COP26 | What did it mean for net zero standards and carbon offsetting?

Carbon offsetting enables states and businesses to compensate for the emissions which they produce and are sometimes used to help meet net zero targets. Article 6 of the Paris Agreement, agreed in principle at COP21 in 2015, established the basis for carbon markets, although the detail as to how Article 6 should be interpreted and implemented has only now been clarified at COP26. 

The  need for clarity over net zero standards and carbon offsetting was highlighted by UN Secretary-General António Guterres, who noted that there is a "deficit of credibility and surplus of confusion" over emissions reductions and net zero targets.

Net zero standards

There were significant  developments relating to net zero standards both before and during COP26. It was a topic considered throughout the fortnight of the conference, and in advance of the summit, on 28 October, the Science Based Targets initiative (SBTi) published the first science-based net zero standard. 

The SBTi standard aligns targets for companies with the Paris Agreement target of limiting global temperature rise to 1.5C above pre-industrial levels. The standard prioritises emission reduction over carbon offsetting, and sets near-term Science-Based Targets (SBTs), defined as five to ten year greenhouse gas (GHG) mitigation targets in line with 1.5C pathways, and long-term SBTs, which require a reduction in value chain emissions to align with net zero by 2050 or sooner. 

Other developments which took place at COP26 included:

•    António Guterres announcing to the World Leaders Summit that he intends to establish a group of experts to propose clear standards to both measure and analyse the net zero commitments made by non-state actors. This is to reduce the confusion often caused by the various different meanings and metrics used currently to measure emissions reductions. 

•    An official COP26 side event titled "Building back to a net-zero resilient economy through Governance, Policy, Standards, Skills & Inclusion", held standards to be the key to connect and align economies and fast-track the transition to net zero. Scot Steedman, the Vice-President of the International Organisation for Standardisation (ISO), confirmed that the ISO and the British Standards Institution will implement the London Declaration, which commits standards organisations to incorporating key climate considerations in the development of any new standards.  

Following COP26, there is likely to be further pressure on companies to set clear net zero targets, with a robust strategy on how the targets will be achieved. An option for companies to evidence their strategy is to sign up to the SBTi net zero standard. While there is no legal obligation to do so at this stage, there is likely to be increased commercial pressure on companies to ensure their net zero targets are not perceived as greenwashing. This increased commercial pressure may in part explain the surge of sign-ups to the SBTi net zero standard – as of 10 November 2021, over 1,000 companies in 60 countries had committed to science-based emissions reductions in line with the 1.5°C climate ambition.

Carbon offsetting

Progress was also made at COP26 in relation to carbon offsetting. The final deal struck provided important detail as to how Article 6 of the Paris Agreement will work in practice, including: 

•    The establishment of a new framework for the trading of credits. The framework will be comprised of two parts: a centralised system open to the public and private sectors, and a separate bilateral system allowing countries to trade credits helping them to meet their decarbonisation targets.

•    Agreement on how to avoid double counting of emissions reductions. The country hosting the emissions reduction project will decide whether the emissions reductions will count towards its own target or that of a country they are trading with. This eliminates double counting, and also provides a framework which could be followed in the voluntary carbon markets to ensure appropriate accounting. 

•    Agreement that 5% of the proceeds generated by offset trades will be put into an adaptation fund that will support developing countries in their efforts to adapt to the effects of climate change. 

•    Consensus on the use of Clean Development Mechanism (CDM) credits, established under the Kyoto Protocol, which will enable a limited carryover of CDM credits to be used against Nationally Determined Contributions (NDCs). 

•    The final COP26 deal clarified the required length of the timeframes to be included in parties' NDCs. The effect of the agreement is that all NDCs proposed by parties in 2025, for example, must have an end date of 2035 to be able to see clearly the cumulative result of the combined commitments, and in 2030, the NDCs must have an end date of 2040, and so on.

The Chief Executive of Australia's Carbon Market Institute described Article 6 as "providing a framework to enable the immediate operationalising of global carbon markets". This prediction was reflected in the news that European carbon prices rose to an all-time high of 66 euros per tonne, and a positive impact on carbon markets and private-sector investment appears inevitable. 

While the developments of COP26 will help countries to meet their decarbonisation targets, transparency as to how carbon credits will benefit the climate is also fundamental. There remains concern that the compromise in the rules allowing for the carryover, albeit limited, of old credits created under the Kyoto Protocol's CDM mechanism will muddy the water in relation to the climate benefits of climate credits, with such credits criticised as being of poor quality.

The agreements reached in relation to Article 6 provide companies and states in the voluntary carbon market with a framework they can choose to follow in future transactions. However there are currently no explicit rules which apply to the voluntary carbon market, leaving a degree of uncertainty as to its future development.

Osborne Clarke comment

Matthew Germain, Decarbonisation Stream Lead on Developing Sustainable Infrastructure, commented that: "The new SBTi net-zero standard is welcome news and provides a much needed bar for what companies should aim for in reaching net-zero. Without this net-zero can mean whatever a company wants it to mean and that's unhelpful for stakeholders such as consumers, customers and investors.

The agreements on Article 6 add helpful clarity and at last bring some shape, stability and structure to the carbon market. If the expected resulting surge in trading in the global carbon markets follows, then we may see some sense of a true carbon price. What is still badly lacking though is some clarity on the voluntary market." 

This Insight was produced with the help of Jonathan Ford, trainee solicitor.