Carbon markets, fossil fuels and COP29

It was foreseeable that the latest UN climate negotiations, COP29 in Azerbaijan, wouldn’t deliver cheerful tidings. However, few could have predicted just how grim an event it would turn out to be from start to finish. During the opening plenary, governments endorsed a controversial text on carbon markets without any discussion among countries. The decision bypassed the democratic process of UN proceedings, setting a bad precedent for lack of transparency and due process at the UN level.

At a time when the world urgently needs real and just climate action, COP29 paved the way for expanding an industry that has been unable to reduce emissions(opens in new window) or phase out fossil fuels for over 20 years. As the 2024 UNEP Emissions Gap report states, no real emission reductions would lead to 3.1°C of warming. That would be an unimaginable disaster, particularly for countries and communities most vulnerable to the impacts of the crisis.

This article reflects on the COP29 decision regarding carbon markets and looks ahead to the challenges facing next year’s UN climate negotiations (COP30) and beyond.

UN fast-tracks and scales up a broken system

The text on carbon markets in the Paris Agreement that governments swiftly(opens in new window) agreed upon is anchored in Article 6. In a nutshell, Article 6 has two related components:

• Article 6.2 – For countries to trade credits generated from the reduction or removal of emissions through bilateral or multilateral agreements;
• Article 6.4 – For an international carbon market, which is now called the Paris Agreement Crediting Mechanism(opens in new window) (PACM)

As the UN climate website explains, under PACM, “a company in one country can reduce emissions in that country and have those reductions credited so that it can sell them to another company in another country. That second company may use them for complying with its own emission reduction obligations or to help it meet net-zero targets”. 

Like other carbon markets, companies and governments can purchase carbon credits generated in offset projects to claim compensation for their emissions (on paper). Each carbon credit is supposed to represent one ton of carbon dioxide that has been avoided, removed or reduced at the offset project. Offsetting allows those companies and governments to keep polluting, almost always from fossil fuels.

Even though the United Nations’ Kyoto Protocol’s offsetting scheme, known as the Clean Development Mechanism (CDM), has a track record(opens in new window) of failing(opens in new window) to deliver its promised climate(opens in new window) benefits(opens in new window) and has been linked to human rights abuses(opens in new window) , approximately two thousand CDM projects have applied(opens in new window) to transition to the Article 6 mechanism, PACM. On top of that, the CDM scheme is being used(opens in new window) as a key institutional precedent for developing the governance of PACM.

Carbon markets operate under both compliance markets and voluntary markets. Compliance markets are regulated by a central actor at the national, regional (e.g. EU), or international (e.g. UN) level. On the other hand, voluntary carbon markets are overseen by self-appointed standard bodies, allowing companies and individuals to claim “net zero” emissions by purchasing carbon credits. The implementation of Article 6 of the Paris Agreement has significantly blurred the borders between these two types of markets.

The standard-setting bodies of the voluntary carbon market already started to align their methodologies(opens in new window) with those of Article 6, and several countries are working on regulations(opens in new window) that incorporate the voluntary carbon market’s credits into their national accounting systems.

Article 6 also lacks mechanisms for accountability and transparency, which is already a core problem of the voluntary carbon market. Moreover, it sets the basis for a system that relies on external actors to report potential failures and abuses. Similar to the voluntary carbon market, those involved in the offset industry have a vested interest in inflating the amount of the commodity to be sold (carbon credits). This perverse incentive leads to “junk credits(opens in new window) ”, which essentially allow for increased pollution and enable social harms and abuses where projects are developed.

Improving safeguards and methodologies will not resolve the underlying problems of this failed scheme. The Integrity Council for the Voluntary Carbon Markets (ICVCM) promotes what it calls “high integrity carbon credits,” aiming to align some of these credits with Article 6. However, two of its Expert Panel members recently resigned in protest over the Council’s decision to approve three activities related to forest-based offset projects. They affirmed, “We fear that the current methodologies could lead to large volumes of credits not backed by any actual emission reductions.” The ICVCM is a private multi-stakeholder initiative of executives linked (opens in new window) to some of the biggest fossil fuel and financial companies. This includes the Institute of International Finance – the largest industry association and lobby club of the private financial industry, whose members(opens in new window)  include several of the world’s top 50 fossil fuel financiers.

