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Carbon Finance – Are Carbon Credits Really Helping Developing Countries?

Carbon credit schemes are increasingly popular as countries around the world seek ways to reduce their greenhouse gas emissions. They promise to offer businesses and individuals a way to offset their emissions through investment in projects that have been shown to remove or mitigate climate change. The global market for these credits is expanding, and many of the schemes are based in developing countries. But, according to a new report from the Overseas Development Institute in the UK, these markets may not be helping developing countries the way they claim.

The report focuses on finance, which refers to money that is used to pay for emissions reduction projects in low-income countries. The financing is intended to help the countries implement their Nationally Determined Contributions (NDCs) under the Paris Agreement.

Two-thirds of the world’s nations are planning to use international market mechanisms to meet their NDC commitments. The market mechanisms include the Clean Development Mechanism, which allows advanced countries to fund emissions reduction projects in developing countries and then claim those reductions as part of their own commitments, and the voluntary carbon market.

Typically, carbon credits are generated by avoiding deforestation or investing in renewable energy. The carbon ascribed to those investments is then sold to companies that want to offset their own emissions. The carbon markets are highly complex, and they raise concerns about double-counting, fraud, and greenwashing — where companies falsely market themselves as environmentally friendly.

The carbon finance market consists of the formal, international compliance markets and the informal, voluntary schemes. The former are regulated by the Kyoto Protocol, while the latter are often not. Companies and individuals that purchase carbon credits in the voluntary markets aren’t required to do so by law, but rather out of their own philanthropic or environmental conscience.

While the current voluntary carbon market has grown, its integrity is being threatened by a number of factors. One concern is that credits are often purchased from projects that don’t have the proper documentation. Another problem is that the market lacks price transparency, making it difficult to match buyers and sellers.

A new initiative announced at the recent COP27 conference in Egypt could help to resolve these issues. The United States, Japan, Ethiopia and 23 other institutions have pledged to join a new partnership aimed at creating “high integrity” carbon markets.

These carbon finance partnerships would generate credits by reducing power sector emissions and funding climate-smart energy initiatives in low-income countries. The partners would then be able to sell these credits to corporations, and the proceeds would flow back into their countries. The plan was backed by the Rockefeller Foundation and the Bezos Earth Fund, and it is expected to be finalized in coming months. Ultimately, the US State Department hopes to use this model to provide more private capital for developing countries to support their NDCs. This approach is a significant departure from the current practice, which relies on international funding and a combination of bilateral and multilateral climate finance agreements.


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