Carbon markets: What to expect in 2022?

For some years, sustainability has been at the top of the agenda at big world conferences, for nations and organisations. Pandemic aside, which has undoubtably sharpened the focus on addressing climate change, little has been achieved so far, and COP21 to COP26 have marked small progress towards achieving the goals set in the Paris Agreement. This year, as pressures grow, we should expect to see stricter laws exposing ‘greenwashers’, increasing demand for clear disclosure and reporting standards and growth in the carbon credits space.

Stricter regulation is coming!

The surge in carbon prices in the EU – permits to pollute rose to a record in 2020 and traded almost 150% higher in 2021 – if not managed, can undermine the functioning of the carbon emissions allowance market. In the US, Biden is poised to scale up regulatory efforts to cut down on greenhouse gas emissions, such as for power plants, methane limits on existing oil and gas facilities. Last year, the EU Commission also adopted a set of legislative proposals to decarbonise the EU gas market by facilitating the uptake of renewable and low carbon gases – the EU has pledged to decarbonise the energy it consumes to reduce greenhouse gas emissions by at least 55% by 2030 and become climate-neutral by 2050. We can expect to see further integration of regulation expand this year. 

Implementation of mandatory data disclosures 

Nations around the world are finally realising the relevance of implementing mandatory disclosures on climate risks to better monitor and reduce carbon emissions. For example, the US is looking to implement mandatory disclosures on climate risks, with its securities and exchange commission to develop a rule by the end of the year. The UK has also said it will introduce mandatory climate-related financial reporting for the first time. In Asia, the Singapore stock exchange revealed a roadmap for climate-related disclosures to be made compulsory in sustainability reports, and Japanese regulators are considering mandatory climate risk disclosure requirements starting in April. 

The truth is that estimated emissions data are 2.4 times less effective than reported data in identifying the worst carbon emitters, which is why international mandatory and audited carbon emissions data is essential. 

Eyeballs on big corporations

Stricter regulation will force companies to start getting serious about their net-zero goals, exposing corporations that are not delivering on their commitments. Last year, research revealed that a fifth of the 2000 largest publicly-listed companies in the world have committed to a net-zero strategy, however, many of those either do not count emissions produced by their supply chains or depend on weak strategies to offset their carbon emissions. 

Additionally, the COP26 deal left the door open for private companies to offset their emissions beyond the realm of the Paris Agreement. As discussed in our previous post, while COP26 gave greater clarity around Nationally Determined Contributions (NDCs), it did little to improve the voluntary carbon market. This means, for example, a US company investing in green projects (i.e. planting trees) in Chile, could claim the credits towards reducing its corporate emissions while Chile could also count the reduction towards its national target. 

The UN backed non-profit Science Based Targets initiative (SBTi) is working on only accrediting companies that have serious carbon-mitigation plans, to abolish greenwashers. This will require companies to collect a comprehensive inventory of their direct emissions (scope 1), indirect emissions from purchased electricity (scope 2) and emissions from suppliers and end users (scope 3). Most companies will need deep decarbonisation of 90-95% to reach net-zero under the standards of the SBTi. 

Expansion of carbon credits 

There has been enormous growth in demand for carbon credits in the past year, with consumers holding multinational corporations to account and greater scrutiny of and by stakeholders. This demand is projected to grow exponentially, bringing greater liquidity to the voluntary carbon market and enabling green projects to receive the financing they need to get off the ground. Over the previous year, verified carbon credits have also become an emerging investment area for companies as well as investors who are looking to help solve climate change while also achieving long-term returns, and we foresee this trend growing in 2022. 

The Taskforce on Scaling Voluntary Carbon Markets, led by Mark Carney, has established an independent governance body that is now finalising the Core Carbon Principles, meant to set a global benchmark for carbon credit quality. We predict that in the coming year, not only will demand for carbon offset credits grow, but the infrastructure enabling project verification and trading of high-quality credits will also improve. 

We at CTX, for example, have developed the Carbon Neutrality Token (CNT) to improve the reliability that a token is actually representing a real carbon credit that hasn’t been double counted. Over the coming year, we will continue to develop products that bolster the carbon offset market, building trust with our clients and having a real positive impact on the environment. 

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