By Luan Gloria (UFPA/CFC-GS)
In the new global climate configuration, the carbon credit market, which consists of the purchase and sale of carbon emission quotas, emerges as an alternative to mitigate the effects of greenhouse gases (GHG). This market was formalized in 1997 at the Third Conference of the Parties (COP 3) in Kyoto, Japan. The document that outlined the initial goals and rules for this market model became known as the Kyoto Protocol. This Protocol established the Clean Development Mechanism (CDM) tool. This mechanism allows developing countries to voluntarily participate in the global process of reducing GHGs. In practical terms, the CDM works on the idea that developed countries (with mandatory reduction targets) can offset part of their emissions, while developing countries, by implementing projects that reduce GHG emissions, exchange (or sell) this reduction as a compensatory financial asset. The entity responsible for the global registration and supervision of projects classified as Clean Development Mechanism is the United Nations Framework Convention on Climate Change (UNFCCC). According to the “Status Report on CDM Projects in Brazil in 2016,” published by the Ministry of Science, Technology, and Innovation (MCTI), 7,690 projects were registered worldwide, and their distribution among countries is detailed in the figure below.
Figure 1: Distribution of CDM in countries.
Source: CDM Report, Ministry of Science, Technology, and Innovation (2016).
As shown in Figure 1, China, followed by India, accounts for most of the distribution of projects, with two South American countries, Brazil and Chile, standing out, which together account for 5.7% of global projects. It can be concluded that most of the distribution is concentrated in Asian countries. Having completed the exploratory analyses, it is crucial to highlight the need to standardize and regulate this market, establishing robust operating standards and promoting transparency in its operations, so that trade relations are effectively advantageous on the supply side. This is because the asymmetry of the carbon market, which is still in its infancy, benefits the demand side, the purchasing countries (the Global North), which already have economic advantages due to their economies being at advanced stages of capitalism. They end up obtaining economic advantages by purchasing emissions at a reduced price, due to the market asymmetries of carbon credits and the problem of measuring and standardizing this asset.
Given the above, the future of the carbon market as an effective instrument for mitigating climate change depends crucially on overcoming its structural weaknesses. Regulation should not only aim at technical standardization, but also at climate and economic justice. This implies the adoption of prices that truly incorporate the total cost of externalities (the social cost) and that fairly remunerate the efforts of developing countries (the Global South) for environmental preservation and the implementation of clean technologies. Only then will the market cease to be a mere mechanism for low-cost emissions compensation and become an engine of sustainable development.
Although the significant number of CDM projects in countries in the Global South highlights the potential supply, their evolution from an incipient stage to a mature and equitable market requires a paradigm shift. The simple logic of supply and demand, distorted by economic asymmetries, must be complemented by a strong effort from global nations. Such regulation and transparency are vital, not only to prevent the potential from being underutilized and the wealth appropriated mainly by buyers, but also to ensure the creation of independent monitoring and oversight mechanisms, ensuring that resources are applied to the maintenance and expansion of projects with integrity and equitable distribution of benefits. Thus, the success of the carbon market will not be measured solely by offset emissions, but by joint efforts toward a global economy that is socio-environmentally fair.
