private sector too in terms of meeting climate goals.

Another highlight from COP27 was Kerry introducing the Energy Transition Accelerator (ETA), which is a government partnership with the Rockefeller Foundation and the Bezos Earth Fund “intended to catalyze private capital to accelerate the clean energy transition in developing countries,” as a press release from the U.S. Embassy in Egypt explains.

The ETA will involve the creation of carbon credits for clean energy produced in developing countries, which could help meet emissions reduction targets while supporting sustainable development.

“By providing jurisdictions with fixed-price advance purchase commitments for verified emission reductions, the ETA will create a predictable finance stream that can unlock upfront private finance at more favorable rates,” the embassy press release adds.

This private capital is important, given that “a global transformation to a low-carbon economy is expected to require investments of at least USD 4-6 trillion a year,notes the UNFCCC.

While the details of the ETA still need to be worked out, the goal is to have it running by next year’s COP28. And it will have parameters in place so that only certain private sector organizations can access carbon credits via the ETA.

“The credits will only be available to companies that commit to eliminating their net greenhouse gas emissions entirely by 2050, set science-based interim goals, report regularly on their progress, and are not fossil fuel suppliers,” reports Quartz.

This carbon credit mechanism ties into another big theme emerging from COP27, which involves wealthier countries providing funding to developing countries to prepare for climate change, known as a loss and damage fund.

“The deal was widely lauded as a triumph for responding to the devastating impact that global warming is already having on vulnerable countries,” reports Reuters.

Specifics, however, still need to be worked out, with more details likely coming at COP28 next year.

The Importance of Additionality

With lots of talk about carbon credits at COP27, it’s becoming increasingly clear that these need to be high-quality, verifiable, impactful offsets, rather than accounting gimmicks that get companies off the hook for their emissions.

In particular, carbon offsets often need to play a role in giving back to society, such as in terms of supporting wealth transfers between developed and developing countries and aligning with the UN’s Sustainable Development Goals (SDGs).

“As guidelines emerge for a high-integrity voluntary credit market, credits can be used above and beyond efforts to achieve 1.5°C aligned interim targets to increase financial flows into underinvested areas, including to help decarbonize developing countries,” notes a report from the UN High‑Level Expert Group on the Net Zero Emissions Commitments of Non‑State Entities, released during COP27. 

To that point, Terrapass has been seeing increased interest in carbon offset projects that have a social benefit in addition to the environmental benefit, explains Sam Telleen, general manager and director of renewable solutions at Terrapass.

“There’s a higher demand for those projects and higher pricing for those projects given the demand,” he adds.

That demand could pick up more steam following COP27, and market participants will likely increase their scrutiny of carbon offset projects to make sure their spending is making a positive impact.

For many businesses, “it’s not a question of whether we should use carbon offsets,” says Telleen. It’s just a question of what kind of rules are we going to set around them, because we do need them.”

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