IETA: Carbon markets primed for key role in net-zero push

Carbon trading is gaining traction globally as governments recognise the role of market-based systems in reducing emissions and driving investment. Japan, India and Brazil are among those developing mechanisms that are expected to lead to emissions trading systems (ETS). Carbon Economist spoke with Andrea Bonzanni, international policy director at the International Emissions Trading Association (IETA) about the evolution of compliance and voluntary markets, and his expectations for the upcoming COP28 global climate talks.

Tell us about the role of IETA and the global emissions trading landscape.

Bonzanni: We are a global organisation with offices and staff all over the world, and our mission is to promote carbon pricing and carbon markets worldwide. Our priorities are largely driven by the policy agendas in individual jurisdictions. The largest jurisdictions in terms of emissions, GDP and population are the most important ones. But each country should contribute. The EU has a mature carbon market that continues to be expanded. China, South Korea, New Zealand, the UK and large subnationals such as California and Quebec also have functioning ETSs. We see carbon markets being developed in a number of countries. Japan has recently launched a mechanism that is expected to lead to an ETS in the next couple of years. India has also started the process. They are at an early stage, but things have kicked off. Brazil is another case. They have been trying to implement a carbon trading mechanism for a long time, but it seems that now, with the new administration, things are moving faster.

What are your expectations for COP28?

Bonzanni: Our main message is that carbon markets are an effective tool to reduce emissions and achieve net zero. Reducing emissions globally by using international carbon market mechanisms reduces the cost of mitigation and therefore allows for more mitigation for the same amount of financial resources. Carbon markets can deliver investment flows from the Global North to the Global South to close the carbon finance gaps. On carbon trading under the UN Framework Convention on Climate Change there is steady progress, perhaps not as fast as we would like, but considering the overall political and geopolitical backdrop, we have been fortunate the big decisions were taken at COP26 and implementation can move forward. The big decisions on Article 6 (on international cooperation on meeting emissions reduction goals) were made in Glasgow. Article 6 is still on the agenda and will be for a number of years, but the negotiations are now focused on technical and operational details rather than the bigger political questions. There was a change after COP26 because negotiations on carbon markets entered a completely new phase. Now, what negotiators are discussing is reporting templates and a registry infrastructure to track the movement of [carbon] units across countries and market participants. So these are all important elements, but they are technical and operational. There is also another process that is formally separate from the COP negotiations, and this is the process to establish the so-called 6.4 crediting mechanism, which will be run by the UN and replace the Clean Development Mechanism, the market created under the Kyoto Protocol.

How close are we to seeing a single global price for carbon and how beneficial would that be?

Bonzanni: It would be more efficient if all carbon emissions globally would be subject to the same price, but we are far from getting there. There is some good experience with the linkage of ETSs. The EU and Switzerland, and California and Quebec are two cases in point. We hope to see more of those. But we are far from a global carbon price, so we have to live with the complexity and inefficiencies of different carbon prices applying to different countries and also different sectors within a country. But this does not mean that carbon markets cannot be effective and certainly does not mean that no action should be taken because we do not have a global carbon price.

The voluntary carbon market has come in for some criticism recently, especially in terms of the quality of offsets. How is that market performing?

Bonzanni: The market grew dramatically, by a factor of probably four or five, between 2019 and 2021, but since then it has stalled. There are some forecasts by [consultancy] McKinsey and [research firm] BloombergNEF, among others that show exponential growth. So, the potential to grow significantly is there but we have not seen that materialising in the last year or two. It is important to improve the quality of credits that are being generated. The supply side has been subject to criticism recently, but the industry had already identified that as a priority, for example, with the establishment of the Integrity Council for the Voluntary Carbon Market. IETA is one of the organisations that serves on the secretariat for the Integrity Council, and there have been some key milestones in 2023 such as the publication of the Core Carbon Principles, which aim to set a minimum quality bar that all high integrity carbon credits should comply with.

How is corporate demand for voluntary offsets developing?

Bonzanni: There was a significant increase in commitments by corporates in recent years but more recently there has been a slowdown and, unfortunately, some companies have decided to scale down their plans for carbon credit purchases. There is work to be done to build the confidence of corporates in these markets. In addition to the public criticism of credit quality, which is specific to the voluntary carbon market, broader trends such as the new macroeconomic context and some backlash against ESG investing also contributed to the slowdown.