COP29 shows the shortfalls of multilateral negotiations on climate, but it still unlocked some opportunities for businesses to drive progress
COP29’s headline achievement – the new target agreed for international climate finance –has been criticised as too little, too late by many developing countries, and the negotiations were beleaguered by rifts, some stoked by petrostate lobbying, and flawed management by the Azerbaijani hosts. The efficacy of multilateral decision-making forums has been called into question, and coupled with an incoming Trump presidency that will likely pull the US out of the Paris Agreement, there is more need than ever for ‘real economy’ actors in the private sector to deliver progress.
While the outcomes of the formal negotiations at COP29 were not as ambitious as needed, they do still hold some opportunities for businesses in the transition to a Net Zero economy. Notably, the long-awaited operationalisation of the global carbon credits market should spur immediate action, and the pathway created on climate finance and some new national emissions reduction targets should do more to illuminate the direction of travel, allowing businesses to plan ahead with greater confidence.
Agreement on carbon markets could deliver new financial flows for businesses in the Global South
COP29 kicked off with the agreement of new rules for the UN global carbon credits market or ‘Paris Agreement Crediting Mechanism’. Under Article 6.4 of the Paris Agreement, countries and companies can now begin trading UN-approved carbon credits representing emissions reductions or removals. For businesses, the operationalisation of Article 6.4 could mean a potentially significant new private sector funding stream for climate action projects – estimated to reach $1 trillion by 2050.
The Supervisory Body governing Article 6 will follow a workplan in 2025 to approve methodologies for identifying creditable activities under the mechanism. These methodologies must address concerns such as additionality and leakage – to ensure a project has high climate integrity. Project developers can then use these methodologies and apply for UN accreditation, enabling them to create an additional revenue source through the sale of credits. This form of finance is still results-based, so won’t provide upfront capital to a project, but could help support project development finance. It’s been a ten year wait for the Paris Agreement Crediting Mechanism to be agreed, in which time the voluntary market has continued to scale, and considerable measures have been undertaken to improve the integrity of voluntary credits. The agreement will hopefully expand opportunities for project developers and corporate buyers to access the market with greater confidence, opening up new financial flows for businesses engaging in creditable activities.
The benefit is likely to be felt most strongly in the Global South, where finance is desperately needed for mitigation projects that otherwise wouldn’t get off the ground. To enable these finance flows, methodologies will need to consider how to prove that carbon finance is ‘additional’. This has been particularly challenging for renewables projects, as carbon credits are a results-based form of finance which can’t support upfront project costs and initial project viability, making additionality difficult to prove. To help resolve this challenge, the Integrity Council for the Voluntary Carbon Market (ICVCM) is now reviewing methodological options to enable carbon finance to flow to these activities.
Another key area of opportunity for the Global South is nature-based solutions, which are vital for enabling relatively inexpensive carbon removals but are challenged by effective baseline setting and monitoring. Technological solutions for monitoring are improving the credibility of a range of nature-based solutions, but the challenge remains for the crediting price to effectively cover the project monitoring cost and benefit the project development. The amount of finance that actually gets to the project developer, given the range of intermediary players, is largely unknown. Understanding this is important to ensure the carbon finance is flowing to the right places and achieving maximum impact.
Article 6.4 agreement also presents a further expansion of options for businesses looking to purchase carbon credits. Confidence in the voluntary carbon market (VCM) has been rocked in recent years and a number of integrity standards have emerged to try and bring confidence back. The Paris Agreement Crediting Mechanism will sit alongside the variety of initiatives in the voluntary market, and could prove challenging to navigate for corporates, given there are differences. For example, the rules agreed under Article 6.4, particularly for carbon removals, are not as robust as the integrity rules governing the voluntary carbon market. Integrity rules should be aligned across the market to support businesses to ensure consistently high levels of quality and climate integrity investment.
An underwhelming new finance goal could place more pressure on the private sector to fund the global Net Zero transition
Unlike the talks on Article 6, the task of developing a new climate finance target, or Newly Quantified Collective Goal, had negotiators running into overtime on the final day of the conference. Developed countries ultimately agreed to a goal of ‘at least’ $300bn per year by 2035, a step up from the previous target of $100bn but $1tn less than many developing countries say they need to mitigate and adapt to climate change.
