Finance, climate action plans and carbon markets: What to expect from COP29

Introduction

Global co-operation to address climate change is organised under the remit of the United Nations Framework Convention on Climate Change, or UNFCCC – one of a small number of global treaties agreed at the Rio Earth Summit in 1992. Every year the Conference of the Parties (COP)^[1] – ie a meeting of the nearly 200 countries that are signed up to the UNFCCC, as well as a range of civil society observers – is held to advance the UNFCCC’s goal to limit the impact of climate change. Led by the host country, generally each COP reaches a consensus on a statement or a binding agreement which is publicly released at the end of the conference. Recent years have seen some significant developments emerge, particularly since the Paris Agreement was negotiated and signed by 196 countries at COP21 in 2016.^[2]  

While other global fora like the G7, G20 and the UN General Assembly might see some agreements being struck on particular areas of climate-relevant collaboration, the UNFCCC talks have the legitimacy and scale to bring together global efforts on climate change. Also, because they allow a voice and a veto to all parties including vulnerable countries, they have seen a number of breakthrough moments where the global ambition for addressing climate change has increased. That said, progress at these international talks can only proceed at a rate that is able to be backed by domestic support and action from all the countries within the talks.

At COP28 in Dubai in 2023, the Parties agreed the UAE Consensus.^[3] This key achievement saw 198 countries agreeing to a landmark deal to start “transitioning away from fossil fuels”, the first time fossil fuels were expressly mentioned in a UNFCCC COP decision. Additionally, countries agreed to fund and operationalise the landmark ‘Loss and Damage Fund’,^[4] designed to support countries dealing with unavoidable climate damage and originally agreed at COP27 in Egypt. And in response to the first Global Stocktake (GST),^[5] a process for assessing countries’ progress against their commitments under the Paris Agreement, countries made a range of commitments including agreeing to triple renewables and double energy efficiency by 2030 and planning to halt deforestation by 2030.

The 29th COP (COP29) is set to be hosted by Azerbaijan in November 2024, and the Azerbaijani Presidency^[6] has a lot on its agenda. The key areas being negotiated are the:

- New Collective Quantified Goal on Climate Finance:^[7] agreeing a new commitment to provide annual climate finance to developing countries, replacing a previous goal of $100 billion per annum set in 2009 and met in 2023.

- Nationally Determined Contributions (NDCs):^[8] encouraging countries to commit to more ambitious and extensive 2035 climate change targets and plans, due to be submitted by February 2025.

- Adaptation: developing more specifics on how countries will deliver on the Global Goal on Adaptation^[9] – ie putting in place measures to cope with and minimise the unavoidable impacts of climate change.

- Article 6: pushing forward thorny discussions around Article 6,^[10] which covers climate action co-operation both between countries and with and between non-state actors like business. This includes discussions on potential carbon market structure.

In an increasingly turbulent geopolitical context, reaching consensus will be more challenging than ever. This is exacerbated by the continued growth in populist and nationalist politics. There is also concern that the outcome of the United States (US) election just one week before COP29 kicks off could be a decisive factor for COP29 outcomes and have implications for the international climate regime more broadly^[11] and the future of US climate finance funding.^[12] US Presidential candidate Donald Trump previously withdrew the US from the Paris Agreement in 2020 when he was then President, and if he is re-elected in November, he is said to want to exit the Paris Agreement again and prevent the US from re-entry.^[13]

In this context of growing political debate internationally alongside ever-rising temperatures, this year’s COP will be more important than ever for bridging these divides and getting the world back on track for 1.5°C. The UNFCCC COP is central to tackling climate change as the only forum which brings together all countries in the world to discuss and collaborate on climate action.

The private sector is key to the implementation of the outcomes, both on a global and a national level. Businesses can take on the mantle through corporate climate commitments and investments and by advocating a stronger policy and regulatory environment from governments to enable a just transition. This includes taking action to phase out fossil fuels across their operations and actively advocating more progressive policies, sending a strong demand signal to their value chain to phase out fossil fuels and scale clean solutions faster.^[14] The finance sector also has a key role to play in ensuring private finance is helping deliver collective climate goals.

This briefing sets out what to expect from the negotiations, the topics which will be most important, the elements needed for a successful outcome, and how the private sector can help to push the international climate agenda forward. These insights will be invaluable for businesses planning to engage with COP29, as well as policymakers and those in the environmental space seeking to understand the dynamics at play this year.

