Carbon markets—the mechanisms through which carbon credits derived from carbon reductions or removals can be traded—are viewed as vital to meeting global climate goals. At COP29, this year's UN climate summit, they will be once again be under discussion. Mirabelle Muuls explains why carbon markets matter, why they are so contested and how the new Labour government can play a role in shaping them.
Why are carbon markets so high on the agenda at this year’s COP?
Article 6 of the 2015 landmark Paris agreement on the climate enables countries to collaborate in order to fulfil their Nationally Determined Contributions (NDCs)—the commitment that countries make to reduce emissions—including through the transfer of credits for emissions reductions achieved elsewhere. This allows for global reductions targets to be met efficiently, and it incentivises investment in carbon removals and climate restoration. But the effectiveness of carbon markets depends on ensuring that any reduction by a ton of carbon is only counted as one credit for one single market and that only high-integrity credits are traded.
Why have carbon markets been such a thorny issue at successive COPs?
Regulatory carbon credit systems are present in various geographies, most notably in the European Union. Voluntary carbon credits are also being issued independently at a small scale. But the development of global carbon markets and trade as part of the implementation of the Paris agreement has been slow and contentious. Talks have faced repeated delays and disagreements. At COP28 last year, there was a breakdown in negotiations, highlighting the challenges and risks these markets face. Article 6.4 of the Paris agreement, intended to establish a global crediting mechanism, has become highly politicised. This has undermined the creation of a stable system that investors and companies can depend on.
Reaching a solid agreement at COP29, including the finer regulatory details, is crucial to creating a functional and trustworthy international carbon market.
Can the UK help make carbon markets work?
The UK was at the forefront of the negotiations that led to the establishment in 2005 of the EU Emissions Trading System. While less so recently, the UK was for many years considered a leader in climate policy. This all means that the UK has the potential experience and influence to play a role in shaping high-integrity carbon markets. Britain can promote stringent standards for carbon credits and advocate for transparency and robust regulation, which would help prevent the market abuses that have previously undermined confidence in carbon credits.
Furthermore, Britain’s expertise in the financial sector could help create a strong infrastructure for carbon trading, providing guidance and support to emerging markets. Through its involvement in global initiatives, such as the private-sector-led Taskforce on Scaling Voluntary Carbon Markets, the UK can work to establish common international standards that enhance trust and participation in carbon trading.
However, Britain is not on track to meet its upcoming carbon budgets and NDC targets. The independent Climate Change Committee (CCC) has highlighted gaps in policy implementation and the sectors where progress is lagging. To play an important role in shaping carbon trading rules, Britain needs to be seen as a leader in climate policy.
How can we stop companies from using carbon credits to avoid reducing their own emissions?
Companies might be keen to cut emissions for various reasons, such as meeting their customers’, investors’ or employees’ preferences. It might, in some cases, even make economic sense. But it is more likely to be a response to public policy. Governments can use different tools to incentivise companies, such as creating national carbon markets, taxing emissions or providing subsidies for clean energy investment and innovation.
Including voluntary carbon credits as one of the ways in which a company can meet such objectives is risky, however. Firms could pay for other companies who might not be regulated in line with the Paris targets to reduce emissions, rather than taking the necessary steps to limit their own carbon footprint. To avoid this, governments can choose to strongly limit the proportion and type of international carbon credits that can be considered valid within a national policy, or to only accept them when a certain threshold of reductions has been achieved in-house. This is a way of ensuring that credits are high-integrity and correspond to real carbon reductions. It also helps make sure credits are not double-counted. Say that a farmer in Brazil plants trees on his plot of land. Brazil’s government could count this towards reaching its national emission reduction targets. But if that farmer then sells to a company a voluntary carbon credit reflecting the carbon-reducing impact of the trees, it would also be counted towards the firm’s targets.
Are we likely to see the UK Emissions Trading Scheme (UK ETS) apply to more industries?
The UK government and the CCC have discussed the potential expansion of Britain’s trading scheme. The EU has put in place a second carbon market, EU ETS2, that is expanding the continent’s emissions-trading system to more sectors, such as maritime shipping, construction and road transport. This is part of Europe’s efforts to meet “Fit for 55”, the EU’s legislative package aimed at achieving a 55 per cent reduction in emissions by 2030. This puts pressure on the UK to follow a similar path with its own UK ETS.
In the EU and the UK several obstacles remain before the systems can include agriculture. Measuring emissions accurately across diverse farming practices is complex, but further advances in carbon accounting and measurement could bring progress. The potential economic impact on farmers is a challenge, as is the importance of food security. So far the EU has opted to encourage decarbonisation of the sector through other policies instead.
Could carbon credit trading impede development in countries with offsetting projects?
The correct pricing of carbon credits is key to ensuring that carbon markets do not impede development. Many of the countries in the Global South, where many carbon offsetting projects are located, have a large comparative advantage in potential sources of carbon removal and abatement. This can lead to investment at large scale into growth-enhancing initiatives, such as renewable energy generation or other infrastructure projects.
Carbon credits can also lead to the transfer of funds—for example, for reforestation projects, where payments are not only needed to plant trees but also to remove cattle from the land and incentivise farmers to invest in other economic activities. This is why carbon credits are often seen as a potential tool to promote decarbonisation and sustainable development concurrently.
How can we safeguard against ineffective offsetting projects?
Voluntary carbon markets have suffered a serious reputation problem. In 2023 the volume of credits traded on the voluntary carbon market decreased significantly, as did their value. Corporate buyers have been put off by scandals. Some project developers claimed credits for protecting forests that were not at risk of being cut down, for instance.
To safeguard against ineffective carbon offsetting, several key measures are required. Governments, companies and other organisations should adhere to high-integrity standards and undergo independent third-party verification to ensure credibility. Projects must report transparently and prove additionality, meaning that they must show that emissions reductions would not occur without the funding. Long-term monitoring is needed to ensure ongoing impact and decarbonisation. Governments can also set standards and enforce compliance, ensuring accountability.
Involving local communities and favouring projects that have mutual social and economic benefits will improve public trust and sustainability, too. Stringent standards, verification, community involvement and government oversight can help ensure that carbon offsets deliver.
