Abstract
This paper examines the principles and outcomes of Cop29 regarding climate finance and market and non-market mechanisms. These are all tools that have been introduced and implemented with the aim to create a common structure and mechanism to deal with carbon emissions. Even though they could seem the same thing, there is a difference among the three concepts. This paper aims to state this difference by describing the main features of each tool and analysing how they were discussed during Cop29 in Baku.
Martina Franzoni (Junior Researcher G.E.O Environment)
Miriam Viscusi (Junior Researcher G.E.O Environment)
Introduction
Climate finance, market and non-market mechanisms, although different concepts, are closely interlinked. They share the common goal of supporting global climate action, however they differ in their approach. Climate finance provides economic resources, often from developed to developing countries, to finance mitigation and adaptation projects. Market mechanisms, on the other hand, use economic instruments such as carbon credit trading to reduce emissions efficiently. Non-market mechanisms promote cooperation through technology, training and solutions without economic transactions. Together, they represent complementary elements in the fight against climate change.
One of the main issues discussed at COP29 in Baku was climate finance. Through the Conference a certainty was reinforced: the fact that without clear and fair climate fundings, the green transition will not become a reality. The importance of climate financing stems from the fact that large amounts of capital and state-of-the-art technological solutions are needed to ensure a green transition.
Market and non market mechanisms definition
When applying market principles and rules to one country’s right to emit greenhouse emissions, the countries (or companies) that are able to reduce their emissions under a certain cap or goal can “sell” on the market the remaining rights to emit. On the contrary, the countries (or companies) that are unable to meet their targets and need to emit, can buy some “units” (known as “carbon credits”) to compensate for their emissions. This is a simple explanation of how the market rules apply to carbon emissions and what are the principles of emission trading, also known as cap and trade. Carbon markets trade in gas emissions with the purpose to channel finance to climate projects that contribute to lower emissions. The aim of this tool is to keep zero the value of the net effect of emissions on the atmosphere. However, one rule has to be valid: measurements need to be accurate. One unit - or carbon credit - usually represents a single tonne of carbon dioxide or its equivalent in other gas.
The principle of the market - who has the right to sell and who is the buyer - is based on initiatives that contribute to increase or reduce emissions. In other words, credits are sold and bought based on actions that reduce emissions. For example, committing in a renewable energy project or planting trees, based on their estimated impact, is a common way to issue credits. Other ways are carbon capture and storage, wetland management, regenerative agriculture, helping other countries to build renewable projects.
Emission trading or cap trade is regulated by article 6 of the Paris agreement, which was the main discussion point during Cop29.
Issues in market mechanisms and discussions at Cop29
A common problem that characterizes the use of carbon credits is that measurements were not always accurate. To be accurate means that each unit represents a true one-tonne reduction and that each unit is used and counted only once. However, despite the article 6, rules were not very clear, especially those about the calculations. Those were often entrusted to the single country or company or to single private third companies.
Another critique is that, too often, carbon credits were used to compensate for emissions. Sellers were marketing their carbon credits as an offsetting tool and were using them to claim that some projects were “carbon neutral” or “climate neutral”. This led to unclear and ambiguous messages, making the whole system non transparent. the above-mentioned critiques were at the centre of the discussion during Cop29 in Baku.
Parties modified article 6 (in particular point 6.4) and reached an agreement about a global market mechanism, managed by the United Nations and with one UN certification not only based on private initiatives and certificates. The first positive effect of such an initiative is that credit buyers or sellers now will have more reliable certifications, which correspond to real emission cuts, not double-counted and not obtained through human right violations. In other words, the countries delegations found an agreement on the setting that frames how carbon markets will operate. There was also a decision on point (point 6.2) of the article, which is related to the country-to-country trading established through bilateral agreements or other deals. The core of this point is that it could enable the voluntary development of cooperative approaches, conceding a certain degree of flexibility. However, this point still needs to be discussed and it will probably be faced during Cop30. As the last point, countries agreed on standards for a centralized carbon market (point 6.4). This means that the UN supervisory body in charge of the carbon market has the task of setting scientific standards. This ensures that the international carbon market is highly reliable and that removal is real, verifiable, measurable and not double-counted.
