COP27: Kerry unveils carbon credit scheme, but will it work?

By Anne-Marie Bissada

Posted on Friday, 11 November 2022 12:32
John Kerry, U.S. Special Envoy for Climate speaks as he attends the opening of the American Pavilion in the COP27 climate summit in Egypt's Red Sea resort of Sharm el-Sheikh, Egypt November 8, 2022. REUTERS/Mohammed Salem

US climate envoy John Kerry announced a much-anticipated — and controversial — expanded carbon credit market system at COP27. Although the concept is not new, the proposal on the table could be a game-changer — but only if certain parts are in place, experts say.

The programme, the Energy Transition Accelerator (ETA) officially announced by Kerry at COP27 on 9 November, involves the US government, Bezos Earth Fund and the Rockefeller Foundation, along with possible support from others, including Bank of America, Microsoft, Standard Chartered Bank and PepsiCo. Kerry hopes to get it “up and running” within a year.

The ultimate goal of the ETA is to fund renewable projects and accelerate clean energy transitions in developing countries where financing is harder to come by.

Given the precarious situation of the Joe Biden administration’s post-midterm elections, Kerry had focused more on securing partnerships with the private sector to ensure the deal can still take off even without congressional support.

Cap-and-trade model

Carbon credits are based on the ‘cap-and-trade’ model used during the 1990s by the US-based Environmental Defense Fund (EDF) to reduce sulphur dioxide pollution (acid rain). Its success means the scheme is perceived as a highly effective way to solve the problem.

The template has been used to fight climate change through carbon markets.

This concept holds enormous promise. We are working closely with governments and companies and NGOs on this.

The market essentially turns CO2 emissions into a commodity by giving it a price. Companies or countries are allotted a certain number of credits and may trade them to help balance global emissions. According to the EDF, one credit represents the greenhouse gas equivalent of 1 ton (0.91 metric tonnes) of CO2 emissions.

Through the ETA, entities working to combat climate change through certain projects, such as a solar farm, are issued a credit. Polluting companies can then purchase those credits to offset the emissions they produce.

  • 5% of the value of all credits generated through the ETA are earmarked for international support for adaptation and resilience;
  • It is open to all companies except those in the fossil fuel industry, Kerry said. Companies that participate must have net-zero goals (as per new guidelines issued by a UN panel on 8 November) and science-based interim targets;
  • Above all, the credits are to supplement, not substitute emission cuts, so everyone will be held accountable, Kerry added.

“This concept holds enormous promise. We are working closely with governments and companies and NGOs on this. We can ensure it delivers finance at scale…a just energy transition, with environmental integrity,” Kerry said at COP27. He added that it should be up and running “by no later than COP28”.

Downsides

“We’re putting it out there to be able to build the support for it. I think there’s a lot of interest in it – a lot of interest,” the climate envoy told The Africa Report just ahead of the launch on the sidelines of COP27.

However, companies and countries that are interested are doing so on a voluntary basis.

“Carbon markets need demand and there needs to be policy instruments driving the demand. Under the clean development mechanism, the demand was driven by the European Union emission trading scheme. There you could use the credits and that was a mandatory system,” Axel Michaelowa, climate policy expert and managing director of Perspectives Climate Group, tells The Africa Report.

Additionally, polluting companies can alleviate their guilt by paying someone else to do the hard work of cutting greenhouse gas emissions.

“Kerry needs to put something on the table that goes beyond the pure voluntary aspect of it,” says Michaelowa.

Profit might very well be that incentive.

“There [are] huge profits in this,” one employee (who asked not to be named) of a renewable energy firm based in the UAE that does much work across Africa, told The Africa Report on the sidelines of COP27.

In a hypothetical situation, the employee said: “We can probably go to a country and help them build a billion dollar project. And if we can get credits, then we don’t even have to charge the country for [building] the project,” such as a wind farm in Zambia.

Another issue is carbon sequestration or storage.

“How do you measure carbon sequestration? Where is the standard? How do you actually measure the carbon that you’re saving?” said the employee.

Interested participants

The carbon credit system is “going to allow us to transit quicker, transit faster, transit easier. I think every African country would support [it]. If there’s a debt for climate swap, then it’s meaningful to the developing countries,” Matthew Opoku Prempeh, Ghana’s Minister of Energy, told The Africa Report on the sidelines of COP27.

Kerry added that Nigeria is also keen to participate.

Going forward

UN Secretary-General Antonio Guterres had raised a red flag earlier in the week when he said at COP27 that “shadow markets for carbon credits cannot undermine genuine emission reduction efforts”.

His ultimate solution is through “real emission cuts….fossil fuels must be phased out and renewable energy scaled up”.

However, the UN chief said he would support Kerry’s plan so long as “safeguards” are included.

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