Building on COP28

The Azerbaijani Presidency will seek to build on the achievements of COP28 where the major negotiated outcome was the UAE Consensus. This included the political response to the first Global Stocktake (GST), the process which aims to provide a comprehensive assessment of the world’s progress on climate action and an opportunity to ratchet up ambition. The reports produced through the GST process in 2023 found that the world is significantly off track to meet the goals of the Paris Agreement, and that accelerated action by countries was, and still is, urgently needed to combat the growing threats posed by climate change.^[15] Taking this on board, the UAE Consensus recognised the need for rapid and sustained emissions reductions.

The UAE Consensus also called on countries to transition away from fossil fuels.^[16] This marked the first time that fossil fuel reduction has been explicitly mentioned in a UNFCCC COP decision, although it was compromise language, as more than 100 countries had called for the agreement to ‘phase out’ oil, gas and coal use. Other notable outcomes from COP28 included setting a new target for tripling renewables and doubling energy efficiency by 2030, encouraging countries to submit economy-wide NDCs, operationalisation of the Loss and Damage Fund to secure financial help for the countries most affected by climate change, and the delivery of the UAE Framework for Global Climate Resilience to advance adaptation efforts.

As the decision for Azerbaijan to host COP29 was only agreed during the COP28 summit, the UAE also looked ahead to COP30 in 2025, which was already agreed to be hosted by Brazil and by which time countries will need to have submitted updated NDCs. The UAE Presidency committed to working closely with both the COP29’s Azerbaijani Presidency and COP30’s Brazilian Presidency through a ‘Presidencies Troika’, the aim of which is to maintain momentum in support of limiting temperature rise to1.5°C.^[17] This troika could also support Azerbaijan in achieving greater outcomes from COP29. Working with Brazil closely will be key, as in addition to hosting COP30 in late 2025, Brazil is also set to host the G20, where climate change and sustainable development will be on the agenda. The timing of the G20 coincides with COP29, taking place during the second week of it, meaning there is an opportunity, if taken, for the outcomes from one to be mutually reinforcing and amplifying of the other.

What is the state of play on climate finance?

Climate finance is a critical enabler of climate action and is set to be the major theme at COP29. This is because a post-2025 finance goal, known as the ‘new collective quantified goal’ (NCQG), is due to be agreed. Countries signed up to the Paris Agreement decided that the goal should be set “from a floor of $100 billion per year, taking into account the needs and priorities of developing countries”.^[32] The $100 billion figure relates to a pledge agreed in 2009 which was due to be mobilised by 2020, but has only recently been met and is seen by many as too little too late.^[33]

This history of under-delivery makes the Azerbaijani Presidency’s task to build trust between developed and developing countries and secure an NCQG which is higher in both quantity and quality that much harder. Despite these challenges, new analysis from the Organisation for Economic Co-operation and Development (OECD) provides some source of encouragement as they find a total of $115.9 billion was mobilised by developed countries in 2022, marking a significant increase in financing of $26.3 billion or 30 per cent compared to 2021.^[34]

Discussions have been centred around the mobilisation of funds to support developing countries, particularly the most vulnerable, to accelerate climate action. The consortium of thought leaders ‘Allied for Climate Transformation by 2025’ (ACT2025), which aims to elevate the voices of climate-vulnerable countries in UN climate negotiations, has developed a COP29 Call to Action which emphasises that finance is lacking across the board, and that a successful outcome in 2025 and beyond hinges on the finance decisions made at COP29.^[35] The NCQG has the potential to be a dealbreaker for securing more ambitious NDCs by early 2025, as well as delivering on all previous commitments to scale up ambition. However, countries remain at odds over the most fundamental aspects of the goal including how large it should be, what it should cover and over how many years, transparency mechanisms, and of course the elephant in the room – who should pay.^[36] The following sets out the key elements which will need to be addressed in NCQG negotiations at COP29 to achieve a robust post-2025 finance goal.

What are NDCs and why do they matter?

Nationally Determined Contributions (NDCs) effectively operate as a country’s climate action plan, setting out targets for cutting emissions and adapting to climate impacts. All countries which are signatories to the Paris Agreement are required to develop new NDCs on a five-year cycle of increasingly ambitious climate action, known as the ‘ratchet mechanism’.^[53] The next and third round of NDCs is due to be submitted by countries between November 2024 and February 2025, and will present updated targets for 2030 as well as new targets for 2035.

COP29 falls at the start of the submission window. This presents a major opportunity for non-state actors, including businesses, to advocate updated NDCs which raise ambition, put the world on an emissions trajectory in line with the 1.5°C warming limit, and build greater resilience to climate change. It is likely that the most committed countries, such as Azerbaijan and Brazil, will submit their NDCs in November at COP29. If these are ambitious, they could set an example and provide an advocacy opportunity to encourage other countries to demonstrate similarly high levels of commitment. As UNFCCC Executive Secretary Simon Stiell hammered home in March, “This next round of NDCs may be the most important documents to be produced in a multilateral context so far this century”.^[54]

By virtue of being nationally determined by each country’s governments, NDCs are intended to be flexible to the needs and unique contexts of each country. In theory this bottom-up approach means that countries can decide what is achievable and appropriate based on their individual circumstances, but it also means there are no stringent guidelines on what must be included in an NDC and therefore whether they are ambitious enough.