Entrenching injustice and inequality

With the establishment of carbon markets under the Kyoto Protocol, countries in the Global North created their own registries to account for their carbon emissions and trade. When the Kyoto Protocol was established, Global South countries were not obliged to reduce emissions due to the North’s historical responsibility for the climate crisis. Since the Paris Agreement replaced Kyoto, all countries are mandated to present voluntary reduction commitments, effectively overlooking the historical responsibility of the Global North.

This move, however, also created another disadvantage for countries in the South, as most operational carbon trading systems are located in the North, including in the EU, Japan, UK, New Zealand, Canada, and regions in the US. Article 6.2. allows governments to use existing crediting mechanisms to address the lack of registries in most countries in the South. Standard bodies from the voluntary carbon market, like Verra and Gold Standard(opens in new window) , use this to offer their crediting mechanisms as platforms for Article 6.2.

In this context, and despite the fact that rules under Article 6 have yet to be defined, its approval occurs against the backdrop of over 90 bilateral agreements(opens in new window) already signed between countries under Article 6.2, with Singapore (with 22) and Switzerland (with 17) in the lead. The vast majority of these agreements involve countries from the South selling carbon credits, as with the Kyoto Protocol. This trend reflects the reality that Global South countries are, in practice, selling their cheapest credits to the benefit of the accounting sheets of Global North actors. Moreover, countries in the Global South might opt for having low climate targets in order to be able to sell more credits to foreign actors.

The five projects already authorised to produce carbon credits under these bilateral agreements (in Ghana, Thailand and Vanuatu) are selling their credits to Switzerland. Recent research (opens in new window) by a Swiss think tank on one of these projects in Ghana revealed several concerning issues, including the alarming finding that the emission reductions were overestimated by as much as 79%. This would mean that the majority of the credits do not represent real emission reductions. The same research concluded that: “[this is] a good example of why the trade in certificates under the Paris Agreement is not conducive to attaining the ambitious climate goals.”

Despite more than 20 years of carbon offset projects resulting(opens in new window) in fraud(opens in new window) , human rights abuses(opens in new window) , land evictions(opens in new window) , overestimation of credits(opens in new window) , and lack of additionality(opens in new window) , among other problems(opens in new window) , offsets are still being promoted as the climate policy. Economic and corporate interests, rather than environmental and social ones, seem to dominate the UN climate negotiations.

Carbon markets are not climate finance!

It is not a coincidence that carbon markets were agreed upon during the so-called “Finance COP.” In light of the extremely low commitments made by Global North countries, carbon markets were presented as a tool to ‘mobilise’ private capital for climate action. This perspective, however, is both misleading and dangerous.

First, carbon markets give the buyer of the carbon credits a “license” to continue polluting. Offsets do not reduce emissions. In the best-case scenario, which hardly happens, emissions are merely ‘cancelled out’. By failing to halt the accumulation of greenhouse gases in the atmosphere, offsets exacerbate the climate crisis and obstruct real and just climate action.

Moreover, carbon markets lack transparency regarding financial flows. Often, the communities and countries where offset projects are implemented end up with very little, if any, of the money generated. Instead, various actors—including brokers, intermediaries, auditors, and developers—profit from trading the credits.

While climate funding needs are real, frontline communities should not be required to implement offset projects to access it. The abuses and risks associated with offsetting will only intensify(opens in new window) if the industry continues to expand.

Similar concerns are raised by the Science Based Targets initiative (SBTi), a body that evaluates whether companies’ climate targets align with leading climate science. Their report(opens in new window) stated, “The evidence suggests that there could be clear risks to corporate use of carbon credits for the purpose of offsetting, with the potential unintended effect of hindering the net-zero transformation and/or reducing climate finance.” (emphasis added)

Meanwhile, the private financial industry argues that carbon markets have the potential to provide hundreds of billions of dollars of capital flows for decarbonisation efforts while also establishing carbon markets(opens in new window) and an offset industry. However, this same financial industry previously lobbied against restructuring or cancelling the large private debt of the Global South.

