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New IEA analysis shows that global energy-related CO2 emissions increased by 1.1% in 2023, reaching a new record level of 37.4 billion tonnes. Understanding the drivers behind this emissions growth provides insights into the progress of the energy transition.

Carbon markets come in many forms, the main distinction being between compliance and voluntary markets. Compliance markets are set up by regulatory bodies who control the number of carbon emissions allowed by issuing a limited number of emission allowances (the cap) and allow for trading of these allowances. Voluntary carbon markets involve the trading of carbon credits which are issued for emissions that have been avoided, reduced or removed. Parties can buy carbon credits to offset their own residual emissions.

The potential of voluntary carbon markets has yet to be fully realised. According to Oxford University researchers, the majority of carbon credits are for avoided emissions, and these are often over-credited or it is difficult to prove that they have had an impact beyond what would have happened anyway. In a roundtable organised by NautaDutilh we discussed the evolving carbon markets. Here are the three key takeaways from the discussion.

#1 Regulation can enhance the effectiveness of voluntary carbon markets
The voluntary carbon market is key to facilitating carbon emission reductions beyond regulated sectors, delivering environmental benefits and enabling companies in non-regulated sectors to offset emissions. Introducing regulation to improve transparency, carbon credit reliability and market efficiency could significantly increase the effectiveness of voluntary carbon markets. This in turn could increase the confidence among banks and other project financiers, encouraging them to invest in environmentally beneficial projects and to offer financial products linked to voluntary carbon markets.

#2 The future impact of the Carbon Border Adjustment Mechanism on the dynamics of the EU energy market remains a subject of speculation
The Carbon Border Adjustment Mechanism (CBAM) is the EU's tool to put a fair price on the carbon emitted during the production of carbon-intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries. Introduced in 2023, the CBAM is currently in its first phase of implementation, with full implementation scheduled for 2026. Its future impact, both on emission reduction and on the EU and global markets, remains a subject of speculation. For example, expected issues in the EU-UK energy market include the risk of imported emissions being overstated and practical obstacles such as how to prove that a carbon price has been paid in the UK. The mechanism is expected to have a significant impact on the wider EU energy market dynamics, in particular due to its nature as both a regulatory and a market-driven mechanism. Stakeholders are therefore closely monitoring its development.

#3 Carbon insetting: a viable alternative to the offsetting approach
The voluntary carbon market works through offsetting a company's own emissions by preventing, reducing or eliminating emissions elsewhere. Insetting offers an alternative approach to carbon footprint reduction by focusing on improvements within a company’s supply chain rather than external offsetting. The World Economic Forum has characterised carbon insetting as “doing more good rather than doing less bad within a value chain.” As voluntary carbon market expert Jos Cozijnsen pointed out in het presentation, this approach emphasises corporate responsibility and promotes sustainable production practices. Insetting can also have financial benefits, as a reduced carbon footprint can prevent the triggering of local carbon taxes and make green financing more accessible. By committing to insetting rather than offsetting, companies can directly address and reduce their environmental impact, leading to more sustainable business operations and contributing positively to global climate goals.

  • Let’s catch up

    Carbon markets - both compliance and voluntary markets - are here to stay and can play an important role in achieving a net zero world. We help our clients understand and comply with the changing regulatory landscape and keep abreast of global trends.

    Are you interested in learning more about the regulatory developments and the latest trends in carbon markets or, more broadly, sustainable business and climate change? Our multidisciplinary Sustainable Business & Climate Change team looks forward to sharing insights with you.

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