Carbon Markets: A Climate Solution or a Power Imbalance?
The next time a forest in Africa, or a solar project in South Asia, is marketed as a “global climate solution”, ask a basic question: who actually sets the price of that solution? The actual determining control is not the location where the forest exists.
Carbon markets are expanding in size, scope and complexity around the world under the United Nations Framework Convention on Climate Change (UNFCCC) and Paris Agreement to create a neat bargain, emissions reduced in the Global South (in emerging markets) with financing provided both from public and private entities in the Global North. It seems like a promising idea but, in reality, will be very misleading.
A market shaped far from where emissions are reduced. Carbon markets do not redistribute power, they are not designed to shift economic power, gaining control, resources, or decision-making authority. They are a reflection of the existing global inequalities, embodiment of power relations between countries.
The global voluntary market for carbon credits is relatively small around $ 1-2 billion in size (as of October 2024) and is growing rapidly. What matters more than its size is its structure, and its trajectory and ultimate impact will be defined by the way it operates. The overwhelming majority of demand for carbon credits is concentrated in developed countries. Historically, buyers located in Europe have accounted for the largest share of voluntary carbon credit demand. However, recent trends show that North America now constitutes the majority of global voluntary carbon credits market approximately one-third of total demand. As the vast majority of demand comes from private companies, which largely reside in the U.S. and Europe, and they therefore control the vast majority of the carbon credit market. Large corporations such as Microsoft, Shell, and Google, are not just buyers of carbon credits; they are buyers who determine market prices. Thus, the price of carbon credits is determined by the purchasing decisions of large companies, including the determining factors of which projects will be funded with carbon credit sales (i.e., methodology), and ultimately, what the value of a ton of carbon will be.
Carbon credits are generated in more than 80 different countries, the vast majority of which are located in Africa, Latin America, and Southeast Asia. For example, carbon credits are generated for forest conservation in Brazil, for clean cook stoves in Africa, and for renewable energy in South Asia. The reporting requirements governing these processes will create a market structure that determines how carbon credits are created (via project implementation) and how they will be sold (through the execution of transactions).
As we see this great imbalance; the Global South creates value, while the Global North prices that value and uses it. This repetition is a fundamental pattern of older global systems, where raw resources are taken from one location and the actual value of what has been created is taken to another regime of governance. There is power not only via money but also through rules. Buyers shape what they want, and the standards they create then define what that will look like in reality. Certified carbon credits exist based on the fact that they have been certified. The certification bodies of the most commonly used standards (i.e., Verra and Gold Standard) are located in Washington D.C. and Geneva respectively, and set forth who creates a legitimate reduction in their CO2 emissions, what counts to get certified, what does not, and how it is ultimately certified. This is not simply a technical detail, this is also an example of epistemological power.
Verification adds another layer. Projects located in developing countries would have to be validated by third parties (DNV, TÜV SÜD), if there is no third-party validation then no credit can be issued or sold. Even registries, which track credits, are often managed or hosted in countries other than where the credits come from. This means that the system is structured such that standards are created in the Golbal North, validation happens in the Global North, demand comes from the Global North, while the Global South primarily supplies the raw materials needed to produce carbon-related products. Is the North benefitting from participation or dependence of the South? Proponents of carbon markets say that they provide critically needed investment in developing countries; this is a true statement, but it is only part of the truth. The important question is not just about the amount of money that comes from the North to the South, but also about the amount of value that remains in the South.
It is being repeatedly seen that from carbon offset projects, local communities usually receive a small portion of total revenues from these projects even though they generate considerable revenue when awarded with carbon credits. Some projects have received carbon credits for reducing carbon dioxide (CO2) that was actually overstated by the project or never had been an actual reduction, so-called “phantom credits.” This is more than a technical failure; it is a failure of governance. The chances of this occurring are increased when countries enter into these markets without having strong Monitoring, Reporting, and Verification (MRV) systems; clearly defined legal frameworks for carbon ownership; skilled negotiators and regulatory authorities to oversee negotiations. This leads to dependence of parties to rely heavily upon external consultant experts, as well as foreign verification and international intermediary-type organisations. A system that is evolving, but not yet equitable. As increasingly developed and evolving carbon markets are being created in developing countries, so is the geography of carbon markets.
China has created the biggest emissions trading scheme in the world, and the Gulf states are investing heavily in carbon finance. Places like Singapore are creating themselves as global hubs for trade. Developing nations are taking more control of their emissions programs as well. The Paris Agreement allows nations to allow or limit the buying and selling of carbon credits, and countries such as Indonesia and Brazil are creating stricter national policies. Yet these changes do not change the asymmetry at the base of the system; they only reallocate the asymmetry. For example, Ghana has created an emerging carbon market and established a national carbon registry; however, the platform for linking Ghanaian carbon credits to the rest of the world is under the control of external trade platforms and processes. Hence, while the project is local, the market is not. The pattern is consistent: the entry is local; the control is through the network.
The true risk is becoming involved too soon and under poor conditions. The greatest danger of entering carbon marketplace is not being excluded, but being included before the opportunity exists to be prepared. Countries who enter without adequate resources run the risk of undermining their carbon asset value by locking in at lower pricing; allowing outside developers or other intermediaries to control the carbon resources; and entering into long-term contracts that are tough to change from. These are not possibilities, but have happened many times in the natural resource marketplace as a result of entering into agreements too soon prior to have had enough time to develop a reasonable knowledge level; and resulting from having done this, had large competitive disadvantages compared to the other parties with whom they were negotiating. Carbon markets, with their potential positive impact on our environment will have similar dynamics and experiences as seen in natural resource markets as noted above, from a carbon pricing standpoint.
So What must change? Rejecting carbon markets completely is a mistake because they can be used as a way to mobilize private climate finance and may be one of the only tools to provide significant large amounts of private climate finance. But embracing them blindly would be worse. The way forward must be strategic, not passive engagement with carbon markets, building domestic capacity prior to increasing participation; promoting sovereignty over carbon assets; prioritizing value over volume; investing in developing indigenous ecosystem of carbon consultants, verifiers, and other relevant institutions to retain more value domestically. Lastly, we need to coordinate with other countries in the region. When countries band together and create an agenda, use collective bargaining and develop standardized methods and protocols for carbon markets, then collectively they can help to balance the still heavily weighted carbon marketplace toward those that created the markets.
Carbon markets are often framed as a test of global cooperation. In reality, they are a test of governance. They have the potential to either replicate the inequities of historical economic systems or to help correct such inequities. The difference will not be decided in international negotiations alone. It will be determined by how countries choose to engage: as passive suppliers of low-cost offsets, or as strategic actors shaping the terms of exchange. Thus, the message to policymakers in the Global South is that they should be careful to not rush to sell to the market until they fully understand the value of what they have.
