COP27 and the Energy Transition: a Deal on Carbon Offset Trading Remains Elusive

Egyptian Environment Minister Yasmine Fouad welcomed the world to the 27th UN Conference of Parties of the Framework Convention on Climate Change (COP27) by touting, "The solution to climate change lies within our Earth, within our minds and within our capacities, so let's come together to take tangible steps to prepare and respond to the greatest threat to humanity." Fouad, a bright light amid the darker elements of Egyptian President Abdel Fattah El-Sisi's autocratic administration, set a pragmatic tone for the climate summit and placed green hydrogen at the center of the summit's discussion over the energy transition.

Over the past year, Horizon Client Access has tracked the surging attention paid to green hydrogen among policymakers and stakeholders. In September, the IEA claimed that "Hydrogen and hydrogen-derived fuels can contribute to both climate ambitions and energy security if they are produced cleanly and deployed wisely in sectors such as heavy industry and long-distance transport where they can cut emissions and replace fossil fuels." Months before, in India, the Adani Group signed a multibillion-dollar deal with TotalEnergies for the latter to buy a 25% stake in Adani New Industries, which plans to invest more than $50bn in developing green hydrogen projects through 2032. Adani Industries is trying to turn itself into the world's biggest integrated producer of hydrogen. In the second half of 2021, Brazil, Egypt and Saudi Arabia also announced efforts to produce green hydrogen. Industry analysts have pinpointed Brazil as having the potential to become a significant exporter of green hydrogen by 2030. President-elect Luiz Inacio Lula da Silva has embraced the energy transition and could nominate outgoing Senator Jean Paul Prates, who has introduced legislation to regulate sustainable hydrogen, as the next CEO of Petrobras.

Although green hydrogen has been on the minds of investors and policymakers, the COP27 delegates have failed to work out the details of a global carbon offset certificate trading scheme that could advance Article 6 of the Paris Agreement - meaning one that would allow national governments to obtain offsets to fulfill their National Determined Contributions (NDCs) to reduce greenhouse gas emissions. Many companies have begun voluntary efforts to obtain such offset certificates to advance their net-zero strategies, while several developing countries have introduced carbon emission reduction offset programs to achieve their NDCs. For example, after the Paris Agreement, Brazil implemented the RenovaBio program in the transportation sector; it requires fuel distributors and importers to cancel out the carbon emissions linked to their fuel sales through offset certificates, called CBios, that are earned by biofuel producers and sold through the B3 stock market in Sao Paulo. Brasilia wants to enact a national multi-sector carbon offset scheme, but many policymakers are waiting for COP27 to shed some light on the future of carbon emission offset trading.

In Sharm El-Sheikh, government delegations have decided to delay a deal on Article 6 until next year's COP28 in Dubai. The burning controversy over which types of projects could earn emission offset certificates, especially in the agriculture and forestry sectors, continues to block an agreement. Meanwhile, the US government has presented a new initiative, called the energy transition accelerator, to provide private investment to developing countries' clean energy projects through voluntary carbon emission reduction certificates. According to US Special Presidential Envoy for Climate John Kerry, the plan counts on the support of the Rockefeller Foundation and the Bezos Earth Fund but would not include fossil fuel companies. The US government has historically advocated for carbon emission offset trading but has failed to broker a deal on Article 6 in Sharm El-Sheikh amid criticism from those who argue that such trading schemes fall short of the needed emission reductions. Moreover, most governments are focused on getting energy prices under control in 2022, distracting them from reaching an agreement on globally traded carbon offsets but framing the upcoming G20 discussions in Bali, Indonesia.

While COP27 could disappoint, there are several takeaways that shine a light on the near-term challenges and opportunities.

First, the intersection of energy security and the transition favors greater pragmatism and cooperation between policymakers and investors. For example, Europe’s gas crunch has strengthened efforts to diversify away from Russia, offering new opportunities for gas producers in the eastern Mediterranean and Caspian Sea plays, while also deepening domestic support for accelerating the transition with locally generated renewable energy. Investors will need to re-examine the emerging scenario because it promises as many risks as it does opportunities.

Second, the energy security and transition roundabout will increasingly impact geopolitics, daring China, the EU and the US – among others – to deepen the discussion over collective energy security as an element of global peace and prosperity. The upcoming G20 talks will reveal whether there is appetite among the rival blocs, but there is potential that global leaders could frame an agreement on Article 6 and a global offset trading scheme ahead of COP28 in Dubai. The challenge is whether such efforts could convince Saudi Arabia and the UAE to play ball.

Most will remember Sharm El-Sheikh for its disappointments but it could also serve as a watershed, convincing the major global powers that more needs to be done to confront the swirling challenges of energy security and climate change. Regardless of COP27’s outcomes, Horizon will continue to help clients understand the new energy plays, including green hydrogen, the struggle for energy security and the politics of the transition across a broad range of emerging market economies.

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Since 2003, Horizon Client Access has been a trusted partner to global investors in emerging market countries. We provide actionable insights and intelligence on the political, investment and social environments with a focus on the stakeholders who shape policy and impact foreign investors.

Mark S. Langevin, Ph.D. is a senior advisor to Horizon Client Access