Developing countries hoped for reassurance that a defined proportion of this money would be provided in the form of public, grant-based funding. Instead, the $300bn will include grants and loans from public, private and multilateral sources. Developed countries agreed to ‘take the lead’ on delivering the $300bn, but for the first time, contributions from wealthy developing countries like China will also be allowed to officially count as climate finance.
As well as the core $300bn goal, the text of the deal reached in Baku recognises the need to close the gap to $1.3tn, but crucially puts the onus of all actors (not just developed countries) to find and mobilise funds from all public and private sources in order to do so. Over the next year, the ‘Baku to Belém Roadmap to $1.3tn’ aims to provide much-needed clarity on how this gap will be closed. Two principles must form part of that roadmap. Firstly, to crowd-in private finance, it’s vital that the limited amount of public climate finance available is used efficiently to de-risk key projects and sectors. There’s also a need for greater capacity and climate awareness within national financial systems so local financial institutions can play a stronger role in providing financing solutions.
A smaller pot of funding than hoped from developed countries and multilateral development banks makes private sources of finance all the more important. All options are on the table; a Taskforce for Global Solidarity Levies set up at COP28 is exploring a number of avenues relevant to businesses, including taxes for high-emitting sectors like aviation and shipping, reduced fossil fuel subsidies and a tax on financial transactions.
After two weeks of fraught negotiations – involving developed countries refusing to discuss figures, Least Developed Countries (LDCs) and Island States walking out of the negotiations, and ministers being brought in to address the stalemate – there was relief that the last-minute agreement at least prevented the multilateral talks from total collapse. That said, businesses in developing countries are unlikely to feel the benefit straight away. Many developing countries were calling for the higher climate finance provisions to start as soon as 2025. However, with the US expected to exit the Paris Agreement and pull all climate finance from next year, developed countries landed a more conservative commitment to provide the step up in funding by 2035.
‘Watch this space’ on how national ambition on mitigation will affect sectors
Another source of modest progress at COP29 was on national climate targets. Businesses can expect greater clarity from February 2025, the deadline for submitting Nationally Determined Contributions (NDCs) for 2035, but some countries took a leading role by submitting NDCs at COP29, namely the UK, UAE, and Brazil. Brazil’s NDC gives an indication of the strong level of ambition the host country is likely to push for at next year’s COP30. It commits (unconditionally) to an emissions reduction of 59-67% by 2035, based on a 2005 baseline.
Meanwhile, the UK committed in Baku to an 81% reduction by 2035, a steeper reduction than the previous target of 78% by 2035. Businesses will have to wait for further detail on the policies that will enable progress towards NDC targets, but businesses can expect carbon pricing to drive faster sectoral transitions to be a common feature of national climate policies going forward.
There were also several side line commitments in Baku that provide insight into key components of upcoming NDCs: a group of over 30 countries committed to include methane targets and a group of 25 countries said they would include pledges for “no new unabated coal power”.
But beyond this, COP29 did not deliver the hoped-for official guidance on what 2035 NDCs should include. Negotiations on mitigation were tainted from the start due to a fall-out on the scope of negotiations aimed at building on what was achieved at last year’s COP in the United Arab Emirates. At talks in Baku, the final text on the UAE Dialogue was not adopted due to disagreements on including language on the transition away from fossil fuels, which was hard-won in last year’s Global Stocktake negotiations against fierce opposition from wealthy petrostates such as Saudi Arabia.
Greater public-private collaboration is needed to deliver on higher levels of climate ambition
Political ambition on climate remains alive , but world leaders are experiencing what many business leaders have known for some time: the reality of achieving Net Zero is hard. COP29 held firm on the core elements of the Paris Agreement, and finally reached agreement on two mechanisms for much-needed climate finance. Though both are imperfect, they provide a basis to build from and may provide businesses new ways of accessing capital for the activities that will support the transition to a Net Zero economy.
Beyond the tense negotiation rooms in Baku, the private sector remains in pole position to accelerate progress to a more sustainable future and the transition it is delivering is already well underway. Clean electricity already makes up 39% of global supply, solar generation grew 23% in 2023 and wind generation by 10% in the same year. Investment flows towards clean energy projects are now double that of the combined spend on coal, oil, and gas supply. The clean energy transition is clearly unstoppable, and the private sector is driving it.
How to support and scale up that transition, and the private sector’s role in it, needs to remain front and centre of governments’ efforts in the run up to COP30 next year, as they set new NDCs for 2035 and map out how the levels of finance needed will flow to fund it.
