Carbon Credits Take Center Stage at COP27, $580B for “Loss & Damage”

As world leaders gather at the COP27 summit in Sharm el Sheikh, Egypt, carbon credits take center stage as well as the push for the ‘loss and damage’ compensation from the largest polluters.

At the same time, the International Monetary Fund (IMF) chief says a $75/ton carbon price is a must by 2030.

As the latest climate change conference is happening this week, concerns about tackling the catastrophic effects of global warming have never been more urgent during COP27.

And as nations meet to address climate change, the U.S. aims to reassert its global leadership by working on a plan to develop a new framework for carbon credits.

Another critical question on the agenda is whether rich nations will pay for climate-related losses and damage.

U.S.’ New Framework for Carbon Credits

The U.S. plans to pool money from the world’s largest companies to help developing countries stop using fossil fuels. This would be under a new framework for carbon credits which proceeds will fund new clean energy projects.

Under this plan, state bodies can earn carbon credits by reducing their power sector’s emissions if they cut their use of fossil fuels and increase renewable energy use instead.

There will be an independent, accreditation body, which remains unspecified yet, that will certify the credits. Entities can then buy those credits to offset their emissions.

The scheme is considered a power-sector version of the so-called Lowering Emissions by Accelerating Forest Finance (LEAF) venture launched at last year’s COP26. Big corporations will back up the plan such as Nestlé, Amazon, and BCG. The credits will be from avoiding deforestation in countries like Brazil and Indonesia.

US president Joe Biden’s climate envoy John Kerry is to unveil this plan at the COP27 where over 110 heads of state are present.

Though it’s voluntary, the scheme will give the biggest polluters a means to address their footprint, according to Kerry. And so, it can entice participation from the private sector.

U.S. officials hope the plan will unlock ‘tens of billions’ of cash to fund the energy transition and said they would ensure the environmental integrity of the carbon credits.

Apart from the U.S., other world leaders are also racing to fund the shift to clean energy and reduce developing countries’ reliance on fossil fuels.

For instance, Mike Bloomberg, a billionaire special U.N. envoy on climate change, revealed a new initiative to help developing countries phase out coal by 2040.

Meanwhile, environmental activists at COP27 are calling for a “fossil fuel nonproliferation treaty.” They’re asking governments to promise an end to all new oil, gas, and coal projects. But such a “treaty” to end fossil fuel use is not on the agenda at the conference.

But there’s another big issue on COP27’s agenda for the first time – compensation for the “loss and damage”. That will be paid by the world’s largest polluters to the most climate vulnerable nations.

COP27 Agenda: “Loss and Damage”

Loss and damage refer to the concept wherein rich countries, who emit the most greenhouse gasses, should pay poorer nations that suffer the most from climate disasters.

Loss refers to economic impacts that are harder to quantify. For example, lost agricultural production due to extreme drought or rising sea levels flooding fields.

Damage, which means the destruction of homes, roads, bridges, and other infrastructures, is easier to calculate.

The funding needed to compensate for the loss and damage varies.

According to a study, it’s worth up to $580 billion annually by 2030, increasing to $1.7 trillion by 2050. The money differs from the funds to help poor nations adapt to climate change.

Asking for loss and damage compensation is not new. It was first championed by nations in the Pacific Ocean and then embraced by other developing countries. And real losses and damages keep on piling up.

Then came record flooding in Pakistan last month, which the World Bank estimated to incur economic losses worth $30 billion.

At this year’s COP27, “funding arrangements” for loss and damage were part of the formal agenda that overcame long-standing objections from the U.S. and the E.U.

The biggest debate at the summit will be over whether to create a dedicated financial mechanism for loss and damage. Or clarity on whether funds might come from new or existing sources.

While this agenda is a hot topic, talk about carbon pricing is also on the sidelines of the COP27 discussion.

IMF Managing Director Kristalina Georgieva said:

“Unless we price carbon predictably on a trajectory that gets us at least to [a] $75 average price per ton of carbon in 2030, we simply don’t create the incentive for businesses and consumers to shift…”

The problem is that the acceptance of pricing carbon is still low in many countries, as per Georgieva. The EU may already price carbon above that level, but other regions like California have much lower carbon prices under $30/ton. While some regions don’t even price pollution at all.

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