The following are areas commonly covered in NDCs:

- quantitative and qualitative targets to reduce emissions and adapt to climate change 

- a timeline for these targets 

- a set of actions across priority sectors such as energy, transport, agriculture, health, water, infrastructure and more as relevant to the country 

- an estimated budget to achieve these climate goals (noting that many developing countries require external financial support and capacity building).^[55] 

What does an ambitious NDC look like?

Steep emissions reductions

There are several elements to an ambitious NDC. Firstly, it should set a stronger 2030 emissions-reduction target and a 2035 target which is aligned with limiting global warming to 1.5°C and to achieving net zero by 2050. Deep emissions cuts are urgently needed by 2035, with the Intergovernmental Panel on Climate Change’s (IPCC’s) 2023 report indicating that global emissions levels must be slashed by at least 60 per cent relative to 2019 to keep the 1.5°C limit within reach.^[56] This is a collective goal so it is more difficult to say how it can and should be fairly apportioned across different countries, but it is clear that emissions cuts must be steep in the near term as the final reductions from hard-to-abate sectors will be the most challenging to achieve. Major emitters must go much further in their emissions cuts, and developed countries which were the largest emitters historically have a responsibility to make deep emissions reductions while also supporting developing countries, by mobilising finance, trade and technology-sharing, to do the same. Businesses should also support this economy-wide effort by setting credible net zero targets and developing transparent transition plans which include ambitious interim targets.

Timebound targets

Secondly, these targets need to be timebound and broken out at the sectoral level to accelerate the systems change transformations needed. Key high-emitting sectors include the energy system, buildings, transport, food, agriculture and land use. NDCs should commit to phasing out fossil fuels rapidly in the next six years while scaling up renewables, and electrifying buildings, industry and transport. ^[57] By setting sectoral targets, governments will encourage their ministries to integrate them into their strategic planning to enable more effective implementation and will signal the direction of travel to public and private sector investors. A good example is the development of Nepal’s NDC implementation plans for the energy and agriculture sectors which used participatory processes and included representation from national and provincial governments, youth, women’s groups, academia, and of course, the private sector.^[58]

Address adaptation

Thirdly, ambitious and effective NDCs should build countries’ resilience to the irreversible impacts of climate change, working to reinforce tools like National Adaptation Plans. This third round of NDCs comes after the adoption of the first Global Goal on Adaptation and will be important for cementing national priorities in areas such as climate-resilient food production and building resilience to climate-related health impacts. The updated NDCs also provide an opportunity for countries to assess and quantify their loss and damage related vulnerabilities, enabling them to highlight financial costs and capacity development-related needs to respond to the most severe impacts of climate change. The importance of identifying and responding to climate risks will come as no shock to many businesses, whose supply chains and operations are increasingly threatened by the impacts of climate change, and who also stand to benefit from stronger national adaptation planning.^[59]

Investable and implementable

Lastly and above all, NDCs must be investable and therefore deliverable. Financing climate action is one of the main challenges countries have experienced in setting and delivering their NDCs. World Resources Institute (WRI) analysis indicates that current climate finance is insufficient to implement even a subset of NDCs. In August 2023, 91 developing countries estimated that they will need a total of $4.5 trillion to achieve the climate actions in their NDCs, of which $1.6 trillion is needed to deliver ‘conditional’ NDC pledges, vastly exceeding the current $100 billion pledge which is due to be updated at COP29.^[60]

Businesses are also seeking investable NDCs. The UNFCCC Executive Secretary, Simon Stiell, has said, NDCs should “be implementable, unlock finance, kick-start transformative developments, and ensure that no one is left behind”.^[61] Businesses know this and have been increasingly calling for consistency and clarity in climate policy to create certainty to unlock investment finance to deliver on climate action plans.^[62] To deliver this, a whole-of-society approach to NDCs is needed with private sector entities brought on board in order to help develop and fund feasible NDC implementation plans via public–private partnership.^[63]

What does Article 6 cover and why has it been so challenging?

