(Bloomberg) -- COP28 Daily Reports: Sign up for the Green Daily newsletter for comprehensive coverage of the climate summit right in your inbox.

A push to fix carbon markets is gaining momentum as climate envoys at the COP28 conference in Dubai look for ways to meet green finance pledges and keep the goals of the Paris Agreement alive.

The aim is to restore investors’ trust and strengthen a mechanism which could channel cash to developing countries that need billions of dollars to pay for their energy transition and adapt to climate change. 

With cheap loans and grants in short supply, especially at a time of higher interest rates, allowing firms in richer countries to pay for emissions reductions in the developing world to partly offset their own pollution is an attractive way of increasing financial flows. But voluntary offset mechanisms have been tainted by concerns that some of their projects do little or nothing to slow global warming.

“I have become a firm believer in the power of carbon markets to drive ambition and action,” John Kerry, US climate negotiator, told a Monday meeting held under the patronage of the United Arab Emirates, the host of COP28. The talks are expected to endorse carbon credit guidelines drafted by experts last month. 

The concept of trading carbon credits across borders to accelerate the green transition is not new, nor are challenges to its transparency and impact. The Kyoto Protocol in 1997 paved the way for the Clean Development Mechanism, once worth $8.2 billion s year. Credit prices collapsed close to zero in 2012 due in part to concerns about the integrity of the projects.

United Nations-overseen carbon market got a boost from the 2015 Paris Climate Agreement: under Article 6, nations agreed to work toward a new global system of exchanging allowances covering greenhouse gases. In the following years, envoys have worked on designing a robust financial instrument that would translate national emissions-reduction pledges into comparable, exchangeable units. COP28 is expected in the coming days to endorse technical recommendations drafted by experts last month. It should finally be ready to go by 2025.

Read More: What Is COP28 and Why Is It Important?

Meanwhile, various carbon-crediting initiatives with their own standards mushroomed around the globe, attracting $36 billion of investment between 2012 and 2022, according to data by climate policy analysis firm Trove Research. The same questions over projects’ robustness, and the ability to deliver measurable emission reductions led to a confidence crisis last year, underscoring the urgency of reform. 

For UN Climate Change Executive Secretary Simon Stiell, the markets must supplement climate ambition rather than replace pollution cuts by companies and governments. That also requires trust from stakeholders, environmental integrity, safeguarding human rights and oversight to avoid double-counting — where both seller and buyer count the credits against their own climate targets.

 

After two years of development, the Voluntary Carbon Markets Integrity Initiative in June published guidelines to tighten climate claims purchasers make. To comply, companies must first publish annual emissions, adopt science-based targets and make measurable progress in cutting pollution — only then they can buy credits to offset some of their remaining emissions. 

Read More: Are ‘Carbon Offsets’ a Credible Climate Solution?: QuickTake

“With integrity and confidence, we will get scale and the market could grow to $50 billion by 2030,” said Rachel Kyte, co-chair of the VCMI.

Financial institutions and national governments are spearheading the shift to environmentally sound projects. The World Bank is working with 15 countries, including Chile, Costa Rica, Ghana and Vietnam, on carbon credits generated from preserving their forests. The projects expect to generate a total of 126 million credits by 2028, earning as much as $2.5 billion.

Offsets from forest conservation have come under sharp scrutiny after major projects were found to be over-counting their impacts. The World Bank is seeking to rectify the sector’s past mistakes by implementing stricter monitoring and verification protocols, and making sure that reforestation efforts don’t lead to clearing trees elsewhere.

“If we can make progress in unifying the fragmented market and we can replicate this work around the world,” World Bank Group President Ajay Banga said, “I think you unleash a very powerful tool to combat climate change, aid development and erode inequality.” 

 

--With assistance from John Ainger.

©2023 Bloomberg L.P.