Opportunities and Challenges in Carbon Markets

LEARNING OBJECTIVE:

• The project developer should be able to summarize the challenges and opportunities of carbon markets.

Strengths

• Market-based mechanism — compatible with market economy provides cost-effective opportunities to mitigate climate change.

• It can unlock finance at scale (insert data point)

• 25+ years of experience

Opportunities

• Economic players generally more favorable to market mechanisms than taxes.

• Revenue from taxes is available to generate projects that mitigate climate change.

• Increased awareness and public support for climate policies & carbon pricing.

• Digital technologies can improve efficiency and transparency cost-effectively and help manage the growing complexity of a disaggregated market accounting post-2020 markets under the Paris Agreement (Climate Warehouse).

Limitations

• Can be complex to implement (e.g., setting caps or baseline is complex).

• If poorly designed can have no impact or negative consequences (e.g., EU ETS oversupply).

• Requires a high enough carbon price to be effective (estimated “2030 carbon price corridor” between US $61 to $122 per tCOe2).

Challenges

• Increased public scrutiny. For instance, a recent journalistic report refers to “phantom” credits generated from forest protection projects with questionable methodologies. https://www.theguardian.com/environment/2023/jan/18/revealed-forest-carbon-offsets-biggest-provider-worthless-verra-aoe

• Some civil society organizations are opposed to the use of market mechanisms to tackle climate change (insert link).

• Scarcity of accredited validators and verifiers to process Project applications limits growth in the market.

• Restrictions on credit issuance by certain countries.

• Current carbon prices are below ideal conditions to promote mitigation over offsetting.

An important challenge to address is the carbon price point:

Less than 5% of global GHG emissions are covered by a direct carbon price at the recommended range for 2030!

Why is this important?

If the price of offsetting is lower than the price of taking direct action to mitigate climate change, there is limited incentive to act.

Figure 2.18. Recommended carbon pricing range (Source: State and Trends of Carbon Pricing 2023)

SUMMARY

Central to the premise of carbon crediting is that the projects deliver emission reductions that would not have happened without the financial support provided by the credit buyer. Thus, projects must be:

1. Additional.
2. Emissions reductions are quantified in a robust manner.
3. The risk of “leakage” is address and it will not lead to increase in emissions elsewhere.
4. The risk of “non-permanence” is appropriately addressed.
5. Double counting of emission reductions is avoided.

Finally, the responsibility on this challenges is not distributed equally as we can see in Figure 2.19 where there are countries with a higher carbon emission intensity than others.