Carbon markets so far have not delivered meaningful climate finance to least developed countries (LDCs), according to a report by the UN Conference on Trade and Development (UNCTAD), although the mechanisms under Article 6 of the Paris climate agreement present improved prospects.
"Fragmented" carbon markets have "fallen short" on providing climate finance to LDCs, increasing climate change mitigation, and supporting the structural transformation of these countries, UNCTAD said.
Carbon credit prices are not high enough to incentivise projects, the report warns, and if they hold at about $10/t CO2, about 97pc of LDC mitigation potential will remain unharnessed by mid-century.
Participation in the voluntary carbon market (VCM) and the UN's clean development mechanism (CDM) has also been concentrated in few LDC countries.
About 75pc of carbon credits from LDC-based projects in the VCM come from just six countries — Bangladesh, Cambodia, the Democratic Republic of the Congo, Malawi, Uganda and Zambia — while 80pc of CDM credits come from six countries, four of which also figure in the VCM's areas of concentration — Bangladesh, Cambodia, Malawi, Myanmar, Nepal and Uganda.
And the limited inclusion of carbon offset credits in most compliance markets means they "do not offer meaningful entry points" for LDCs, UNCTAD said.
"The outlook may improve" as markets at the UN level shift to new mechanisms under Article 6 of the Paris deal, UNCTAD said, as parties can apply the lessons learned from the CDM to create an improved system — efforts for which have been evidenced by the "prolonged negotiations" on Article 6 rules, which will continue at the UN's Cop 29 climate conference kicking off in Baku, Azerbaijan, next week.
The success of these mechanisms will rely on "decisive action" by LDCs to determine how to approach their participation to ensure it supports their development goals, the report found.
And UNCTAD called on the international community to standardise carbon market rules to reduce fragmentation and simplify access for LDCs, as well as to allow them to participate in compliance markets.
But carbon markets are just one tool, UNCTAD emphasised, and not a substitute for other forms of climate finance. This will be a key topic at Cop 29, as parties attempt to decide on a new collective quantified goal to replace the existing $100bn/yr commitment pledged by developed countries.
