Few climate instruments are as controversial as carbon credit markets: some see them a cost-efficient way to reduce or remove emissions globally and to help the Global South in the bargain, while others see a failure to deliver sufficient climate benefits, as well as inequitable, or even seriously negative, social consequences.

Regardless of their contested track record, carbon credit markets are not going away anytime soon. With carbon markets under Article 6 of the Paris Agreement taking off, more and more countries globally will f ind their way to carbon markets, either as sellers or buyers of credits. Countries and communities in the Global South that have historically not been very active under the Clean Development Mechanism of the Kyoto Protocol, the predecessor to Article 6 carbon markets, or on the voluntary carbon market may enter this space in the hope of securing some financing for their mitigation efforts.

But if we want to understand whether this hope is warranted or not, the role of carbon markets demands a profoundly critical examination of the theoretical arguments set against evidence from the real world. Let us start with the argument that carbon markets can deliver cost-efficient emission reductions. In theory, this idea makes sense. When your goal is to lower global emissions, then for the planet, it will not matter much where you achieve those reductions, even though air pollution does have localised effects on local temperature and public health.

A carbon credit is meant to represent the reduction or removal of a tonne of CO2 equivalent. In many cases, this credit is used to offset, or justify, continued emissions on behalf of the buyer, typically a highly polluting company in the Global North. And this is where it gets tricky. The assumed equivalence, in practice, is hard if not impossible to guarantee. It requires a mindboggling amount of rules and obligations for a credit to truly represent a measurable tonne of carbon that is permanently reduced or removed, and that would not have happened without the sale of that credit. A peer-reviewed systematic assessment of one-fifth of all carbon credits issued to date, published in Nature Communications, underscored this difficulty: only 16% of analysed credits were found likely to have accurately reported their climate impact.

What is more, the market is not exactly designed in a way that the quality of carbon credits is the top priority of market players – quite the opposite. Participants in the market are motivated to create as many credits as possible at the lowest price possible, which often results in a skirting of exactly the requirements that underpin a credit’s transferability. This was recently underscored by an editorial published in Science on auditors, which are supposed to independently verify carbon credit outcomes but have a strong perverse incentive to appease project developers.

Who pays and who benefits?

On the potential for carbon credits to deliver climate finance to the Global South, history offers a sobering lesson. If we look at what carbon markets have delivered to date, evidence suggests that these systems frequently fail to deliver promised benefits to developing nations and can even exacerbate existing inequalities. This is compounded by the opaqueness of the market, where intermediaries, such as traders and brokers, can hike up the price of a credit to such an extent that the amount received by the project developer or community at the project site is only a fraction of the price paid by the end buyer. Moreover, there is a glaring lack of evidence that benefit-sharing arrangements with local communities involved in carbon credit projects are even in place.

It is also important to recall that buyers of carbon credits are rarely altruistic. The payment is not a donation without any strings attached. Most buyers are expecting a return on their investment, that is, the delivery of inexpensive carbon credits to offset substantial carbon footprints or to market polluting products as carbon neutral. In addition, delivering the underlying mitigation involves resources – often scarce land or labour – and incurs hidden costs in developing countries, where most projects are located, since project owners and local communities must conduct long-term monitoring for years or even decades to come. For these reasons and others, the UN body specialised in the economic interests of developing countries, UN Trade and Development, also concluded in its most recent least-developed countries report that carbon markets do not constitute or replace climate finance.

If we take a step back, we can see that the premise of carbon markets also sidesteps the crucial concept of historic responsibility. The use of carbon markets allows nations with a significant legacy of emissions to purchase credits and potentially defer their own deep decarbonisation efforts, thereby avoiding their greater liability for the climate crisis. Carbon markets place the onus for climate mitigation on the Global South: the valuable land there is dedicated to achieving emission reductions to offset ongoing emissions in rich countries, effectively allowing continued pollution rather than fostering fundamental systemic change.

For wealthy countries with a large carbon footprint, domestic efforts will no doubt incur high costs, but if we want not only a green but also a fair and equitable future, they are unavoidable, and even more costly, in the long run.

Realpolitik

Despite these fundamental flaws, we cannot forget the reality we acknowledged at the beginning: carbon markets are here, and they are not going away. While we could demand a moratorium, it might be more fruitful to focus our efforts on damage control, as well as on critical but constructive engagement with the reality we find ourselves in. We not only have the opportunity but also the responsibility to demand a more equitable approach to carbon markets that delivers genuine and fair climate action. Concretely, the following asks are an important starting point for this.

First, robust rules that are upheld and independently verified, including conservative quantification and strong environmental and social safeguards, must be part of every carbon market framework.

Second, there must be elements to ensure that generating credits is not the only outcome of carbon market projects. There also needs to be fair benefit-sharing with the host country and local communities, delivering tangible co-benefits, including “mitigation sharing”, through which the climate benefits of carbon market projects contribute only to the mitigation efforts of the host country without offsetting someone else’s ongoing pollution.

Third, upholding free, prior and informed consent for any project involving community land or resources is vital. Indigenous peoples and local communities, as stewards of the land, should be given the opportunity to not only consent to projects but to take the lead and own the projects themselves. It is crucial to acknowledge that while these elements are indeed needed, they are unlikely to be enough. Even with robust protections, the fundamental design and implications of carbon markets can still pose challenges to achieving true climate justice for the Global South.

This is why, beyond well-needed adjustments, we also need to continue challenging the underlying structural issues and power imbalances upon which carbon markets are built. The global climate crisis demands urgent action, and the path forward – with or without carbon markets – must be rooted in justice and equity.

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This article first appeared in the Institute for Strategic and International Studies Malaysia’s Focus magazine.