Another outcome of the discussion at Cop29 should have been the creation of a framework for non-market mechanism: indeed, until the countries decide otherwise, non-market approach can still be everything (or nothing), without clear frame or rule, broadening the possibilities. The non-market approach mechanisms should focus on cooperation on climate policy like putting a price on carbon or applying taxes to discourage emissions.
Climate Finance
The discussion among climate finance
The real crux of the discussion on climate finance, however, concerned the definition of a New collective quantified goal on climate finance (NCQG). The aim was to replace the criterion defined at the 2009 Copenhagen Cop15, which called for a commitment of USD 100 billion per year by 2020.
The revision of the NCQG was made particularly complex by two main issue:
- The Burdens: on the subject of finance, it is possible to divide the states participating in the conference into two groups. The first is the group consisting of the OSCE member states and the group consisting of G77+ China, which represents the largest intergovernmental group within the United Nations. This group includes the EU, which is one of the main donors and it proposed a figure of around 200 and 300 billion dollars. In contrast, the second group (which includes the so-called developing countries and small island countries) was asking for $1.3 trillion per year. A particularly debated issue is the fact that China and some Middle Eastern countries, such as the United Arab Emirates, have not been included in the group of donor countries, when in fact their development conditions would allow them to do so.
- Guarantees of transparency: greater transparency in the management of funds was called for, as a significant part of the aid was distributed through existing channels, rather than coming from additional resources.
The new features introduced by Cop29
The definition of the figure for the new NCQG was undoubtedly the main challenge. Two drafts were needed to draw up the official agreement:
- First draft: in this initial version little was concretely defined because a total amount was missing and neither the donor countries nor the recipient countries of funds were specified. The form of financing was not well specified either, but on this issue it was emphasised that the financing should be non-debt inducing, i.e. it should not favour the indebtedness of the recipient countries. China, still officially categorized by the UN as a developing country, has the option to contribute to climate finance initiatives voluntarily. This possibility aligns with Article 9 of the Paris Agreement, which allows developing countries to provide support on a voluntary basis if they choose to do so. Finally, although no precise number was given, the possibility was alluded to of calculating the amount each country would have to offer on the basis of historical emissions and gross domestic product per capita. A condition that would have meant a victory for the countries of the South.
The first draft was rejected by all delegates.
- Second draft: in this second version, there is talk of USD 1,300 billion. However, there is no reference to an obligation of developed countries to contribute to this amount. It is emphasised that the 250 billion per year will have to come from a variety of public and private sources. References to historical emissions and GDP per capita have been removed.
The final document was approved at 2.40 a.m. on 24 November. The agreement provides USD 300 billion per year for developing countries by 2035. The document introduces for the first time the goal of transferring USD 1.3 trillion per year from rich to developing countries to support them in mitigating and adapting to climate change. However, no binding obligations are imposed on rich nations. Instead, USD 300 billion per year is earmarked for developing countries. As envisaged in the second draft, the money will come from a wide range of sources.
Among the main innovations of Cop29 in the field of finance we can find that ten multilateral development banks have declared their commitment to mobilise 120 billion by 2030 towards low- and middle-income countries. Among these entities there are the European Investment Bank and the Inter-American Development Bank. It was made clear that USD 65 billion will be financed by the private sector, the remaining amount will have to come from the public and governments.
Conclusion
While the crucial issue for Cop28 was Global Stocktake, the one for Cop29 can be said to have been climate finance. Despite the importance of this topic, some experts agree that the agreement reached in Baku is not enough to ensure the achievement of objectives.
Undoubtedly, the absence of some key countries such as China, the United States, India, France, Germany, and Brazil with high financial and technological capacities damaged the outcome of the negotiations.
Many have called this agreement a failure and it has been interpreted as the victory of low ambitions.
In order to alleviate this sense of defeat, the Baku to Belem Roadmap was envisaged, which aims to increase climate finance, thereby also securing funds for mitigation and adaptation for developing countries, which are among the hardest hit by climate change.
It is therefore possible to say that the discussion on climate finance does not end in Baku. It will be up to the future Conference of the Parties, the Cop30 to be held in Brazil in the Amazon city of Belém, to get to grips with this delicate and controversial issue.
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Article 6 - Cooperative Implementation | UNFCCC A-1