At COP29 in Baku, carbon credits ignited intense debate from the very start. While Azerbaijan, the host nation, celebrated progress on Article 6, climate justice groups criticised carbon markets for enabling major polluters to continue emitting greenhouse gases.
A carbon credit represents the right to emit one metric tonne of CO2 equivalent or an equivalent amount of other greenhouse gases (GHGs). These credits can be generated through projects that either avoid emissions or sequester carbon from the atmosphere, such as reforestation or renewable energy initiatives.
Indeed, the cross-border carbon markets are not new. The Clean Development Mechanism (CDM), established under the Kyoto Protocol, has been operated since 2004. The CDM allowed developed countries to invest in emission reduction projects in developing nations in order to claim carbon credits to offset emissions generated in their own countries. Therefore, industrial investors and companies in developed nations invested in CDM projects in other countries to meet their own emission targets without disrupting their economic activities.
It must be recalled that Article 6 of the Paris Agreement enhances the CDM, which aims to foster international collaboration to achieve Nationally Determined Contributions (NDCs) — each country’s specific climate action plans to limit global warming. Article 6 introduces two distinct pathways for carbon trading.
Article 6.2 allows two countries to forge bilateral carbon trading agreements tailored to their specific needs. This means that countries can directly negotiate how they will exchange carbon credits, providing flexibility and cooperation based on mutual goals.
Article 6.4 aims to establish a centralised, United Nations-managed system. This system is intended to create a standardised framework where countries and companies can offset their carbon emissions by purchasing and trading verified carbon credits. The UN oversees this process to ensure transparency.
Supporters of the carbon market argue that carbon credits are essential for incentivising companies to reduce emissions and for channelling financial resources to projects in the Global South. They believe a global carbon market enhances efficiency by allowing countries to leverage their unique strengths.
For example, renewable energy projects such as solar farms in countries with abundant natural resources and lower labour costs can generate carbon credits more cheaply than similar projects in high-income nations with limited renewable potential. This results in lower costs per ton of carbon reduced on a global scale.
A report by the International Emissions Trading Association, a Geneva-based think tank, states that the full implementation of Article 6 could reduce the costs associated with meeting NDCs by up to $250 billion (8.7 trillion baht) by 2030. This financial incentive is particularly crucial for developing nations that may struggle to fund their climate initiatives independently.
Opponents argue that carbon markets can perpetuate “carbon colonialism”. Under this premonition, vast lands in the Global South will be used to offset emissions from the Global North, allowing wealthy nations to evade their direct climate responsibilities. A significant concern is the negative impact on human rights, as reported by the UN Special Rapporteur on the Rights of Indigenous Peoples. The current carbon market system lacks adequate human rights and environmental safeguards, making it vulnerable to abuse.
For instance, communities involved in forest conservation projects in Peru, which sell carbon credits, have faced forced evictions and conflicts with local authorities. Similarly, some hydropower projects that sell carbon credits highlight their environmental benefits while ignoring the social impacts, such as displacing local communities and losing traditional ways of life. These cases show that without strict regulations, carbon markets can cause social injustices.
A particularly troubling issue is that some carbon credits may not deliver the promised carbon reduction. One notable example is the forest conservation projects in Kariba, Zimbabwe. Verified by Verra, the world’s largest carbon credit certifier, the Kariba project has sold carbon credits worth hundreds of millions of euros since 2011.
However, the carbon credits sold by this project are based on a questionable estimation model that predicts the deforestation rate if conservation projects were not in place and then claims that the preserved trees can be sold as carbon removal credits. For example, if the model estimates a deforestation rate of 3% per year and assumes that conservation projects reduce this rate to zero, the project can sell carbon credits equivalent to the sequestered carbon from those 3% of forests that have been preserved.
In theory, this approach works in an ideal scenario where long-term deforestation rates can be accurately predicted without conservation projects. In reality, these estimations are prone to overestimation, meaning that the actual emission reductions may be significantly lower than the carbon credits sold in the market.
The Kariba project is not an isolated incident. A recent study published in Nature Communications, a peer-reviewed scientific journal, analysed 65 studies that evaluated the quality of carbon credits across 2,346 carbon mitigation projects. The researchers estimate that out of the 972 million carbon credits issued globally to date, approximately 812 million do not correspond to a full metric ton of C02 reduction. In other words, only about 16% of carbon credits accurately reflect climate impact.
These findings present grim prospects for the carbon market. However, there is also a silver lining because at least the valid carbon credits are above zero. The challenge now is to expand the proportion of high-quality carbon credits and prevent fraudulent projects from entering the market. Lessons from over two decades of experience, combined with improved monitoring technology and more accurate estimation methods, can help achieve this.
These statistics also indicate that the carbon market is not a silver bullet but should serve as a supporting mechanism to facilitate a low-carbon transition. The ideal carbon credit should be high in quality, limited in quantity, and appropriately priced, with strict monitoring and regulations. Additionally, effective grievance mechanisms must be in place to ensure that carbon markets do not violate human rights.
Phasing out fossil fuels remains an urgent priority, and formalised climate finance from developed countries is still necessary to address climate change effectively. Carbon markets cannot replace the need for direct action and substantial financial support to achieve meaningful climate progress.
Ultimately, whether carbon credits become a valuable tool in the fight against climate change or remain ineffective and potentially harmful hinges on the well-regulated Article 6. The outcomes of COP29’s discussions on Article 6 may not be perfect, but at least they provide much-needed clarity to international efforts to coordinate emissions trading and carbon crediting.
Importantly, the agreement ensures that countries will continue dialogue on this issue and persist in refining and improving the guidelines.
First published on the Bangkok Post
