global perspectives

Carbon markets are at a critical moment. That should be exciting.

01 June 2023 / WORDS BY Phil Cohn

The first stock markets were – depending on the source you prefer – either in Belgium or the Netherlands, but by the year 1600 a stock market was taking shape in London. Trading took place in busy coffee shops, amid the general hubbub of daily life and with few rules to ensure anything like what we might view with today’s eyes as integrity or transparency. 

Those markets, and others like them, have had hundreds of years to develop rules and standards (and can still occasionally fall prey to those who wish to distort or act unethically). Carbon markets are far younger – around 25 years or so at most – but we don’t have centuries, or even decades, for the machinery and infrastructure around them to mature. 

We need it now. 

As we race to net zero, such markets will be pivotal in helping nations, economies and companies decarbonise. Securing finance for much-needed emissions reduction and removal activities, particularly those that preserve and restore nature, can be challenging. Carbon markets provide a crucial means to finance these activities for several reasons: 

Carbon credits are the most viable way we’ve been able to develop to date to facilitate private sector investment in Nature Based Solutions (NBS) at scale. 

Carbon markets are a way to finance activities that would not attract capital through any other means, which is particularly important for funding climate change solutions in developing economies where domestic compliance markets don’t exist or the cost of finance is high. 

Cooperative action enabled by carbon markets may provide a more economically efficient pathway to net zero than if each individual actor (country, company, facility etc) sought to reduce their emissions independently. 

Offsetting using carbon credits enables emitters to take responsibility – now, not in 2040 or 2050 – for their pollution while they take other steps to transition to net zero. How such offsets are used is a policy matter, but they must be directed towards an overall genuine reduction in global levels of emissions. 

Just(ly) do it 

Whether it is rainforests, mangroves, sea grass beds or other at-risk ecosystems, large amounts of the natural capital that needs preserving and restoring exists in developing nations across the world. That means it is vital that the nature-based solutions required for this part of the net zero challenge must work in and for those nations and their people.  To scale the impact of carbon markets effectively, but also to do it justly and ethically, benefits must be equitably shared with the countries and communities where carbon projects are located. 

For centuries, global capitalism has engaged with developing nations, indigenous peoples and local communities using a logic of extraction – accessing and relocating resources at will. If we want to decarbonise globally that can’t continue. Success will only be possible if capital is able to find its way to the places where it can have greatest impact. That means we must have a global system that incentivises host nations, and local communities, as well as international investors – allowing all who participate to do so with full confidence and transparency. 

A critical moment 

Right now, we are seeing a critical moment play out, all around the world. For more than two decades, first movers and early adopters have built the carbon markets we see now, seeking to speed ahead and accelerate emissions reduction in response to the urgent need to transition towards net zero. 

The result has been an arc bending from a myriad of different carbon markets (in which it was sometimes hard to get a sense of which credits were moving where and which ones had more integrity) towards a globally connected and mature market where all credits are tracked, valued appropriately, and reported transparently. We aren’t completely there yet, but we are getting much closer. 

Past market participants have sometimes been operating in the absence of clearly agreed national and international frameworks or have found themselves forging ahead while the infrastructure to support a healthily functioning market was simultaneously conceived and built around them. 

Both tasks are necessary, and both must happen in tandem. The rate of decarbonisation required means we cannot hit pause while we spend years crafting a theoretically pure market. 

What we are now seeing, though, is an acceleration of the market build-out, as nations and investors grapple with how to create impactful projects, generate meaningful credits and trade them transparently in ways that benefit local communities, host countries, investors and the global decarbonisation effort in general. 

From Zimbabwe to Indonesia and many places in between, these questions are playing out in real time. 

Where we are at 

There’s been plenty of attention on recent developments in Zimbabwe, where the world’s 12th largest producer of carbon credits has halted projects already underway within its borders and announced those creating and exporting credits in future must give over half of all revenue from these sales to the national government. 

That announcement has sent shockwaves through the industry and come as unwelcome news for proponents of the 30 or so projects already underway in that nation. 

Zimbabwe’s decision reflects one that many developed and developing nations are grappling with: not just whether to put in place rules around capturing value unearthed by carbon projects within their borders but also where to set the levels so that returns are optimised, and international investment is not deterred. 

In Indonesia, home to 20 % of the world’s rainforests, a related but different process has been playing out. The Indonesian Government has been working hard to create the nation’s first carbon market and has been debating whether such a market should function only domestically or should feature credits that can be exported. 

All of this activity is in line with what’s foreseen within the Paris Agreement. Article 6 of the Agreement makes clear that in order to maximise their decarbonising potential, carbon markets need some additional scaffolding and mechanisms and that national governments will need to make their own decisions about how they participate and benefit. 