Article 6 of the Paris Agreement enables countries to co-operate in implementing their NDCs, namely by transferring ‘internationally transferable mitigation outcomes’ (ITMOs), ie emissions reductions between countries, as well as supporting other forms of collaboration with non-party stakeholders.^[73]

Under Article 6.2, a country can transfer carbon credits earned from the reduction of greenhouse gas (GHG) emissions to help another actor such as a country or private sector company meet its climate targets. Such co-operative approaches have already been put in place by Switzerland via bilateral agreements with Ghana and Vanuatu.

Article 6.4 establishes a new international carbon crediting mechanism for trading GHG emissions reductions.^[74] The Article 6.4 mechanism has an associated Supervisory Body tasked with developing and supervising the requirements and processes needed to operationalise the mechanism. In theory, this supervisory body would hold actors to account and prevent risks such as double counting emissions reductions, the production of fake emissions reduction credits, and misrepresentation as permanent carbon removal.^[75]

Among Article 6’s provisions is the authority to provide a global rulebook governing carbon markets that include the private sector.^[76] Many stakeholders argue that carbon markets are an important tool for reaching global climate goals by enabling the trade of carbon credits generated by the reduction or removal of GHGs in the atmosphere, but this will only work if they are high-integrity carbon credits.^[77] Failure to deliver this high integrity baseline, alongside scepticism in the underlying logic, has led to a growing critique of voluntary carbon markets and offset schemes in particular.^[78] The Integrity Council for the voluntary carbon market has published a set of Core Carbon Principles to establish a global benchmark for high-integrity carbon credits around governance, emissions impact and sustainable development.^[79]

The whole area of carbon credits, voluntary carbon markets and carbon trading is highly contentious. In the best-case scenario, Article 6 could provide much-needed incentives for countries and non-party stakeholders like businesses to increase their climate ambitions and lower the cost of emissions reductions. In the worst case scenario, the rules could allow the world’s largest emitters to trade unreliable and unverifiable emissions reductions credits which avoid the need to reduce actual emissions at the source, thereby weakening ambition.^[80] The contentiousness of this topic has translated to repeated slow progress and deadlock in this area, and at COP28 there was a breakdown of talks meaning no decisions related to Article 6.2 or Article 6.4 were adopted, sending a poor signal for the future of carbon markets.

The operationalisation of the Article 6.4 carbon crediting mechanism has been delayed, with some viewing it as a significant missed opportunity to implement international carbon markets, as well as the chance to set a high bar on environmental integrity and human rights.^[81] Article 6.4 has become increasingly politicised, undermining the development of a robust crediting mechanism which investors can rely on – which is one reason why voluntary carbon markets are seeing a decline in trading. Companies interested in the potential of trading such credits will need to follow how article 6 negotiations progress and will be keen for clarity on what high-integrity credits should look like.

Summary

Global action is largely off track to keep the original Paris Agreement goal of keeping warming below 1.5°C alive. This COP provides an opportunity to raise ambition that the world cannot afford to miss, even if expectations of what it can deliver are lower than some such summits. Azerbaijan needs to use its Presidency to materially build on what was achieved at COP28 and to prove that even though they are a petrostate, they can be ambitious on climate policy. The outcomes will, no doubt, be influenced by the challenging geopolitical landscape, with so many nations going to the polls this year, but the pressures of climate change will continue to ramp up in all political weathers.

A major indicator that such progress is possible will be the NCQG negotiations and whether they result in a robust post-2025 climate financing goal which responds to the needs of developing countries, enabling stronger action on mitigation, adaptation, and loss and damage. However, the extent to which the negotiations comprehensively address the quantity, quality, timeframes, scope, contributors and transparency of the climate financing remains to be seen.

COP29 will also be the last major international moment to push countries to develop more ambitious NDCs, and the extent to which progress is made here will be telling. It is likely that the most committed countries, such as Azerbaijan and Brazil, will submit their NDCs in November at COP29. If these are ambitious, they could set an example and provide an advocacy opportunity to encourage other countries to demonstrate similarly high levels of commitment.

Finally, the fine print for many work programmes will also need to be ironed out at COP29, namely the specifics of the GGA to ensure progress on adaptation can be measured and countries held accountable; as well as decisions adopted on Article 6 which help to build a robust and well-regulated international carbon market.

The private sector has a key role to play in the outcomes of these negotiations through calling for greater ambition, both in the lead-up to and during the COP. Business can accelerate climate action in the real economy through its own actions and investments, and through advocating a stronger policy and regulatory environment from governments. Campaigns, such as the Fossil to Clean campaign which calls for an accelerated shift from fossil fuels to clean energy, offer a powerful vehicle for private sector impact.

COPs cannot substitute for progress in national policymaking and implementation but they are the primary platform for building international consensus on how to address the ever-worsening climate crisis, and now more than ever, there is no time for a wasted COP.