Market forces |
Jeremy Wilcox is managing director of the Energy Partnership, an independent Thailand-based energy and environment consulting firm 8/27 Sukhumvit Soi 8, Klongtoey, Bangkok 10110, Thailand | T: +66 2 653 1263 | Mobile: +66 860993375 | S: energypartnership
Sustainable development is advanced through the implementation of carbon markets
The ultimate objective of the United Nations Framework Convention on Climate Change (UNFCCC) and its decision-making body the UN Conference of the Parties (COP) is to stabilise greenhouse gas concentrations in the atmosphere. But global emissions have not been reduced in the three decades since the inaugural COP 1, and overall, emissions are still rising, though the rate of increase has slowed in some areas. And the world is also currently off track to meet its climate targets, with some projections showing the 1.5°C global warming threshold being breached as early as 2029. Where there has been success in reducing emissions, it has been via carbon pricing. According to the World Bank, there are 80 carbon pricing instruments in more than 50 countries with these instruments, which include both emissions trading systems and carbon taxes, covering 28% of global greenhouse gas (GHG) emissions. Since its establishment 20 years ago, the EU Emissions Trading System has reduced emissions in the covered sectors by 50% compared to 2005 levels and has generated over €250 billion in auction revenue. EU Member States have used this revenue to fund climate and energy initiatives, such as renewable energy, energy efficiency and low-emission transport. Given the success of the EU ETS the European Commission has been pushing for a coalition on compliance carbon markets with a declaration being reached at November’s COP 30 in Brazil. Over the past decade governments have also been working to launch a UN-backed global carbon market, with the rules finally agreed at last year’s COP 29 climate summit on a centralised UN trading system where countries and companies can buy CO2
emissions credits representing
emissions reductions in poorer countries. The idea behind the UN market is to let richer nations and companies count these emissions cuts towards their climate goals, and at the same time channel funding into CO2
-cutting projects in
developing nations. It is seen as a replacement for the Clean Development Mechanism (CDM) from the Kyoto Protocol. The new scheme aims to be more transparent and effective, ensuring that carbon credits are credible and valuable. While the new UN-supervised global carbon market will be better than the former CDM by correcting past failings, this will be contingent on the effectiveness of new rules. The new
The main failure of the CDM was … [that] many projects would likely have happened even without carbon market funding.
UN market aims for stronger climate benefits, more sustainable development, and greater transparency than the CDM.
The main failure of the CDM was its inability to produce high-quality, additional carbon credits, meaning many projects would likely have happened even without carbon market funding. The new global market is expected to produce actionable, high-integrity opportunities for financial institutions and global decarbonisation, with the UN overseeing the new market to ensure a transparent, standardised framework for carbon credit trading that aims to address skepticism around voluntary carbon markets after reports found some projects provided little climate benefit. And unlike the CDM, the new market has mechanisms to manage over– and undersupply and stabilise prices. The new mechanism is also designed to channel financial resources to low- carbon projects, particularly in developing nations, with an emphasis on aligning with national climate targets and ensuring community benefits. Yet there is a risk that with the new market allowing certain CDM projects and their credits to transition, this could potentially undermine the new mechanism’s effectiveness if low-integrity credits are included.
Unlike the UN approach for a global offset market, the coalition on compliance markets aims to enhance the recognition of carbon pricing and market mechanisms as key tools to advance
climate action globally and implement national climate plans. The EU wants to encourage other countries to launch their own domestic compliance carbon markets and support the establishment of the open coalition. Compliance markets are more effective for reducing emissions than offsets because they set legal limits on a company’s emissions that ensures a direct reduction. While carbon credits can be a useful tool for offsetting emissions, relying too heavily on them without first trying to reduce internal emissions can delay necessary investments in cleaner technologies. The effectiveness of carbon credits depends on the quality of the underlying project, and some may not be effective in fighting climate change. Also, unlike the UN carbon market the European Commission does not envisage a single, global carbon compliance market but seeks a world where numerous, high-integrity carbon markets operate and potentially link up, rather than a single, centrally managed global market. Although a global carbon market remains the theoretical ideal due to its potential for maximum economic efficiency by allowing emissions reductions to occur wherever they are cheapest, enhancing market liquidity to help stabilise carbon prices, and reducing the risk of carbon leakage, achieving global consensus would be a major roadblock due to differing national priorities, economic development levels, and concerns about fairness between developed and developing nations.
If the risk of the global warming threshold being breached as early as 2029 is to be mitigated, both the UN carbon market and the European Commission’s push for a coalition of compliance markets need to be successful. For all the failures of the past three decades of COP, where squabbling over funding has repeatedly hindered collective climate action, the one overriding success has been that of carbon pricing and trading.
Unlike the UN approach for a global offset
market, the [EC’s proposed] coalition on compliance markets aims to enhance the recognition of carbon pricing and market mechanisms
12 | November/December 2025 |
www.modernpowersystems.com
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