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TRENDS | October 27, 2023

Clearing the air on the state of carbon markets

Climate & Sustainability

Carbon markets are an essential mechanism for accelerating global decarbonization. This miniseries lays out steps which stakeholders
can take to make the market more robust, transparent, and trustworthy.

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The race to net zero is accelerating by the day, and globally integrated, transparent, and well-managed and efficiently run carbon
markets could provide the much-needed boost to reach the finish line. Yet carbon markets are in flux, despite years of
international negotiations, significant investments, and widespread consensus acknowledging the role they should play in the
global energy transition. With less than a decade to avert the worst impacts from global warming, it’s time to take a fresh look at
how carbon markets can support the transition to a low-carbon economy.

Defining carbon markets

Carbon markets offer a critical bridge to long-term climate solutions. There are now 36 “compliance carbon markets” that offer
cap-and-trade programs for heavy polluters. Together, these markets represent sectors responsible for nearly 20 percent of
global greenhouse gas emissions.1

The voluntary carbon markets (VCMs), where companies and governments can purchase credits, have grown significantly in the
past two years and are currently valued at US$2 billion. By comparison, compliance carbon markets are worth more than
US$850 billion.2

The VCM ecosystem includes project developers, registries, brokers, exchanges, rating agencies, standard-setters, and financial
intermediaries. The sheer number of intermediaries has further exacerbated the fragmentation of voluntary carbon markets,
which has driven their structural and operational issues, including a lack of trust in the credibility of carbon credits, and concerns
about transparency. This has undermined confidence and suppressed demand.

Despite this, a recent analysis found that companies who used carbon credits to neutralize at least 5 percent of their operational
emissions cut emissions twice as quickly as companies that did not purchase carbon credits at all.3
 Benefits of carbon markets
If designed well, carbon markets could spur investments in innovations that can accelerate decarbonization at scale.

Carbon markets can accelerate a more just transition toward sustainability. Since many suppliers are located in developing and
emerging economies, capital tends to flow from North America and Europe into these regions. Last year, almost 98 percent of
carbon offset retirements—which take credits out of circulation once a stakeholder claims the benefit—originated from Asia-
Pacific, Latin America, and Africa.4 In addition, there are also other programs such as the World Bank’s Carbon Initiative for
Development that facilitate the flow of private capital for clean energy access in low-income communities.

In a more ideal scenario, carbon project and transaction data would be visible and transparent across registries or platforms so
participants can track the certifications, ownership, sale, and benefits claimed by carbon credits. Offering that level of
transparency could also hold project developers, brokers, and others accountable to the same standards. Such a system could
also support the development of a consistent definition of “high-quality” carbon credits.

Go Deeper:
Learn more about making carbon markets more robust:

The world needs carbon markets. Here’s how to make them work better, Deloitte Insights / Ricardo Martinez, Val Srinivas, Jill
Gregorie, 2023.

Footnotes:
1. The untapped power of carbon markets in five charts, BloombergNEF, 2022.
2. Ibid.
3. Corporate emission performance and the use of carbon credits, Trove Research, 2023.
4. The past, present, and future of carbon offsets, Harrison, BloombergNEF, 2023.

#Sustainability #ClimateChange

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