Local actors in the Global South face roadblocks that limit the development of high-integrity carbon market activities. The recent UNDP and Climate Focus partnership will address some of these.
Carbon markets are an important and growing source of finance for climate change mitigation. The value generated by these markets is significant: compliance markets were estimated at around USD 800 billion in 2023 and voluntary markets are projected to reach USD 100 billion by 2030, and these figures do not factor in potential positive economic spillover effects such as the growth of businesses and professionals servicing this industry. Many policymakers, particularly in the Global South, look to both compliance markets and the voluntary carbon markets (VCM) as sources of financing for the implementation of Nationally Determined Contributions (NDCs) and other climate policies. Both compliance markets and the VCM can be effective in providing necessary finance, but compliance markets can take longer to establish than VCM activities due to political and economic barriers. Engagement with the VCM can help channel finance quickly and to decarbonize activities that are not covered by compliance schemes and regulations.
The last few years have been rocky for the VCM. Heightened scrutiny and criticism pointing to insufficient integrity, quality, and transparency of VCM activities has created discomfort among investors and credit buyers. Doubts about whether VCM activities are delivering real impacts in emissions reductions were amplified by news in early 2023 that 90% of REDD+ credits are worthless due to inflated baselines by projects. There are also reports of communities’ rights’ being infringed (with recent examples in Kenya, Tanzania, and Guyana), which led to the United Nations special rapporteur on the rights of Indigenous Peoples calling for a moratorium on voluntary carbon markets to stop human rights violations. There are also ongoing concerns about the lack of equitable sharing of benefits with communities and landowners from carbon credit sales. These critiques may have contributed to a decline in credit issuances and prices in 2023 and several governments halting or pausing VCM activities (for example, Papua New Guinea and Honduras imposed moratoria on VCM deals or sales).
However, actors in the VCM are course-correcting, pushing the market towards increased quality and integrity in a bid to restore confidence in the market. The Integrity Council for the VCM (ICVCM) developed the Core Carbon Principles for identifying high-quality carbon credits and the Voluntary Carbon Markets Integrity Initiative (VCMI) guides buyers toward high integrity uses of carbon credits through its Claims Code of Practice. Carbon standards are also strengthening their methodologies and internal processes: for example, Verra consolidated its REDD+ methodologies under a single avoided unplanned deforestation methodology that more conservatively estimates emission reductions. UNDP’s High Integrity Carbon Markets Initiative is equipping host countries to strategically leverage these markets for NDC achievement. These advancements show the course-correction taking place within global carbon markets.
Nevertheless, Global South decision makers continue to face barriers that limit their engagement in carbon markets and impact the overall supply of high-quality activities. Governments are seeking to identify the most appropriate strategy to leverage carbon markets to achieve their policy goals. In particular, governments want to correctly determine which mitigation outcomes they will use to count towards their own Nationally Determined Contributions (NDCs) and which they can sell on global carbon markets. Governments also are struggling to strike the right balance between attracting much-needed private finance while ensuring local rights are protected. Indigenous Peoples (IPs) and local communities (LCs) are facing questions about whether to engage with carbon markets, what the financial and political benefits to them would be, and how to protect themselves from risks such as loss of rights or contributions to greenwashing. All these decision makers face significant knowledge and skills constraints as well as stretched institutional capacity to cooperate strategically and meaningfully.
Key actors in host countries must be informed, equipped and ready to take the lead on carbon markets to course-correct asymmetries that primarily benefit the Global North and drive integrity issues. Private and public investors and project developers persist in pushing for negotiations with countries and communities that are not ready to implement carbon market activities. This poses significant risks to governments and communities, who may either enter into agreements that are not aligned with their interests or miss the opportunity to benefit from carbon markets by halting all engagement. This asymmetry in knowledge and capacity drives integrity issues in both the VCM and compliance markets such as Article 6 of the Paris Agreement. The lack of readiness also poses risks to buyers and investors who are seeking consistent supplies of high-integrity carbon credits.
