Nathan Brook discusses the use of carbon markets, and the associated pitfalls of the increasingly popular approach to decarbonise industries and nations.

As more countries shift towards ‘Net-Zero’, the terms emissions trading, carbon credits and offset markets seem to be getting thrown around a lot. Such markets, which produced $84 billion in revenue in 2021, have grown with popularity since the 70s, becoming the leading way in which climate change is being addressed globally. But what exactly are carbon markets, how do they work, why do they seem to be failing, and what can be done?

What are carbon markets?

The term carbon market may be misleading, as it describes a variety of different types of trading mechanisms that include all “transactions for the sale of permits, reductions or offsets” of carbon and other GHG emissions.

While there is no universal carbon market, the main types we see today are compliance markets (sometimes called cap-and-trade) and voluntary carbon markets.

Without getting too technical, these markets essentially allow companies to buy, sell or trade either their excess permits (if they have emitted less emissions than their regulatory allowance) or credits produced through ‘offsets’ (i.e., a verifiable activity which reduces, removes or avoids emissions which would have been emitted, such as preventing deforestation).

The currency in these markets is carbon credits. In terms of carbon, one ‘credit’ represents one tonne of carbon dioxide emissions that have been ‘avoided’. However, credits can be calculated as an equivalent amount of another GHG type. For example, methane is seen as 25 times more potent than CO2 in terms of atmospheric damage over 100 years, thus one tonne of methane is equivalent to 25 tonnes of carbon dioxide, or 25 carbon credits.

A carbon credit allows the entity which possesses it to then emit a certain amount. This allows companies to assign a monetary value to the right to pollute, with demand coming from those who want to compensate their carbon footprint to reach sustainability targets, and those aiming to trade credits for profit.

Essentially, the markets aim to make it more expensive to emit carbon, than to not emit it. These ‘crises fixes’ create financial incentive for businesses to become greener, whilst allowing flexibility to slowly adapt to climate policy, all while still growing their businesses and making money.

Commodifying carbon — what’s the issue?

In theory, carbon markets appear as a good compromise to tackle climate change while promoting economic growth, but the reality of these mechanisms is far less optimistic.

Technical procedures to verify the production of a credit are often where systems fall short. The current supply of credits for voluntary markets largely comes from private entities or governments who invest in carbon projects. However, a recent investigation by the Guardian looking into Verra (the world’s largest carbon standard verifier for voluntary markets), found that more than 90% of rainforest offset credits — commonly used by companies — are likely to be “phantom credits” that do not represent genuine carbon reductions.

This means that credits verified by companies like Verra, which has issued more than 1 billion credits and approves over 75% of all voluntary offsets, become essentially worthless in terms of climate change mitigation. The problem is compounded by the fact that the baseline scenarios of forest loss are often overstated by as much as 400%, leading to exaggerated counting of credits to generate more profit for offset buyers and sellers.

“Offsetting is worse than doing nothing. It is without scientific legitimacy, is dangerously misleading and almost certainly contributes to […] global emissions”

Kevin Anderson, Tyndall Centre for Climate Change Research, 2012.

These findings are far from an anomaly, as the lack of accurate standardised methodologies, guidelines, or regulations often mean that companies can avoid the responsibility to effectively reduce emissions, while appearing ‘green’ to consumers and investors. This casts doubt over any international companies using such systems and claiming to be ‘net-zero’ or ‘carbon negative’ to attract sales, which is likely nothing more than greenwashing.

Even if all claims within offset markets are accurate, they still raise ethical questions. Many offset projects are in the global south, where it’s often cheaper to initiate schemes. Investors from rich nations can target poor farmers or back government adoption of industrial forest and land management models, such as monocultures. Consequently, large sections of land become owned and controlled for carbon projects, shifting land rights, access, and livelihoods, resulting in recorded human rights abuses in what has become known as ‘carbon colonialism’.

Carbon markets often disconnect emissions from the social, ecological and economic contexts in which GHGs are produced and consumed. Thus, they provide new opportunities to exacerbate systemic inequalities by placing the socio-ecological burden on vulnerable demographics, under the guise of ‘more efficient’ environmental management.

What can be done?

Such downsides mean that if carbon markets continue in their current state, they will likely fail to properly incentivise long-term emissions reductions. Ensuring these markets actually foster structural changes to mitigate climate change and decarbonise industries is vital for them to make an effective, positive impact on the planet.

While some progress is being made towards more universal processes and methodologies to access global carbon markets, the current issues they face must be resolved first.

Carbon markets must increase their transparency and integrity in their governance and financial infrastructures to reduce instances of greenwashing, as well as ensuring there’s sufficient socioecological safeguarding measures to protect vulnerable communities. Additionally, the monetary benefits of carbon trading must be more equitably shared with climate-vulnerable countries, who may not currently possess the capacity to adapt to climate change and build resilience to its effects.

All of this requires intervention and investment from state and international regulators to create new legal frameworks and make sure that monitoring, verification and reporting of carbon credits is accurate. To initiate this shift, officials must ensure that full responsibility and accountability is taken, while also seeing that other forms of radical change do not become side-lined.

As such, carbon markets must not become too disconnected from the climate issue itself. Ensuring that these finance mechanisms engender long-term socio-political change to keep most remaining fossil fuels in the ground and protect communities around the globe must remain paramount.