In the current context of the huge debt burden(opens in new window) on the South, carbon offsets are framed as one of the few options for these governments to access climate funding – even if offset projects result in losing control over their territories at the expense of their populations. The World Bank recently reported(opens in new window) how, in 2023, countries in the South “spent a record $1.4 trillion to service their foreign debt (…) squeezing the budgets of many countries in critical areas such as health, education, and the environment.” On top of this, the money transferred as climate finance to Global South countries has been largely given as loans, effectively channelling(opens in new window) billions of dollars back to wealthy countries. This staggering flow of money from the South to (primarily) the North not only undermines the ability of many debt-distressed countries(opens in new window) to deal with climate change, it dwarfs the paltry.

The $300 billion a year in climate finance that the wealthy countries committed to at COP29 is an amount so derisory that many Global South nations refused to accept it. Analysts(opens in new window) , moreover, have shown how this extremely low commitment could be reached with almost “no additional budgetary effort” from wealthy countries beyond already-committed increases.

Fossil fuel interests at the centre of climate policy

One of the reasons why UN COPs have failed so spectacularly on climate justice is due to the immense corporate lobby presence. The fossil fuel industry has continuously exercised its power and influence to avoid climate policies that might harm its business. According to recent research(opens in new window) , their influence can be tracked since the early 70s, and it has consistently grown since the 1992 UN Earth Summit. From the outset(opens in new window) , corporations, often also summit sponsors, were allowed to have a major lobbying presence(opens in new window) , shaping foundational climate negotiation documents. This trend is continuing to this day. Some 1,773 fossil fuel lobbyists(opens in new window) were granted access to COP29, more than all the delegates from the 10 most climate-vulnerable nations combined (1,033). The “climate” conference, held for the third year in a row on a petrostate, was also used to facilitate discussions(opens in new window) on new oil and gas deals.

As a result, the UN, captured by fossil fuel and wealthy governments’ interests, prevents meaningful structural change. A radical transformation is essential. Leading experts, including a former UN Secretary-General and former UN climate chief, reiterated their call for a comprehensive COP reform.(opens in new window) “It is now clear that the COP is no longer fit for purpose”, they wrote. At the same time, the UN Special Rapporteur on Human Rights and the UN Independent Expert on the effects of foreign debt published a letter(opens in new window) during COP29 raising serious concerns over the fast-track approval of carbon markets, which could signal a “prioritizing of carbon markets over other, more effective climate solutions.”

Climate justice beyond COP

The mantra that “there is no money” for climate action must be challenged. The real issue isn’t a lack of funds but rather the choices that favour politically easier investments, like carbon offsets. These choices facilitate the continuation of the current growth-at-all-costs economic model, a paradigm deeply rooted in a history of colonialism and extraction.

But, choices, practices, and policies can be changed.

Rather than subsidising fossil fuel and other harmful industries, public money should go to just climate action. Major companies, including major fossil fuel giants, often engage in aggressive tax planning to avoid taxes, denying countries billions of dollars in revenue(opens in new window) . Instead of investing their substantial profits in a just transition, these companies prioritise distributing funds to their shareholders through dividends and share buybacks.

Research by Oil Change International(opens in new window) has found that wealthy countries could provide at least $5.3 trillion annually in public funding for climate action. By cancelling the private debt of the Global South and implementing taxes on financial transactions, dividends, windfall profits and wealth, we could not only generate funding but also help address global inequality, another goal that governments claim to be committed to.

Only through structural changes grounded in social justice and fair financial transfers – without conditions – to countries in the Global South can we begin to address the climate and its related challenges, such as the loss of biodiversity and food security.

On the road to the UN climate negotiations in 2025, COP30, when governments are mandated to present their new round of climate commitments, groups and people need to urgently mobilise and join the many voices resisting the offset and other polluting and destructive industries. Decision-makers must act on the demands for a fair phase-out of fossil fuels—first and foremost by wealthy countries.