After almost a decade of negotiations, the agreements on carbon markets achieved at Cop29 have been broadly seen as a great success. As well as providing the basis for a global trading system, it may also unlock another source of green finance for global south countries.
In Baku, important decisions on article 6 of the Paris Agreement were made and adopted. Countries have agreed on the ground framework to implement a global, centrally governed carbon market, widely seen as the successor to the clean development mechanism developed under the Kyoto protocol. There were also agreements on helping to refine the mechanisms allowing carbon trading between countries through voluntary cooperation.
Carbon markets provide a platform to trade certified emission reductions or carbon credits, derived from actions attempting to mitigate climate change. Activities such as planting trees, developing offshore wind power or improving energy efficiency in hard-to-abate sectors have the potential to be translated into tradable carbon credits. Countries and companies could choose to sell and purchase these credits to achieve their climate objectives, and in doing so additional finance could be made available to support certain climate actions.
The Cop29 agreements have made a wider spectrum of carbon trading mechanisms available, in particular those under article 6.2 on bilateral and regional carbon trading opportunities. This approach gives countries more autonomy to discuss and decide how carbon credits should be developed, transferred, tracked and reported, taking into account their respective needs for the net-zero transition. It may also provide a quicker and easier channel for countries to reach agreement and start carbon trading, while the implementation details of the global carbon market are being developed.
As such, article 6.2 holds great potential for countries ready to scale up carbon trading and there are good reasons why emerging markets and developing countries (EMDCs) in particular could consider playing a more active role.
Carbon markets can provide additional green finance
In recent years, many EMDCs have shown encouraging progress in demonstrating climate commitments and pioneering green technology, while developing and expanding domestic carbon markets. These combined factors may serve as a springboard for their participation in carbon trading bilaterally and regionally. As EMDCs start trading with each other, they may encourage greater impacts by enabling the flow of capital and technology across borders while boosting overall climate ambitions.
Carbon trading can provide additional finance which can be used for developing new climate or biodiversity projects, and funds can be raised from the transactional revenues earned from carbon credit sales. For instance, a forest-rich country could sell credits based on the verified mitigation outcomes of forest restoration projects, with the earnings funnelled into renewable energy projects that would not have been possible otherwise. The country buying the credits can use them to offset its own emissions.
While the path ahead is promising, challenges also exist. For instance, the methodologies and standards used to measure and verify carbon credits vary considerably across countries and crediting mechanisms, and are not always directly comparable. Moreover, there are rising concerns about the quality of carbon credit projects as they may not have driven the positive environmental changes they claim or even have had negative effects.
This may partially explain the recent downward trend observed in carbon credit markets. According to the World Bank’s report on carbon pricing, the market value of traded carbon credits fell significantly in 2023 from US$1.87bn to $723mn, while the issuances and prices of carbon credits also declined.
A framework for strategic planning
To unlock the full potential of carbon markets, much more needs to be done towards addressing the environmental integrity and social concerns associated with carbon credit supply. To do so, countries including EMDCs will need to set up clear rules, standards and procedures to guide carbon credit development.
What is perhaps more important than specific rules is the need for strategic planning: an overall framework could help countries systematically design how they would apply and benefit from carbon trading.
First, there is a compelling need for countries to think critically and comprehensively when putting in place a standards and procedures framework. This entails anchoring the framework in national long-term climate strategies, linking and coordinating the role carbon trading will play to achieve climate objectives, such as providing capital for green technology investment.
Equally important is the need to define the use cases of carbon credits so stakeholders, particularly those in the private sector, are encouraged to participate. For EMDCs that prioritise the use of article 6.2, the framework might also be planned as part of a broader sustainable development agenda which ultimately contributes to south-south cooperation.
Second, there is scope to innovate in the development of carbon credits, especially when countries trade bilaterally or multilaterally. EMDCs may consider working together on how to improve the credibility of nature-based projects, including those with a focus on landscape and ecosystems, so that wider sustainable development benefits such as biodiversity conservation and protection of rural livelihoods may be delivered.
However, this does not prevent countries from working towards a more harmonised approach by consulting and building on existing methodologies and rules for credit development.
Last but not least, the complexity of carbon markets highlights the need to further strengthen the capacity of countries, especially EMDCs, in setting up the required governance structure and infrastructure. EMDCs could contribute on this front, given their experiences in developing domestic carbon markets. Useful case studies of EMDCs may be compiled as a source of inspiration for their peers.
Besides the positive outcome on carbon markets, Cop29 ended with a climate finance pledge of $300bn per year by 2035 from richer countries. As the fiscal space continues to narrow while debt levels remain high and geopolitical winds keep shifting, it remains to be seen how this target will be reached.
Given the uncertainty, carbon markets may provide an alternative vehicle to channel the funding necessary for climate adaptation and mitigation. EMDCs could play a more active role by taking the initiative to start carbon trading between each other – they do not need to wait for richer countries to kick things off.
The viewpoints expressed in this article are entirely those of the author and do not represent those of the New Development Bank.
This page was last updated April 16, 2025
