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How carbon markets can propel lasting climate solutions

As 2050 approaches, carbon markets must evolve to accelerate the green transition, asserts Verra's founding CEO. Read More

(Updated on August 20, 2024)
The year 2050 displayed on 4 wooden block cubes and green grass.
Source: Shutterstock/Dilok Klaisataporn

This is the final article in a six-part series examining how redesigning the carbon market can enable the long-term transition of global economic sectors and catalyze the transition to a green economy. Previous articles in this series describe reimagining carbon markets, a new model for additionality, government’s role in carbon markets, the integration of natural climate solutions and how carbon finance can help with the energy transition.

The challenge of meeting the target set out by the Paris Agreement is immense. Even if the world starts to reduce emissions now and is on course to meet its net-zero target by 2050, we will overshoot the 1.5 degrees Celsius global heating limit. Given the severe consequences of already observed warming of around 1.2C, exceeding 1.5C would likely have catastrophic effects. This underscores the urgent need for robust solutions that drive the green transition. That is why I’m advocating for a comprehensive strategy that leverages the power of carbon markets to achieve larger and more enduring outcomes.

Tackling ‘under the curve’ emissions

According to the Global Carbon Budget, we have about 275 gigatons of carbon dioxide (GtCO2) left in the carbon budget before hitting the 1.5C threshold. Assuming about 40 GtCO2 are emitted annually, which is a very conservative number (others put this above 50 GtCO2), this budget will be exhausted by 2031. Even with a hypothetical steady reduction in emissions of 3.5 percent per year, we will still consume the 1.5C carbon budget by 2033. By 2050, we would dump a total of 520 GtCO2 emissions into the atmosphere, which starts to approximate the carbon budget for a 1.7C world. (See the chart below.)

Chart on carbon emissions from 2025-2050
Source: Transition Finance
Source: Transition Finance

Very few mechanisms are designed to address the emissions that are “under the curve” (in the chart above, in blue) at scale and rapidly. Much of climate finance is either bogged down in complicated processes or has not been committed. There is a desperate need to deploy capital now.

This does raise a somewhat existential question: What are we trying to achieve with carbon markets? Given the scale of the climate crisis, carbon markets need to focus not just on accounting for financed metric tons but on facilitating large-scale sectoral transitions through the introduction of new technologies and practices, bringing down costs and developing long-term capacity to support these interventions. In short, carbon finance can be designed to de-risk future investments, which then result in the transformation of entire sectors of the economy, delivering significantly more climate benefits than those financed through the sale of carbon credits. This requires a shift from incremental approaches to a more comprehensive, long-term strategy that leverages the power of carbon markets to achieve larger and more enduring outcomes.

The good news is that the basic infrastructure and foundation for using carbon finance to enable the transition of entire sectors of the global economy are already in place; we simply need to change the paradigm to ensure carbon markets drive the green transition and channel the urgent financing needed in the short term.

Toward a new paradigm for carbon markets

In an ideal world, carbon markets help to achieve key elements of the green transition. Specifically, they would:

  • Introduce new technologies and practices to sectors of the global economy.
  • Reduce the costs of these innovations.
  • Build the technical capacity and infrastructure needed to provide ongoing support.
  • De-risk future investments in the sector.

Achieving the above would pave the way for the ongoing adoption of new technologies and practices without the need to rely on carbon finance, thereby jump-starting efforts to support a sustainable economy.

However, today’s carbon market is not designed to achieve these key objectives. To do so, the market needs to:

  • Define the endgame by establishing clear milestones for when carbon finance is no longer necessary for new projects.
  • Ensure the longevity of all interventions, especially for those projects that are solely dependent on carbon finance.
  • Streamline approvals to avoid the complicated, cumbersome and costly review process that has become the Achilles’ heel of the carbon market and prevents it from scaling.

Carbon markets are at an inflection point. To play a greater role in combating climate change, they must evolve. To date, carbon markets have channeled billions of dollars into climate action across various sectors of the global economy. They have pioneered innovative financing methods for groundbreaking efforts that address some of the world’s most complex challenges. These include developing and distributing new technologies, protecting and restoring forests, and promoting regenerative agriculture.

However, to address the scale of the crisis, we need to redesign carbon markets for a broader transition. The modifications proposed in this series are not radical and do not require wholesale changes to the underlying basis of carbon markets. They simply require us to start with the end in mind, plan for the day carbon finance will no longer be needed and design the market to achieve a bigger and more enduring objective.

This series suggests reframing carbon markets to support the green transition. By rethinking additionality, engaging governments, breaking down barriers to natural climate solutions and addressing renewable energy crediting, we can create a more effective carbon market. This redesign can leverage the limited finance carbon markets provide to achieve lasting climate benefits, foster innovation, drive green sector growth and set a global standard for environmental finance.

Embracing this paradigm will mitigate climate change and build resilient economies. The path forward requires bold thinking, decisive action and a willingness to adapt our tools, transforming carbon markets into a powerful force for global sustainability.

The topic of how carbon markets can fuel lasting climate solutions is addressed in Chapter 6 of the author’s recently released report Financing the Transitions the World Needs; Towards a New Paradigm for Carbon Markets.

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