Fast reading
- Carbon market rulebook should bolster confidence among investors and project developers, including companies formulating credible offsetting strategies.
- Blended finance approach crucial for opening up commercial decarbonisation pathways for companies and investors operating outside advanced developed nations.
- Muted response to the Global Stocktake exacerbates uncertainty over the shape and pace of the energy transition.
Given the breakthroughs made at Dubai’s COP28, expectations were lower for COP29 in Baku. Negotiators nonetheless lived up to the Finance COP label and agreed a new climate finance goal and a long-awaited framework for the UN-backed international carbon market. But efforts to respond to COP28’s Global Stocktake, which called for firmer policies on transitioning away from fossil fuels, were shelved for 2025.
Can carbon markets support a just transition?
Convening in Azerbaijan, governments declared an early victory on day one of the summit, announcing completion of an international carbon market rulebook nine years after it was first debated. [1] This will enable countries to trade emissions globally through the purchase of “high integrity” carbon credits, [2] predominantly sourced from nature-based projects in developing countries.
Such investments in nature and carbon sequestration can bring economic and adaptation co-benefits for those countries most exposed to the adverse impacts of climate change. These contributions to a just transition include providing incomes in rural areas and to indigenous peoples, as well as restoring biodiversity. This can promote the resilience of real estate, agriculture, and livelihoods to physical climate risks.
Similar international financing mechanisms – biodiversity credits – were also discussed at the UN biodiversity summit in October. This consensus demonstrates the feasibility of achieving international agreement on innovative financing for natural capital. The rulebook should also bolster confidence among carbon market investors and project developers, including companies formulating credible offsetting strategies.
Willingness to pay: averting global climate risks
The key test for COP29 negotiators was to agree a new collective quantified goal on climate finance (NCQG). Last updated in 2009, developed nations only achieved the agreed US$100bn per annum goal for developing nations in 2022. This was despite relentless calls from developing nations for more funding to tackle the escalating impacts of climate adaptation, and the difficulties faced when decarbonising an economy that is still industrialising.
While COP29’s final text acknowledged early calls for US$1.3tn per annum, this was not agreed despite prolonged negotiations and walk-outs. Instead, the text encourages all parties to enable climate finance to be scaled up to this level. Developed nations will commit to providing $300bn per annum by 2035, which can be achieved by blending public commitments with private finance.[3]
Efforts to meet the new $300bn goal are likely to focus on providing financial loss backstops for otherwise ‘unbankable’ clean energy and adaptation projects in emerging and frontier markets, which are challenging for private investors. We see this blended finance approach as crucial for opening up commercial decarbonisation pathways for companies and investors operating outside advanced developed nations.
This consensus demonstrates the feasibility of achieving international agreement on innovative financing for natural capital.
A stalled transition?
COP28 saw the launch of the first ever Global Stocktake, the UN’s assessment of how well the world is aligning with the goals of the Paris Agreement. Countries responded to this assessment by agreeing to transition away from fossil fuels, an historic moment marked by the UN climate change executive secretary declaring the “beginning of the end” of the fossil fuel era.[4]
But this year, the new era struggled to ignite and identifying next steps for the transition became fiercely contentious. Ultimately, nothing was agreed and negotiators will next convene at Bonn in June 2025, delaying any agreement until COP30. For companies and investors, the muted response to the Global Stocktake exacerbates uncertainty over the shape and pace of the energy transition. It will remain challenging to forecast how fossil fuel volumes will evolve.
Eyes on COP30
All eyes are now firmly on COP30, set to take place in Brazil in November 2025. Before then, countries must update their nationally determined contributions (NDCs) – the national emissions reduction targets last updated at COP26 in Glasgow. The UK kicked this off with its new NDC announced at COP29 – an 81% reduction in emissions by 2035 versus 1990 levels.
The ratcheting up of NDCs is a key mechanism of the COP process, but the Brazilian presidency must also ensure negotiators tackle the Global Stocktake, loss and damage funding, climate finance delivery, and a broad programme of just transition and development work. Hosted at the heart of the Amazon rainforest in Belém, COP30 is also expected to emphasise the role of natural capital, connecting the outcomes of the biodiversity COP16 with global climate goals. We can expect agricultural decarbonisation to feature more strongly.
The Brazilian hosts will almost certainly feel some déjà vu in taking up the mantle, as the COP process originated three decades ago at the 1992 Earth Summit in Rio de Janeiro. Perhaps reflecting on that summit and the achievements of the intervening 33 years will inspire delegates. Despite COP29’s protracted negotiations, the trajectory is clear to investors, and continues to warrant a focus on companies building resilient and competitive business models that are adaptable to the transition.
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1 Article 6.4 is the Paris Agreement Crediting Mechanism and allows countries to identify and execute opportunities for verifiable emissions reductions in other countries, often providing a form of climate finance for developing nations.
2 Carbon credits are instruments designed to account for verified emissions reductions, which can be traded between countries to contribute towards national emissions reduction pledges.
3 New collective quantified goal on climate finance
4 COP28 Agreement Signals “Beginning of the End” of the Fossil Fuel Era | UNFCCC
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