Carbon markets can be understood as a three-legged stool on which part of our climate goals rests; if one of the legs is missing, the stool falls. Unfortunately, today’s carbon market debates focus on two of those three legs whilst ignoring the other.
Current debates have focused on finance and measurement, reporting, and verification (“MRV”) of greenhouse gas emissions abated by a specific mitigation activity. Carbon markets play a role in financing climate action projects and act as incentives to transition to less environmentally harmful activities. However, carbon markets have been questioned on grounds of transparency, specifically whether they actually reduce emissions.
There are multiple documented cases of carbon credits sold that do not represent the real amount of carbon captured. Other cases reveal projects selling the same carbon credit twice in the international and domestic carbon markets. In response, carbon market enthusiasts point out the system’s potential for scalability as the only instrument currently available for funding climate initiatives.
Regardless, the debate is incomplete because it misses an equally important issue: the people and the local communities on whose land the carbon projects are developed. These communities are traditionally excluded from the economic system in most Latin American countries which risks promoting a green transition that leaves those most vulnerable behind.
Two local community issues should be considered in carbon market discussions. The first issue refers to indigenous and other ethnic minorities who have been excluded from or subjected to unfair negotiations in carbon credit projects. This stems from a lack of safeguards and regulations that protect communities from developer abuse. The Constitutional Court in Colombia is reviewing multiple cases of indigenous communities against carbon project developers for allegedly developing projects against their consent. While safeguards exist for international REDD+ projects, they have not been regulated for domestic REDD+ or similar projects in Colombia. Although communities have legal recourse to prior consultation right for certain types of projects in their territories, its application in carbon credit projects is unclear. Recently a Court in Colombia suspended a project on grounds of lack of prior consultation, but the debate is still open.
The second issue is that carbon credit markets can potentially exclude smallholder farmers. In several LATAM countries, like Colombia, agriculture is one of the main drivers of deforestation and a significant contributor to climate change in the region. In response, the global community and policymakers have pushed to shift from traditional agricultural activities to preservation or agroforestry practices. However, the lack of financial incentives has proven to be an obstacle.
While carbon credits can be a possible solution, they risk excluding smallholder farmers. Carbon credit projects are only profitable in large plots of land, which smallholder farmers don’t have. In their current form, carbon credits will only benefit large landowners – who generally are responsible for the negative impacts of agriculture on the environment. Smallholder farmers have traditionally been excluded from local economies; we cannot allow them to be excluded again.
Further, excluding local communities from the carbon market debate can hinder its development and potential. From an economic perspective, prices capture information; inefficient markets with great price dispersity, like the carbon market, can either reflect a lack of information from the demand side, or adverse selection from the supply side – e.g. firms seeking low-transparency carbon credit. If we agree that including local communities enhances transparency, we would expect less price dispersity in the carbon credit market, which would allow investors to better select the carbon credits they wish to purchase and, thus, enhance the whole market.
I believe in the potential of carbon credits to deliver much-needed climate finance, and I acknowledge the importance of addressing transparency concerns through improved MRV practices. However, we cannot overlook the impact on the people—those on whose land these projects are developed. Without considering the welfare of local communities, any transition driven by carbon credits will be unjust and unsustainable.