Jump to: Challenges for Policymakers | Challenges for Indigenous Peoples and local communities | Strengthening Capacities to scale high-integrity markets
CHALLENGES FOR POLICYMAKERS
Policymakers face three major challenges when making decisions about carbon markets. First, policymakers do not have clear information about how to leverage both voluntary and Article 6-linked compliance markets to support country-specific needs and policy goals. Second, policymakers are uncertain about how to structure incentives, guidelines, and regulatory requirements in a way that attracts investments while ensuring safeguards and high-quality outcomes. Third, policymakers are under pressure from project developers and investors to act swiftly to support carbon market activities while they struggle with the first two challenges named. This combination of pressures can result in rushed decision making based on incomplete information that can lead to inadequate policies.
Effectively navigating the technical complexities of carbon markets requires time and resources that policymakers and other decision makers often lack. Scarce funding for readiness and infrastructure limits host country governments from accessing specialized carbon market advisory on their own terms. Existing donor-funded carbon market support programs tend to be pre-defined, narrowly focused or do not meet specific local needs and contexts. Governments, particularly in the Global South, have limited resources to seek tailored consulting and assistance on strategic policy development. Where countries may have some resources, the challenges in engaging with international private advisors increase transaction costs and limits support received.
To enable high integrity carbon credits, countries need technical assistance to facilitate carbon market activities that generate real emission reductions and removals while delivering sustainable development benefits. They also need support setting up the regulatory framework to provide assurance to all parties to these transactions, as well as the digital infrastructure for transparency. In many countries in the Global South, there is low to no local capacity to develop project documents, validate and verify projects, develop the financial plans, and attract private sector investment to these projects and programs.
CHALLENGES FOR INDIGENOUS PEOPLES AND LOCAL COMMUNITIES
As carbon markets proliferate and grow, so too do the opportunities and the risks they present for IPs and LCs. Communities are increasingly being approached by outsiders seeking to develop carbon projects and programs on their lands. Some are exploring possibilities to develop projects themselves. Others are involved through consultation processes about projects and jurisdictional programs that could impact their land or resources, as implementers of project activities, and as beneficiaries of project outcomes. In some cases, IPs and LCs are involuntarily involved in carbon markets when activities impact their land, resources, or rights without prior consultation or consent.
While many communities are keen to understand how carbon markets can provide much-needed access to direct finance to support their livelihoods, they are also wary of the risks these markets raise. Carbon markets have largely been developed with little to no participation by IPs and LCs and there is a scarcity of training opportunities for communities. This places IPs and LCs in a reactive position, navigating complex rules and systems developed by others using language and concepts that are often foreign. This leaves communities at a notable disadvantage when engaging with actors already experienced in carbon markets. The poor track record of carbon projects and programs respecting community rights, as well as skepticism of the commodification of nature and the environment, which is antithetical to many Indigenous worldviews, also makes communities wary of market initiatives.
There is a critical need to support communities in taking the lead in determining whether and how to engage in carbon markets. Communities need accessible, culturally relevant information about what carbon markets are; how to evaluate carbon market activities and developers; how to engage with carbon projects and programs to maximize benefits, strengthen their rights, and avoid risks; and what legal structures and recourse are available to them.
STRENGTHENING CAPACITIES TO SCALE HIGH-INTEGRITY CARBON MARKETS
Equipping decision makers with information and advisory support is essential for carbon markets that lead to real climate, environmental, and social impacts. Clear information and tailored advice enable host country decision makers to understand carbon market modalities, risks, and opportunities, and to engage with carbon markets to deliver national and global climate benefits.
UNDP and Climate Focus are collaborating to provide essential information and advice to Global South decision makers through the Carbon Market Transparency and Implementation Program (TIP). The TIP will catalyze equitable carbon markets by providing tailored technical support, on the ground advice, and access resources to policymakers and Indigenous and local communities.
For policymakers, the TIP will provide country-specific advice about how to leverage carbon markets to support climate policies and NDCs, how to design enabling regulatory environments for strategic carbon market engagement, and how to effectively monitor and account for carbon market outcomes.
For Indigenous Peoples and local communities, the TIP will curate accessible information and resources to ensure communities can make informed decisions, provide “train the trainer” workshops where representatives can receive carbon market information to adapt for their community needs, and deliver on-the-ground technical advice for communities that are deciding whether and how to engage with carbon markets. Teams from Climate Focus and UNDP will provide these services to specific countries and communities on an as-needed basis, based on policymakers and communities who identify needed support.
For more information about UNDP and Climate Focus’s work to support decision makers in the Global South and create an enabling environment for quality carbon market activities, please get in touch with us here.
