The first global carbon market could be a gamechanger for the climate, if COP26 can make it work

In a global carbon market, solar farms in one country can generate credits that can be bought by another.
In a global carbon market, solar farms in one country can generate credits that can be bought by another.
Image: Reuters/Carlos Barria/File Photo/File Photo
We may earn a commission from links on this page.

The rules for a new global market for carbon are being negotiated at the COP26 climate summit in Glasgow this week. In theory, they could unlock billions in new funding to accelerate the low-carbon economy. But first, negotiators need to agree on a few highly technical, politically sensitive details left unresolved since 2015—even as independent researchers question the credibility of carbon credits themselves.

“If you have flourishing carbon markets internationally, you can get significant gains in ambition,” said Alex Hanafi, director of multilateral climate strategy at the Environmental Defense Fund. “Countries and companies can do a lot more with carbon markets than they can do without. But they have to be designed well.”

What is a carbon market?

Carbon markets turn emission reductions and removals into tradeable assets. These credits are generated from emission reduction projects (a solar farm or forest conservation easement, for example) or pollution allowances allocated by government cap-and-trade systems. The credits are then sold to buyers, often a private company or government, looking for cost-effective ways to cut emissions or meet a target.

Buying credits, priced per ton of carbon, is often cheaper than attempting to reduce all emissions within a single firm or national border (something that can be virtually impossible). The buyer is then able to count those avoided emissions against its target. Because greenhouse gas pollution is global (it affects the atmosphere equally no matter where it is emitted), the climate benefit is the same no matter where emissions are avoided or removed.

Theoretically, carbon market revenue funds efforts that wouldn’t happen otherwise (a concept known as “additionally”) opening up cheaper ways for countries and companies to lower emissions. Carbon markets of different sizes and flavors already exist around the world, including legally mandated cap-and-trade markets for certain sectors in the US, Europe, and China, and a booming market for voluntary offset credits bought by companies.

But these aren’t perfect. The voluntary market, in particular, is rife with shoddy accounting and outright misrepresentations. Many offsets don’t really correspond to the stated volume of emissions, aren’t permanent, and/or are derived from projects that would have happened even without the carbon market (and thus don’t represent genuine climate action on the part of the buyer). If carbon markets can’t enforce strong accountability and transparency standards, they merely facilitate greenwashing: Companies and countries get the appearance of shrinking their carbon footprint without real emission reductions.

But the 2015 Paris Agreement aims to strengthen the credibility of carbon markets and expand their reach. Negotiators in Glasgow will be filling in missing details of a section known as Article 6, which sets out the basic guidelines for how countries can use global carbon markets to meet their carbon-reduction commitments.

How a global carbon market could work

Article 6 outlines two types of global carbon markets, which exist in parallel. The first already exists; the second can’t get started until negotiators agree on rules for how it will work. But both boil down to the sale of credits generated through emissions-reducing projects to buyers looking to fulfill an emissions-reduction target.

The first market consists of trade deals between governments that agree to buy and sell carbon credits (or allow private entities within one to sell credits to the government of the other). A few already exist: The state of California and two Canadian provinces, for example, share a linked cap-and-trade market. Japan, South Korea, and Switzerland have all purchased offsets derived from projects in other countries, and then counted those toward their domestic decarbonization targets. Such deals are regulated only by the terms the parties agree to and don’t need to be sanctioned by the United Nations. These will likely gather steam in the future regardless of what happens at COP26, but Hanafi said that the adoption of more specific rules for how these deals should ensure credibility would help make them more commonplace, so that each deal doesn’t have to re-invent the wheel.

“It facilitates more of these bilateral approaches if everyone knows the rules of the road,” he said.

The second kind is a true global marketplace regulated by the UN, replacing a smaller carbon market authorized by the 1997 Kyoto Protocol. In this new market, governments or companies would pitch or purchase credits via a UN supervisory board that would effectively act as an exchange, evaluating project proposals and then tracking the sale of credits from them.

Project developers would need their government’s approval to pitch in this market, in case the government would rather retain those credits domestically. And an as-yet-undetermined share of proceeds from those sales would be channeled into a fund that low-income countries could tap to support their climate impact adaptation efforts. To come into being, COP26 negotiators will need to reach an agreement on rules to avoid the double-counting of credits and other sticking points outlined below.

“We can no longer delay our decision on Article 6,” Tosi Mpanu Mpanu, a diplomat from the Democratic Republic of the Congo who chairs the UN committee handling Article 6 negotiations, said in an Oct. 8 memo to negotiators. “There must also be a point at which we collectively stop negotiating Article 6 and start implementing it. I have said before that it has to be at this Conference.”

The biggest beneficiaries of the latter market could be low- to middle-income countries rich in forests or renewable energy potential but without the institutional bandwidth to manage multiple bilateral carbon trading deals. A majority of such countries have indicated in their official Paris Agreement paperwork that they are keen to participate in the global carbon market, said Gilles Dufrasne, a policy officer at Carbon Market Watch, a Brussels-based nonprofit. The only problem: It’s not clear who the buyers will be.

“You can’t make a market if you have many sellers and not many buyers, and right now there are not that many buyers,” said Dufrasne.

The European Union has specifically said that it will not count outside carbon credits toward its net-zero goal. The US hasn’t ruled it out, but hasn’t expressed interest either. If the market gets flooded with credits that no one wants to buy, the price will be driven so low that the market will be useless, Dufrasne said.

Sticking points on carbon markets at COP26

For the market to attract public and private buyers, there has to be consensus among negotiators in Glasgow. A few key sticking points remain:

First, it’s not yet clear how projects would prove “additionality,” the question of whether a given project goes beyond what might happen without the market. Additionality is a major problem in existing voluntary carbon markets: Should a forest conservation project really generate carbon credits if it faces no actual threat of being cut down? Negotiators need to agree on how a selling party should determine baselines for different types of projects.

Second, some negotiators have argued that the market should be structured so that it actively drives down net emissions, rather than merely matching offsets precisely to emissions in the buyer country. This could happen if every trade includes a tax of a few credits that are paid for but not counted toward either country’s emissions target.

Third, negotiators need to prevent double-counting. If both the buying and selling countries could count sold credits toward their own emissions targets, it would delegitimize the market.

Finally, there is the problem of credits from a smaller carbon market piloted under the 1997 Kyoto Protocol. Countries like Brazil, India, and others, want to continue selling those credits. Others argue validation rules were so weak those credits should be tossed.

It’s a lot to manage in the COP’s two-week timeframe—these rules have been repeatedly hashed over in every climate summit since Paris, without reaching a conclusion. But without stringent global rules, a potentially key tool for fighting climate change is left on the table. ”If there was real confidence among constituencies that the markets had real integrity, that they were achieving real reductions, and that they were more transparent, there would be more interest in using them,” Hanafi said.