Post-COP27, Carbon Markets Turn Focus to Pricing

The race to carbon neutrality faced headwinds in 2022, including uncertain progress at the U.N. climate talks. However, corporations are keen to press ahead with a variety of tools to get the job done, such as embracing the voluntary carbon offset market.

A positive backdrop for business in the coming year will be the persistent evolution of benchmark prices in those carbon markets, providing investors transparency and reference prices, similar to the way benchmarks have evolved in everything from gold to grains.

Companies may well rely on these emerging reference prices as they are under pressure from consumers and governments to meet their climate commitments. They will have to shrug off the lack of breakthroughs at the COP27 meeting that wrapped up after marathon talks in November.

“With the conclusion of COP27 in Sharm El-Sheik, Egypt, we are reminded that while the annual U.N. climate gathering is a predictable event—the path to net zero is anything but,” McKinsey & Company, a consulting company, said in a blog post.

Business leaders at the meeting signaled they will move ahead on their climate commitments, despite the current challenges in the global economy. “While there is ongoing debate about whether enough is achieved at COP, private sector leaders showed up with a mindset of ‘let’s get it done,’ even if precise measurements and outcomes are not yet exactly clear,” according to the McKinsey post.

Delegates faced a broad agenda at the COP 27 climate meeting, including holding talks on Article 6  of the Paris Climate Accords that deal with how carbon markets will be governed globally. Those talks will continue into 2023, including focusing on how countries and corporations can buy carbon credits to help meet their climate pledges, according to a report from Reuters.

But there was some ground for optimism. "After years of negotiations about whether carbon markets under the Paris Agreement would actually exist, now they are at the stage of actually setting them up," said Jonathan Crook, policy analyst at the non-profit Carbon Market Watch, as quoted by the Reuters report. By the end of the COP meetings, delegates were working with a 60-page document on how international carbon trade might work.

"The texts provide key elements to implement high-integrity carbon markets that can help deliver net zero ambitions for all countries," Dirk Forrister, president of the International Emissions Trading Association, said in a statement.

Industry analysts argue investors will need carbon offset markets, spot and futures, more than ever to gain a window on what it costs to offset a metric ton of carbon. Carbon futures help provide those all-important benchmarks, similar to the way futures set prices on everything from corn to copper.

A carbon offset credit is a transferable instrument certified by independent entities or governments, and each credit represents a reduction of one metric ton of carbon dioxide, or an equivalent greenhouse gas. To be effective, the credits must represent an environmentally sound project that helps to mitigate climate change — such as preserving a forest that was slated to be cleared. After purchasing a credit, a company retires it to claim a reduction in their own greenhouse gas reduction goals.

But the challenge in offsetting is how to price the credits, and that’s where futures markets come in. CME Group launched the GEO futures contract in 2021 with the aim of making it a global benchmark, giving customers a way to manage risk, and helping in price discovery.