Carbon markets could boost climate action in least developed countries

This article is published in association with United Nations.

While carbon markets have played a limited role in boosting sustainable development for the world’s least developed economies, a new report from UN Trade and Development (UNCTAD) shows that stronger domestic laws, regulations, and monitoring could pay big dividends.

UNCTAD’s Least Developed Countries Report 2024 highlighted on Monday that the group of 45 least developed countries (LDCs) could use carbon market projects to enhance climate action by offsetting the buyers’ emissions at improved rates which will allow more investment.

LDCs were among the first to join carbon markets – where carbon credits are bought and sold – but they face unique challenges in accessing the market due to their size and difficulties in attracting foreign investment.

Geographic and financing limitations

According to UNCTAD, six LDCs account for over 75 per cent of all carbon credits issued in voluntary markets and 80 per cent of those under the Clean Development Mechanism (CDM) which allows countries to fund emissions-reducing projects in other countries and claim the saved emissions as part of their own efforts to meet international targets. Though LDCs participate, they represent only 1.5 per cent of global CDM projects, highlighting the potential for more inclusive participation.

In 2023, the value of carbon credits from the poorest nations reached around $403 million, just a small fraction of the $1 trillion in annual investment needed for these countries to meet the Sustainable Development Goals by 2030.

This reflects the need for a stronger framework to make carbon markets a viable source of funding.

Opportunities abound

UNCTAD noted that land-based sectors like forestry and agriculture, where LDCs have considerable untapped potential, could provide significant carbon credits. The report estimates that emissions reductions from these sectors could equal 70 per cent of those from the global aviation industry in 2019, or around 2 per cent of global emissions.

However, this opportunity requires viable carbon prices and accessible projects. A rate of $100 per ton is needed to make such projects profitable. Currently, LDCs are utilising just 2 per cent of their land-based mitigation potential, and without higher carbon prices, up to 97 per cent may remain untapped by 2050.

Forging a path forward

UNCTAD’s report calls for targeted actions to help LDCs benefit more fully from carbon markets. It recommends bolstering domestic frameworks with stronger regulatory capacity and systems for monitoring and reporting to ensure that communities directly benefit from the projects.

The report also urges expanded international partnerships. Regional cooperation and South-South partnerships could help LDCs reduce costs and improve their positioning in carbon markets.

Finally, capacity-building is key, with the report calling on development partners to provide resources to help least developed countries align carbon market projects with broader economic goals.

These efforts could help least developed countries unlock significant climate potential, creating economic opportunities while advancing their climate goals, UNCTAD said.