investment viewpoints

Carbon markets advance despite mixed COP27 results

Carbon markets advance despite mixed COP27 results
Lorenzo Bernasconi - Head of Climate and Environmental Solutions

Lorenzo Bernasconi

Head of Climate and Environmental Solutions



The 2022 United Nations Climate Change Conference (COP27) was a missed opportunity to finalise the rules governing how countries can reduce emissions using international carbon markets – but this will not impede the markets’ growth.


Need to know:

  • COP27 brought little progress in resolving key sticking points related to the rulebook for international carbon markets, covered under Article 6 of the Paris Agreement. Even so, the markets continue to develop swiftly
  • While the COP process remains invaluable, the focus of carbon-market implementation has already been shifting away from UN negotiations
  • Bilateral agreements, private-sector initiatives and domestic policy have become key catalysts in the development of these markets


No stalling

After two intense weeks of negotiations, the annual climate talks concluded at dawn on 27 November in Egypt, two days into overtime. Going into the summit, no major decisions on carbon markets were expected. Negotiators in Glasgow had already agreed on the basic rulebook governing Article 6 – the section of the Paris Agreement outlining how countries can contribute to their climate commitments through the carbon markets. The goal of the talks in Sharm el-Sheikh, billed as the `implementation COP’, was to sort out remaining technical details.

Negotiators reached consensus on several technical issues around common accounting principles for the international transfers of credits, and the decision text approved in Egypt mentioned ‘nature-based solutions’ for the first time.

Nonetheless, this COP was a missed opportunity overall. Key sticking points – including whether credits linked to emission avoidance qualify under Article 6 and concerns related to Indigenous Peoples’ rights – were deferred to COP28.  Hopes that negotiations would contribute to greater transparency and trust in the implementation of Article 6 were also muted by the adoption of a confidentiality provision letting countries decide whether to disclose emission transfers. This may only encourage secrecy and increases the risk of double counting.

Still, the outcome of COP27 is unlikely to significantly slow the growth and importance of carbon markets as a tool for meeting climate commitments. Why? The centre of gravity on implementation has already moved outside of UN negotiations to bilateral deals, private-sector initiatives and domestic-policy processes.


Bilateral agreements  

Countries are already moving forward with bilateral international transactions. During this year’s summit, Ghana and Switzerland traded the first-ever ‘internationally transferred mitigation outcome’ (ITMO), ushering in a new era of cooperation in implementing the Paris Agreement. Singapore, Japan and South Korea announced similar agreements with a wide range of host countries for future ITMO transactions.

More such transactions are expected to follow.  On the sidelines of the negotiations, more than 60 countries, including the US and Germany, joined the Paris Agreement Article 6 Implementation Partnership launched by Japan to accelerate “the development of high-integrity carbon markets”.


Private-sector initiatives

Independent private initiatives are also growing in number and size. Launched in Glasgow, the Lowering Emissions by Accelerating Forest finance (LEAF) Coalition has secured over USD 1.5 billion in commitments, more than doubling the corporate pledges since last year for the purchase of high-integrity tropical-forest carbon credits generated at national or state levels. Three forest countries and six Brazilian states have also signed agreements with LEAF, precipitating a new – and potentially very sizable – market for voluntary carbon market transactions linking government-led programs directly to the private sector. These numbers are significant against the backdrop of a global voluntary carbon market that currently stands at USD 2 bn.

Building on the LEAF model, the Bezos Earth Fund, The Rockefeller Foundation and the U.S. State Department announced an initiative to leverage the carbon markets to mobilise private capital for the clean energy transition in developing countries. The Africa Carbon Market Initiative, also launched in Egypt, announced the intention of setting up a similar scheme to attract “hundreds of millions of dollars” of private capital to high-integrity African carbon credits. 

Private sector-led initiatives, such as the Integrity Council for Voluntary Carbon Markets (ICVM) and the Voluntary Carbon Markets Integrity Initiative (VCMI), are also shaping the integrity of the markets on both the supply and demand side. 


Domestic policy

Domestic policy is another catalyst. Globally, compliance markets are growing at record speed. Today, there are 34 compliance markets in operation, representing a more than doubling in market size since 2019 to reach USD 179 bn in market cap and over USD 900 bn in traded volume.  Reforms – such as the introduction of a Carbon Border Adjustment Mechanism (CBAM) by the EU – are likely to accelerate the global growth of carbon markets. 

Domestic tax policies are also increasingly shaping these markets. Singapore recently announced a proposal to raise its carbon tax, with the option for businesses to buy international carbon credits from the voluntary market to offset up to 5% of their taxable emissions. This follows the model of nations such as Colombia and South Africa, where companies can choose to buy domestic offsets to reduce carbon-tax liabilities.


Carpe carbon

The COP process has delivered the foundational principles for a global carbon market. Implementing the rulebook remains an important priority for finalising the Paris Agreement. But to understand what is shaping the growth and integrity of the market, we need to look beyond the conference rooms of the UN to the actions of public and private market participants.


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