How carbon markets should evolve to meet net zero ambitions

Deloitte

Written By: Freedom-Kai Phillips, Ricardo Martinez, Val Srinivas & Jill Gregorie

Published: December 13th, 2023

The world has about a decade left to avert irreversible damage from climate change,1 but charting the path to a more sustainable future will require significant financing, targeted investments, and global cooperation to address emissions impacts in a meaningful way. Carbon markets can contribute to all three of these goals, but to do so, they should first become more robust and credible. Otherwise, the current state of this ecosystem—characterized by fractured marketplaces, frameworks, and approaches—could preclude it from bringing about rapid decarbonization at scale.

While carbon market infrastructure has rapidly evolved over the past five years, it tends to be highly fragmented with several structural and operational challenges hampering progress, including a lack of trust in the environmental integrity, credibility, and additionality of carbon credits (figure 1). While compliance carbon markets (CCMs), i.e., regulated cap-and-trade programs, are well established on their own, diverging regulatory requirements across jurisdictions, different levels of climate ambitions, and varying stages of development are preventing greater convergence among markets. Voluntary carbon markets (VCMs), where governments, organizations, and individuals can purchase credits at will, also tend to be fractured, in part because of the sheer number of actors who operate within them.

As a result, buyers, sellers, and intermediaries may find it challenging to monitor and validate underlying credits in a systematic, credible, and consistent way. This has introduced possible reputational risks and contributed to lower demand: some companies, for example, have stopped including carbon credits in their climate pledges and net-zero targets altogether. Such reluctance from potential buyers may also be keeping carbon prices low.

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