Unpacking New Developments In The Carbon Markets

Carbon markets are growing in significance. More and more experts are recognizing the importance of these markets in reaching global climate goals. Although they are widely recognized, this does not mean these markets have been without downturns.

Last year, the voluntary carbon market almost halved—from $1.87 billion to $723 million—primarily due to integrity concerns over genuine emission reduction, according to the World Bank 2024 carbon trends report. Despite that, the market is expected to grow, with one estimate suggesting it will be between $10 billion and $40 billion by 2030.

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The Role of the United Nations and Article 6

A recent United Nations decision—on Article 6 of the Paris Agreement—gives reasons to be even more optimistic about these markets as it offers them a new kind of legitimacy. The decision guides countries on using carbon credits to meet their climate targets and national climate goals under the Paris Agreement. A carbon market is a trading system that allows the sale and purchase of carbon credits. A carbon credit represents the reduction, removal, or avoidance of greenhouse gas emissions. One carbon credit is equal to a ton of greenhouse gas emissions.

A Green Signal to Trade Carbon Credits

Countries can now trade with each other on internationally tradable mitigation outcomes such as carbon credits through cooperative approaches and include them in their climate goals. At the 2024 U.N. Climate Change Conference, there were talks about cooperative approaches and whether they should be defined as unilateral, bilateral, or multilateral arrangements. The U.S. pushed for unilateral approaches, such as between countries and private corporations, while the E.U. backed bilateral agreements between two countries. The outcome does not specify either, allowing countries great flexibility to enter into agreements that suit their circumstances.

Furthermore, under the new rule—Article 6.2—company actions in carbon markets can count towards a country’s climate goal. For instance, businesses can sell their carbon credits internationally. Suppose they receive authorization from the country where these credits are generated. In that case, the buying country can count these credits toward its emission-reduction targets instead of the seller country counting them in its targets. The country authorizing the carbon credit would have to adjust its climate reduction to reflect the corresponding adjustment. Simply put, it’s the plus and minus in the system—plus in one country’s emissions and minus in another to reflect the buying and selling—which helps ensure no double counting of emissions.

The meeting last month clarified rules around whether and to what extent countries should coordinate, for instance, should there be a common kind of sequencing to the authorization with a template, but flexibility was given to countries. Each country must also maintain a dedicated registry to track such carbon trade. These registries will help manage different stages, such as authorization, transfer, acquisition, cancellation, or transfers. Indonesia, last week, became the latest country to set up an international platform for carbon trading.

New Standards and Central Carbon Market

The new decisions have set guardrails to address double counting and over-estimating emissions from carbon credits, which can improve credibility in the system. Building credibility is particularly important as experts have raised strong concerns from time to time about whether carbon credits can reduce emissions. A study published in Nature last year found that only about 16% of the carbon credits constituted real-world emissions reductions. Their analysis covered one-fifth of the credit volume issued, almost