After years of fractious debate, compliance carbon markets in the developed world are driving capital towards innovative carbon removal technologies.
For developing nations, however, progress remains disconcertingly slow. The current trajectory threatens to create a new form of climate apartheid, leaving the Global South behind. Many developing countries are trapped in the nascent, often unruly, voluntary carbon market (VCM) – not by choice, but by necessity.
The complex institutional demands of compliance markets, such as formal Emissions Trading Systems (ETS), are often ill-suited to economies with weaker regulatory capacity and less mature financial infrastructure.
By contrast, carbon taxes are regarded as a more practical and administratively feasible starting point for lower-income economies. Even so, the VCM remains a fragile foundation on which to build a national climate strategy.
These markets face significant challenges. A key obstacle is the lack of clear policy direction from governments and international bodies, leaving participants in regulatory limbo.
Equally troubling is a deepening crisis of integrity. Greenwashing, questionable verification practices, double counting and a lack of transparency have eroded confidence. In Malaysia, for example, the slow development of the carbon market is linked to these issues, compounded by domestic challenges involving land ownership and energy regulation that have prevented the emergence of a pro-carbon market coalition.
The costs of developing, monitoring, reporting and verifying (MRV) carbon credits are also prohibitively high, consuming much of the potential returns before local communities hosting these projects can benefit.
Is the imposition of a carbon tax contributing to the slow pace? While a carbon tax is a powerful and transparent tool for internalising the cost of pollution, it is no cure-all for the structural challenges confronting developing nations. Although carbon taxes are often better suited than complex ETS schemes, their effectiveness is undermined by one critical issue – financing inequality.
Businesses in emerging markets face far higher borrowing costs for clean energy projects than their counterparts in developed economies. This weakens the incentive created by a carbon tax. Even where a tax is imposed, the investment needed to transition to low-carbon alternatives often remains financially unattractive.
The result is a vicious cycle in which developing countries bear the burden of carbon pricing without the financial capacity to decarbonise.
To accelerate progress, we must look beyond a single policy instrument. The barriers are systemic. Developing countries require trillions of dollars to achieve their climate goals, yet receive only a fraction of global climate finance. They are being asked to solve a crisis they did not create with severely limited resources.
Effective participation in carbon markets also demands considerable technical and institutional capacity. Many countries lack the infrastructure, technology and regulatory frameworks needed to compete effectively. At the same time, the market is widely perceived as inequitable, with lingering concerns that the benefits of carbon projects rarely reach local communities. The opacity of the VCM, where two-thirds of transactions remain private, only reinforces this scepticism.
The current trajectory is a recipe for failure. Treating carbon pricing as a universal solution, regardless of a country’s capacity, is both inefficient and inequitable. If we are serious about climate action, progress in developing nations must be accelerated through a more holistic approach.
First, compliance must be linked to development. Research suggests that connected carbon markets can help offset financing inequality. By linking a developing country’s carbon market to a deeper, more liquid global market, wealthier economies can help absorb part of the transition cost, effectively subsidising emissions reductions in the developing world.
Second, technical assistance must be significantly expanded. The Carbon Markets Access Toolkit launched by VCMI and UNDP is a step in the right direction, but it must be backed by sustained investment in capacity building. Governments in the Global South need more than a rulebook – they need the expertise to interpret and implement it.
Finally, integrity must remain the cornerstone of the market. For the Global South to attract the investment it needs, carbon markets must be credible. This requires harmonised standards and a level of transparency that leaves no doubt about the environmental and social value of every carbon credit.
The carbon market is a tool, not a saviour. To make it work for the developing world, we must stop treating it as a simple transaction and start viewing it as a mechanism for equitable, sustainable development. The slow pace is not an accident; it is a feature of a system designed by and for the powerful. It is time to redesign it.
The views expressed here are the personal opinion of the writer and do not represent that of Twentytwo13.
