Carbon markets ‘a powerful tool’ for least developed countries, COP29 hears

At the annual climate summit, UN Trade and Development urges stronger action to help least developed nations tap into carbon markets for sustainable and resilient growth.

At their core, carbon markets are trading systems designed to reduce greenhouse gas emissions by putting a price on carbon.

They create financial incentives for businesses and countries to invest in cleaner technologies, offsetting emissions through projects like renewable energy development, reforestation or methane capture from landfills.

Such markets hold significant potential to address a paradox facing the world’s 45 least developed countries (LDCs), said Secretary-General Rebeca Grynspan during an event hosted by UN Trade and Development (UNCTAD) at the COP29 climate change conference in Baku, Azerbaijan.

Although they contribute less than 4% global emissions, LDCs are among the hardest hit by climate change. Seventeen of the world’s 20 most climate-vulnerable and least climate-prepared nations are LDCs, which have borne 69% of global climate-related deaths since the 1970s.

For these vulnerable economies, carbon markets can potentially provide much needed supplementary financial support, but capturing significant revenue remains challenging.

Drawing on UNCTAD’s latest Least Developed Countries Report, Ms Grynspan underscored the importance of creating more inclusive and effective carbon markets to foster economic growth and climate action.

With necessary reforms and development partner support, carbon markets could play a bigger role in global climate finance systems, aligned with the new collective quantifiable goal expected at COP29.

Seizing opportunities

LDCs have abundant resources for carbon mitigation, particularly in land-based sectors like forestry and agriculture, with swathes of forests untilled, soil unworked, sun and wind uncaptured.

Protecting forests and implementing climate-smart agricultural practices could generate emission reductions equivalent to 70% of the carbon emissions from the world’s aviation industry in 2019, or about 2% of total global emissions.

However, realizing this potential requires viable carbon prices and accessible projects in place.

Addressing challenges

For LDCs to fully benefit from carbon markets, a price of around $100 per ton is essential to making carbon credits a viable and sustainable revenue source.

With current prices near $10 per ton, much of LDCs’ carbon mitigation potential remains untapped. If current trends continue, 97% of this potential would remain out of reach by 2050.

Another main challenge lies in the fragmented nature of global carbon pricing systems. Multiple regulatory frameworks, standards and institutions have led to significant disparities across markets.

This fragmentation not only makes access more difficult but also reduces the value LDCs can derive from these markets.

In 2023, financial returns from LDC carbon credits totaled only $403 million – less than 1% of total bilateral development aid. This is barely a drop in the ocean compared to the financing needs of these countries.

Policy recommendations

UN Trade and Development advocates for policy frameworks that promote carbon pricing and ensure the quality and credibility of carbon credits as integral components of broader climate-resilient development strategies. It recommends:

• Strengthening domestic capacity: LDCs must develop robust legal and regulatory frameworks and monitoring systems to fully leverage carbon markets. This will ensure that carbon market participation directly benefits local communities and contributes to sustainable development.
• Expanding international cooperation: UNCTAD calls for expanding international partnerships to lower transaction costs and improve LDCs' positioning in carbon markets. South-South cooperation and regional institutions can help harmonize standards and regulations, reduce the burden on LDCs and facilitate greater participation and negotiations.
• Prioritizing capacity building to help LDCs integrate carbon markets into economic and development goals, fostering sustainable growth and structural transformation. These countries also need to carefully consider trade-offs between carbon market participation and long-term policy space.
• Inclusive carbon finance: To enhance transparency and accountability, it's important to differentiate carbon finance from broader climate finance. Clearly labeled "carbon finance" ensures funds are dedicated to reducing emissions, preventing misuse and aligning carbon market investments with actual climate goals.