Carbon markets

November 01, 2023

A person walks past a #COP28 sign during The Changemaker Majlis thought leadership
workshop in Abu Dhabi, United Arab Emirates on October 1, 2023. — France 24

The carbon market is a trading system of carbon credits that

allows states, companies, and individuals to buy and sell carbon
credits.

Whereas a carbon credit is a fixed amount of carbon emissions

that a country or organisation should not surpass, it can be
traded if the full allowance is not used or exceeds the limit. The
cap-and-trade mechanism sets a limit on carbon emissions and
allows states, companies, and individuals to sell their extra
carbon credits and buy carbon credits if they exceed the set
limit.

There are two types of carbon markets — compliance and

voluntary. The Compliance Carbon Markets (CCM) are binding
and regulated by some regime or legal instrument placing
obligations on nations, companies and individuals to buy and
sell carbon credits to reduce carbon emissions – for example:
the Paris Agreement, EU Emission Trading System, and Clean
Development Mechanism — are important examples of
International Compliance Carbon Markets. Voluntary Carbon
Markets (VCM) perform on a volunteer basis to buy and sell
carbon credits.

Many companies buy carbon credits from projects like

reforestation, renewable energy etc. The carbon market is a
growing area as there is greater realization to fight climate
change and protect our planet from its disasters. The Taskforce
on Scaling Voluntary Carbon Markets estimates that the market
for carbon credits could be worth upward of $50 billion as soon
as 2030.

There are several advantages of carbon markets. First, they

have become an important mechanism to fight climate change.
Climate change disasters are hitting countries across the globe
in the form of floods, droughts, forest fires, droughts and heat
waves. Due to these disasters, humanity is facing socio-
economic loss in areas like agriculture, health, education, and
gender equality etc. So, these carbon markets are playing an
important role in mitigating and adapting to climate change.

Second, carbon markets are a new and innovative source of

economic benefits, especially for developing countries. Rich and
developed nations buy carbon credits from developing and
underdeveloped nations and utilize them for their industrial
growth.

Carbon markets have provided alternative means to industries

that were under threat of closing due to their carbon emissions
to keep running their businesses. The introduction of new areas
of financial investments in carbon markets has also opened up
new employment opportunities. The economic benefits gained
from carbon markets help nations to spend on socio-economic
development and carbon credits bought by rich nations are
being used to boost their industrial growth. So, it creates a win-
win situation for rich and developing nations both.

Third, states have set their targets to cut carbon emissions with
timelines in their Nationally Determined Contributions (NDCs).
Carbon markets in addition to financial benefits are helping the
nations to fulfil their commitments to reach their net zero
targets submitted in their Nationally Determined Contributions
(NDC).

There are many challenges for carbon markets across the

globe. First of all, the credibility of carbon markets to reduce
carbon emissions is under question. Rich nations buy carbon
credits and use them thus producing the same level of carbon
emissions. So, carbon emission remains in the same quantity in
the atmosphere rather than any actual decrease in emission.

Second, the boosting of the economic growth of developing

countries is also a myth. Every year developing countries face
most of the climate-led disasters. So, any economic benefits
gained from carbon markets are spent on recovery and
rehabilitation efforts. In real terms, the countries most affected
by climate-led disasters do not have any economic benefits
through these carbon markets.

Third, the issue of human rights is also a challenge for carbon

markets. The profits gained from carbon markets are not spent
on indigenous communities or the people most affected by
climate-led disasters. As a result of this indigenous
communities or people affected by climate-led disasters remain
deprived of their rights to get their share from these markets.
Fourth, the future of carbon markets is still unpredictable. Many
developing countries do not have technical and financial
support mechanisms to establish sound carbon markets and
reap their benefits. They do not have experts to quantify the
exact amount of carbon emissions and establish a sustainable
mechanism of carbon trade.

Moreover, companies running the businesses of carbon fuels

are opponents of climate change awareness and adversaries to
any initiates to reduce carbon emissions to safeguard their
economic interests. Many developing and under-developed
countries are witnessing issues of corruption and political
instability that lead to a lack of interest within foreign
companies to indulge in carbon markets of such countries.

Fifth, many countries are naturally blessed with a huge forest

cover that gives them an advantage over other countries to
acquire benefits in carbon trade.

Carbon markets are an important economic area to invest in

since they can help fight climate change, gain economic
benefits, and generate new employment opportunities. On the
other hand, challenges like credibility, lack of expertise, real
long-term impacts on climate change are still to be resolved.

The writer is a graduate of University of Oxford in Public Policy.

She tweets/posts @zilehumma_1