Article 6 makes clear that authorisation should be necessary from national governments before carbon credits generated in country can be expatriated and sold on the international market, where companies, organisations or other governments can use them to offset their own emissions. 

It also makes clear that mechanisms for doing this will need to act against ‘double counting’ – meaning nations granting authorisation to export credits will need to make a ‘Corresponding Adjustment’ to their own reporting under the nationally determined contributions agreed under the Paris Agreement. 

Essentially, this means that if carbon emissions are reduced via a project in one country and the resulting carbon credit is sold overseas, it cannot be counted towards the emissions reduction targets of the originating nation. 

Indonesia has opted for a hybrid solution where some credits generated will count towards its NDC, some will be retained for sale to Indonesian companies who need to pursue their own decarbonisation targets, and some will be available for sale in international markets. The introduction of a local Carbon Exchange is also expected to facilitate the implementation of Corresponding Adjustments and further ensure transparency in trading. 

Convulsive but exciting 

It’s easy to look at these new developments and see nothing but risk for project developers. The Zimbabwe experience shows certainty can be an illusion for those pursuing and funding carbon projects and can quickly evaporate. 

But it’s also possible to see this current phase – however convulsive it may be for some – as both necessary and ultimately positive. As more nations declare their hand on benefit sharing, certainty for investors can only increase. Those operating in the absence of clearly delineated agreements at the moment are the ones taking a risk, whether they are clear-eyed about it or not. 

Companies worldwide have set ambitious net zero targets that will require some purchasing of credits and offsetting to be reached. Such companies guard their reputations jealously and will prize carbon credits that are unimpeachable from an integrity and transparency point of view. Being able to charge a premium for a premium product will allow host countries and communities to move past the old extractive model to one based on owning or sharing projects and choosing how revenues are distributed. 

Each nation will need to make its own determinations when balancing the different ways they can engage with carbon markets. In some circumstances nations will want to count emissions reductions towards their NDC in order to reach their own declared targets. In other cases, attracting outside investment can be leveraged for domestic businesses who need greater optionality in how they decarbonise themselves. In yet other cases governments will be happy to see credits exported and take a part of the revenues to invest in decarbonisation efforts more broadly, while understanding they may also benefit from job and infrastructure benefits created by projects, and from having depleted natural assets restored and critical ecosystems conserved. 

Zimbabwe, Indonesia and other countries have every right to benefit from carbon credit projects on their territory but ultimately the question for them will be what level of value sharing they should attempt to recoup. If Zimbabwe sets its share at 50 per cent and neighbouring nations set theirs lower, then investment will move accordingly, especially if projects become uninvestable because the return is too low. In time, as more nations declare their regulatory settings, the shape of the market will become clearer, just as it did for the Clean Development Mechanism under the Kyoto Protocol 

How these mechanisms will work is still emerging but is doing so rapidly. An early indication emerged recently in Pakistan where the Delta Blue Carbon project – the world’s largest mangrove restoration initiative – was granted a landmark authorisation by the national government. 

Like other nations, Pakistan is still grappling with how to design a system that allows it to meet its own nationally determined contributions while also creating conditions that attract international investment by allowing resulting credits to be sold outside its borders. 

In the absence of such a scheme, Delta Blue Carbon – a public private partnership established years earlier when carbon markets were hugely uncertain – sought and obtained an authorisation from the Pakistani Government. Under this authorisation, the project — a public-private partnership between the Government of Sindh and a development team including Indus Delta Capital and Pollination — will be able to sell credits from the mangrove project’s two phases overseas until 2043. A corresponding adjustment will be made to Pakistan’s NDC so that double counting is avoided and purchasers of the credits will have unencumbered rights to on-sell or retire them. 

For Pakistan, the benefits are clear. The project, which has been conducted under high-level probity screens and standards, will create more than 20,000 local green jobs across its life span and will contribute much-needed local infrastructure such as health care centres, refurbishment of local schools, training opportunities and fisheries management.  A significant proportion from the sale of credits will be returned to the Government of Sindh to be reinvested in future climate resilience projects. And beyond all of that, a stunningly beautiful piece of the nation’s natural capital will be restored and improved providing a source of economic security for fisheries dependent coastal communities on the Delta. 

At the moment, Delta Blue Carbon stands out as an exemplar of what’s possible when care is taken to create a project with high standards of integrity and transparency, where benefits are justly shared, partnership is genuine and everybody wins. The changes we are seeing across different locations worldwide suggest, though, that the arc of carbon markets in bending faster than ever towards an outcome where this kind of project is the norm and not the exception. Given the size of the decarbonisation challenge ahead, that can’t come fast enough. 


Phil Cohn is Executive Director and Head of Carbon Investments at Pollination and is a lead advisor on the Delta Blue Carbon project. 



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