The controversial carbon market deal that was struck just hours after the start of the UN climate conference COP29 in Baku, Azerbaijan last week is an “opportunity” for some emerging market sectors, says macroeconomic research firm BMI, a unit of Fitch Solutions.
In a Nov 14 commentary, BMI analysts say the deal on guidelines for launching global voluntary carbon markets (VCM) under Article 6.4 of the Paris Agreement would benefit rural households in India, mainland China, Kenya, Uganda and elsewhere in Sub-Saharan Africa.
An effective VCM reform could channel investment towards improving the efficiency of key household appliances, such as cookstoves, boreholes and other clean water solutions, they add.
“Kenya and India, in particular, have a large volume of unretired credits in these areas, which could now see greater demand and increase funding for projects that would improve the quality of life and purchasing power of rural households in these markets and increase long-term consumption growth,” says BMI.
In Latin America and Asia, agriculture-related projects such as reforestation, more sustainable agriculture, and reducing emissions from agriculture could also benefit, says BMI, which was acquired in 2014 and integrated into Fitch Solutions in 2018.
In Cambodia, the volume of unretired VCM credits amounts to a “non-negligible share of GDP”, according to BMI.
Peru and Brazil, too, have a large number of projects with unretired VCM credits in agriculture, forestry and other land use-related areas. These include reforestation, more sustainable agriculture and reducing emissions from agriculture, BMI adds.
‘Potential windfall’
Governments adopted on Nov 11 guidelines to further develop a UN-administered global VCM. These guidelines will now be used to develop a more specific methodology for how the private sector can issue carbon credits to the VCM based on projects that reduce or remove carbon emissions, a process likely to take 12 to 18 months.
See also: EU poised to delay landmark deforestation rule for one year
Verifying VCM credits should increase their integrity, or whether they result in additional and measurable emissions reductions, says BMI. “This should ultimately improve the ability of emerging market governments to attract investment for decarbonisation projects from other governments and the private sector.”
Several emerging markets have a substantial volume of “unretired”, or “tradeable”, carbon credits issued in the VCMs, says BMI, implying a “potential windfall” if the integrity of these and future credits increases.
Coming VCM reform brings “some upside for further investment”, says BMI. In the long term, this could reduce costs and help emerging market governments comply with tightening regulation, such as the European Union’s anti-deforestation regulation, they add.
That said, the EU deforestation regulation (EUDR) is facing a proposed one-year delay. Originally slated to be implemented at the end of 2024, the European Parliament further watered down the law on Nov 14 by adding a new “no risk” category of countries with lighter restrictions.
The EUDR, at its onset, had aimed to ensure that products sold in Europe from cattle, cocoa, coffee, palm oil, rubber, soy and wood do not contribute to deforestation, so that consumers in the European Union do not contribute to deforestation in other regions.
Limiting factors
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That said, the impact of this reform will be limited by several factors, notes BMI’s analysts.
At COP29, the guidelines were adopted in an “unconventional process”, which has drawn flak from the Center for International Environmental Law for reducing oversight and accepting lower environmental and human rights standards in the process of certifying carbon credits.
“This raises the risk that the VCM reform will fall short of shoring up [the] integrity of carbon credits to a high global standard,” says BMI.
Some environmental groups have also criticised how quickly the rules were gavelled through on the first day of the two-week conference, bypassing scrutiny and negotiations from government delegations. “The group of experts who drafted the rules in October — known as the Article 6.4 Supervisory Body — presented their draft as being effective immediately,” notes BMI.
In addition, “local factors” such as corruption and social issues will also constrain the benefits of global VCM reform, says BMI. “Governance and/or social problems — such as corruption, poor working conditions and human rights abuses — are high in all emerging markets where unretired carbon credits represent more than 0.1% of GDP at US$4.73 per credit, with the exception of Uruguay.”
BMI expects these issues “will make it more difficult” to comply with the newly-approved rules, which include a requirement to assess negative impacts on the environment and society of any credit-issuing project. “This will continue to limit investor confidence in carbon credits issued by projects in these markets and, by extension, their positive impacts on the economy overall.”
Table: BMI
Read more about COP29:
- COP29 clash brews as Saudis resist restating fossil fuel pledge (November)
- Temasek-backed Pentagreen to manage Fast-P’s Green Investments partnership, seeking to deploy US$1 bil (November)
- BlackRock, MAS spearhead collaboration on blended finance debt initiative (November)
- US will stay in global climate fight despite Trump, says top official (November)
- COP29 begins with ‘breakthrough’ on carbon market rules, but climate groups criticise lack of scrutiny (November)
- What are COP meetings for? Will this one make a difference? (November)
- UN biodiversity summit COP16 ends in limbo as countries spar over funding (November)
- COP29 Presidency hosts Pre-COP discussions in Baku (October)
- COP29 Presidency to convene ministerial dialogue on climate finance goal today (September)
- Azerbaijan will fund four members of each Small Island Developing State to attend COP29 (September)
- COP29 to call for sixfold increase in global energy storage (September)
- Azerbaijan proposes US$1 bil Climate Finance Action Fund, replacing planned fossil fuel levy (July)
- COP29 Presidency aims to enhance ambition, enable action (July)
- COP29 Presidency sets out agenda, emphasises upcoming work on New Collective Quantified Goal (June)
- COP29 Presidency hosts climate finance dialogue in Washington (April)
