SINGAPORE – The international trade in carbon credits has been plagued with many uncertainties, but carbon markets should not be written off, a new report has suggested.

Despite the challenges, carbon markets are likely to continue to play a role in helping countries reduce their planet-warming emissions to meet their climate change targets, the report published on April 12 by Temasek-backed firm GenZero concluded. 

GenZero chief executive Frederick Teo said that for carbon markets to take off, players in this space need greater clarity on the factors that are shaping the market trajectory.

“The (report) explores the underlying drivers that could shape the trajectory of carbon markets.

“We hope the insights are useful in encouraging discussion around key actions that can develop a more effective carbon market to support global decarbonisation,” he added.

The carbon markets facilitate international collaborations in climate action, as large emitters of planet-warming greenhouse gas emissions can purchase carbon credits generated elsewhere to offset their emissions. 

One carbon credit represents one tonne of carbon dioxide (CO2) – the main greenhouse gas driving global warming – that is either prevented from being released into or removed from the atmosphere.

Projects that supply carbon credits can include a forest protection effort, or the use of technology to suck away planet-warming CO2 from the atmosphere.

However, recent developments have suggested that such cross-border collaborations could be hindered by national policies or concerns over the quality of carbon credits. 

GenZero’s Carbon Scenarios report highlighted three scenarios, each with varying degrees of international collaboration, that show that carbon markets will still have a role in all three outcomes. 

In one scenario, geopolitical fragmentation is pronounced, with nations prioritising the development of their own green economies over international collaboration. 

In such a scenario, carbon credits will be traded domestically instead of globally, the report said.

There are already signs of such an inward-looking scenario playing out in the real world.

For example, India and Indonesia have indicated their intent to either ban or restrict the export of carbon credits generated within the country, preferring to use the emissions savings to meet their own climate change targets.

Indonesia later changed its stance in 2023, allowing foreign entities to buy credits from its carbon market. 

But the GenZero report indicated that even in such a scenario, buyers of carbon credits could still source for credits from other like-minded nations via bilateral agreements.

“Countries which have mutually aligned principles may still opt to trade carbon credits bilaterally,” the report said. 

In a contrasting scenario in the report, climate cooperation becomes a top global priority.

Countries agree on a global standard for carbon credits, and trade with one another. 

Those that are able to decarbonise their economies at lower cost do so first, and once they have met their climate targets, they sell their excess emissions reductions to other countries that face more difficulties decarbonising. 

In the scenario where global cooperation around climate action is heightened, markets also coalesce around a high bar for integrity as buyers of carbon credits are wary of buying low-quality credits over fears of being accused of greenwashing.

In the final scenario, the report highlighted another fault line for fragmentation: concerns over the quality of carbon credits. 

In particular, the report flagged that nature-based carbon projects, such as those that help to avoid or reduce emissions through nature conservation or restoration, could face greater scrutiny over concerns of whether they truly have a positive impact on the climate. 

Nature-based carbon projects tend to be concentrated in developing nations, whereas developed countries tend to host technology-based carbon projects, such as direct air capture technologies that essentially suck CO2 from the air and store it permanently deep underground. 

In January 2023, news outlet The Guardian published a report claiming that most nature-based carbon projects were “worthless”. 

A Bloomberg article in March 2023 suggested that one of the world’s largest nature-based projects in Zimbabwe, led by climate consultancy South Pole, had exaggerated its climate benefits.

In the scenario where fault lines are drawn based on perceived quality of carbon credits, carbon credit buyers may favour tech-based projects instead of nature-based ones, noted Mr Teo. 

This is because tech-based credits, which help to finance direct air capture plants, for instance, tend to provide more certain measurements in terms of the amount of CO2 that they are able to remove from the atmosphere, he said.

Research is ongoing to more accurately determine the amount of CO2 that a natural habitat is able to take in and store. 

However, the report pointed to numerous ongoing initiatives that could help to enhance the environmental integrity of carbon credits available in the market. 

A global carbon marketplace – an Amazon for carbon credits of sorts – is being set up under the United Nations’ Paris Agreement.

Observers have said that this will help pave the way for the trade of more high-quality carbon credits. 

More investments can also be channelled towards the use of digital solutions that can help restore transparency and confidence in carbon markets, said the report.

This could include funding projects that lower the cost of remote sensing technologies, such as satellite imagery that can monitor project activities remotely and cut the need for on-site verification. 

Digital technologies like blockchain can also create immutable records of carbon credits – tracking their origin, ownership and retirement. 

This minimises risk of fraud and double counting, bolstering trust in the market, the report said. 

The GenZero report is not the first to highlight the role of carbon markets in helping the world avert climate catastrophe. 

The UN Emissions Gap Report published in November 2023 had also found that countries will need to cut an additional 15 to 23 gigatonnes of CO2 by 2030, beyond their current national targets, to keep global warming to 1.5 deg C. 

Carbon markets are a cost-effective way to decarbonise, the UN report noted, and can help countries to save some US$350 billion (S$475 billion) through cooperation, as opposed to implementing their national climate targets alone.