The successive COPs [Conferences of the Parties of the United Nations Climate Change Conference] since Paris have established some common ground around climate targets, namely that net zero needs to be achieved by 2050, and that emissions must peak by 2030 to contain temperatures below 1.5°C above pre- industrial levels. LUMA SAQQAF explores.
According to Net Zero Tracker, today 88% of global emissions are under a net-zero pledge by 2050. These targets can only be reduced by companies reducing their own emissions as much as they can. However, it is increasingly being recognized that decarbonization efforts alone are not enough to get us where we need to be at the speed required.
The high-level roundtable titled ‘Unlocking high-integrity carbon markets’ at COP28 [28th Conference of the Parties of the United Nations Climate Change Conference] attended by key parties such as UNFCCC, the World Bank and GFANZ has therefore touted voluntary carbon markets (VCM) as “a critical tool in corporate net-zero journeys” and as part of financing a just transition, through the transfer of finance to the global south. In the words of the World Bank, by “assigning a financial value to carbon reduction and removal, carbon markets encourage private sector engagement in projects that might otherwise struggle to secure funding, especially without a clear price signal”.
In addition, VCMs create new sources of revenue and financing to climate projects that would not otherwise get off the ground. These projects tend to also achieve additional benefits such as biodiversity protection, pollution prevention, public health improvements and job creation. Carbon credits also support investment into the innovation required to lower the cost of emerging climate technologies.
Nevertheless, carbon market development is still not sufficiently mature and is fraught with challenges. Perhaps the most important of which is integrity as well as eliminating potential greenwashing. This concern is relevant to every part of the market: the supply side (project integrity) and the demand side (offsets by companies) as well as the trading and regulatory side (registration and title transfer).
On the buyer’s side, there is an amount of skepticism around the use of credits in decarbonization. Some question whether companies will indeed seek to actively reduce their own emissions if they have the option to offset emissions instead, especially if the price of carbon credits sold remains low.
Emerging challenges
The market recognizes these challenges and more is being done about them. Both the Voluntary Carbon Markets Integrity Initiative and Integrity Council for the Voluntary Carbon Market global initiatives have been working on advancing market acceptable rules for the integrity of carbon credits as well as rules around what companies can claim in relation to offsetting as part of their net-zero plans: when, how and to what extent.
Other challenges relate to the readiness of the markets and regulations generally to address policy and regulatory risks. For example, will policies include carbon pricing that may encourage faster decarbonization? Will countries impose carbon taxes? And will these be permitted to be offset against voluntary credits?
For project countries, policies relating to those challenges faced by private investors will be needed. Governments will need to start defining and regulating their carbon assets. They will need to decide whether to include restrictions on the export of carbon credits, carbon rights and potential new taxes on carbon project development.
One other issue is the certainty around the legal nature of carbon credits: how will they be regulated by the project country and the country of the buyer? How will registration and transfer of title rules across jurisdictions be managed? Overall, many new rules and regulations are required to enable the functioning of this market.
Shariah compliant carbon credits
In a previous article, I highlighted the strong link between sustainability and Shariah, and the fact that addressing climate challenges is within the ultimate purpose of Shariah (Maqasid). Carbon credits as a tool to achieve global climate goals are expected to also fall within Maqasid. We have already seen Fatwas authorizing using carbon credits to offset own emissions such as the case of the International Islamic Trade Finance Corporation.
While carbon credits conceptually may pass the negative screening of Shariah as well as the Maqasid and ultimate aim of Shariah, a few issues remain relevant, starting with some of the aforementioned issues especially around integrity and the legal nature of carbon credits that Shariah needs to be comfortable with. Another related issue would be the contractual elements in accordance with Shariah contract law. For example, in a sale contract, would ‘avoided’ emissions be treated as identified or identifiable and would they therefore be accepted to be the subject of a contract?
With carbon markets being driven in the MENA region by the UAE and Saudi Arabia which are also prominent Islamic finance market leaders, we are witnessing many discussions around the development of Shariah compliant carbon-related products.
It therefore remains to be seen to what extent the market will develop the understanding and tools to enable the use of carbon credits in transactions, other than just offsetting against own emissions.
Luma Saqqaf is CEO of Ajyal Sustainability Consulting. She can be contacted at [email protected].