In 2023, the market value of carbon credits from these vulnerable economies sat at $403 million – just 1% of total bilateral development aid.
Despite contributing less than 4% of global emissions, least developed countries (LDCs) face some of the most severe climate impacts.
Carbon markets offer these vulnerable economies a potential path to help finance climate resilience and sustainable development, but capturing significant revenue remains challenging.
In 2023, the market value of carbon credits from LDCs was about $403 million – 1% of total bilateral development aid and far below the $1 trillion needed annually to meet the Sustainable Development Goals (SDGs) by 2030.
Carbon markets enable countries to trade carbon credits – permits to offset emissions – allowing sellers to generate revenue while contributing to global climate goals. However, most carbon credit revenue benefits other players, with structural barriers limiting returns for LDCs due to their smaller economies and challenges related to infrastructure, technology and institutional capacity.
Highly concentrated market activity pose challenges
The highly concentrated market activity also poses obstacles. Just six LDCs – Bangladesh, Cambodia, the Democratic Republic of the Congo, Malawi, Uganda and Zambia – account for over 75% of all carbon credits issued in voluntary markets and 80% of credits under the Kyoto Protocol’s Clean Development Mechanism (CDM).
Although LDCs make up only 1.5% of global CDM projects, this concentration highlights a significant opportunity to broaden participation and create more inclusive carbon markets that benefit all LDCs.
Untapped opportunities in forestry and agriculture
LDCs have significant untapped potential for climate action in sectors like forestry and agriculture, which could generate carbon credits equivalent to 70% of the CO2 emissions from the global aviation industry in 2019, or about 2% of total global emissions.
Yet, between 2020 and 2023, only 2% of this potential was realized, hindered by low project feasibility and low carbon prices. If prices remain around $10 per ton, 97% of the mitigation potential will likely remain unused by 2050. To make investments in land-based projects worthwhile, a carbon price of $100 per ton is needed.
Recommendations for LDCs and development partners
Case studies show that the anticipated benefits of participating in carbon markets – such as technology transfer, education, and community development – are uncertain for LDCs.
However, The Least Developed Countries Report 2024 suggests that with the right conditions, LDCs can use carbon market projects to support their development.
The report, published by UN Trade and Development (UNCTAD) offers a roadmap for LDCs and their partners to maximize the sustainable growth potential of carbon markets. Key recommendations include:
For LDCs:
- Establish independent policy frameworks that set clear objectives, priorities and engagement strategies for carbon trading.
- Align carbon market policies with national development objectives, as part of broader structural transformation efforts.
- Strengthen national regulatory institutions for carbon markets, developing robust laws, regulations, and monitoring, reporting and verification systems.
- Establish clear domestic regulations for carbon project operations and benefit-sharing, specifying rules for participation, revenue distribution and emissions reductions retained by the host country.
For development partners:
- Strengthen capacity-building in LDCs to enhance the quality of participation in carbon markets, based on their needs for human resources and skills, laws, regulations and institutions.
- Support LDCs in building capabilities to integrate carbon market policies into broader policies aimed at structural transformation, prioritizing collaborative approaches to technical cooperation.
- Enhance carbon market trust, integrity, transparency and credibility by adopting and implementing forthcoming UN principles for carbon markets.
- Implement the principle of common but differentiated responsibilities within multilateral carbon market regulations, ensuring provisions for LDCs that recognize their lower emissions and special development needs.
- Differentiate carbon finance from climate finance to ensure funds raised through carbon markets are additional to the $100 billion annual climate finance goal and other development finance commitments.
The report emphasizes that while carbon markets hold promise, they cannot replace official development assistance or climate finance. Instead,they should be seen as one of many tools supporting LDCs’ green structural transformations and global emissions targets.