This year’s Conference of the Parties (COP) showed just how tightly governments are guarding their budgets.
The new climate finance goal of US$300 billion agreed at COP29 is sorely needed, even if far from sufficient to address the global climate crisis. The deal will go some, but not all the way, in tiding over poorer countries’ urgent need for capital.
From devastating natural disasters and sudden changes in political leadership, to heightened military conflicts and bubbling trade wars, the realities of the past year have tested leaders’ prioritisation of climate change like never before. When totted up, US$300 billion is allegedly just 45 days of global military spending, or the approximate price of damages from a single US hurricane.
So, while US$300 billion a year by 2035 was the final figure countries agreed upon, a daunting question mark hangs over how the world scales up this figure beyond the US$1.3 trillion figure that countries also committed to.
At its core, carbon finance is a transaction, not a donation, where both parties benefit
It’s therefore only fitting that in the same two weeks the world came together to agree on a new finance goal, countries simultaneously agreed on the new rules for establishing an international carbon trading market – referred to as Article 6 – and encompassing the new Paris Agreement Crediting Mechanism and enhanced rules to prevent countries from double-counting emission reductions as they trade.
Crafting these rules to make a new global carbon market a reality has, for the past 10 years, been weighed down by technical issues and the careful building of rigorous safeguards. The significant strides made at COP29 now mean that the use of carbon markets to deliver on the Paris Agreement’s goals is widely accepted, and they have the guidance to scale with integrity and transparency.
Mobilising forces
And scale they must. International carbon finance stands to unlock significant private and public sector investment for the global transition to net zero and into projects that help countries adapt to the climate emergency, enacting the kind of mobilising forces countries have committed to unleashing.
Carbon finance will by no means reach the value of US$1.3 trillion developing countries expect in climate finance, but it has a proven ability to play a catalytic role in crowding in finance many times its own size. In the current global fiscal outlook, we need our finance to be working smarter and harder than ever.
The amount countries agreed to in Baku understandably left many daunted at best, devastated at worst
Public finance is essential to the wider climate finance equation, but governments must juggle competing priorities and reach net zero cost-competitively for their taxpayers. At its core, carbon finance is a transaction, not a donation, where both parties benefit.
Through next year, countries will work together to ensure carbon finance transactions under Article 6 deliver real climate benefits, while also unlocking additional private and public sector finance necessary for addressing climate change. But for carbon finance to contribute to its fullest, the following must happen:
First, governments around the world must set ambitious and robust national climate plans (nationally determined contributions), with a clear definition of how market mechanisms are expected to deliver on their targets;
Second, governments must also define their strategic priorities for mobilising international climate finance and leverage carbon markets through Article 6 implementation. What sectors do they want the carbon finance to be channelled towards? What type of mitigation activities do they want to see funded? This will ultimately depend on countries’ national climate plans, local development goals and their ability to mobilise resources, but answers to these questions will send a strong, early signal to investors and buyers of Article 6 credits;
Finally, the carbon finance methodologies in development must stand up when applied on the ground and to local contexts. Article 6 markets will not materialise unless these theoretical methodologies are truly tested against the realities of developing climate projects in the Global South.
South Pole has been working on carbon asset development and projects for nearly 20 years and knows what it takes to leverage carbon finance for cutting-edge projects in challenging contexts. We have enabled over 850 projects across the globe and sold up to 20% of the credits being retired in the market in Q2 this year.
The amount countries agreed to in Baku understandably left many daunted at best, devastated at worst. With the threat of inflation and legal loopholes, this deal alone will not deliver the amount of finance we need to keep the world within safe levels of warming.
But we can and must use it as a starting point while reaching for the other tools we now have at hand for capital to flow where it is most needed and can have the greatest impact.
