By: Professor Dato Dr Ahmad Ibrahim
The race to net-zero is the defining economic transition of our time. Amid the array of tools at our disposal, international emissions trading stands out not just as a mechanism for compliance, but as a powerful engine for channeling capital towards green innovation. The potential of carbon markets to unlock a cost-effective, globally coordinated path to decarbonization is immense. The theory is elegant: put a price on pollution, and the market will find the most efficient ways to reduce it. Yet, as a recent review by Ariadna Dumitrescu and Carmen Ansotegui clearly shows, this potential remains largely untapped. For every success story, there is a cautionary tale of inefficiency or missed opportunity. The gap between the theoretical promise of carbon markets and their current effectiveness is the chasm we must now bridge. To do so, we must confront three fundamental challenges: fragmentation, integrity, and equity.
Today’s carbon market is not a single market at all. It is a patchwork of over 70 regional, national, and sub-national systems, each with its own rules, price floors, and compliance criteria. This fragmentation creates a “Wild West” environment that stifles investment and creates inefficiencies. A company operating in the EU’s Emissions Trading System (EU ETS), the world’s largest, faces a high and volatile carbon price, while a competitor in a jurisdiction with a weaker or non-existent system operates at a significant cost advantage. This not only leads to “carbon leakage”—where production simply moves to regions with laxer regulations—but also prevents the formation of a clear, global price signal that is essential for guiding long-term investments in technologies like green hydrogen or carbon capture. Without greater harmonization, carbon markets risk perpetuating the very imbalances they are meant to solve.
Perhaps the most significant drag on the system’s credibility is the persistent question of integrity. This issue is twofold, affecting both compliance markets and the voluntary carbon market (VCM). In the VCM, the core product—a carbon credit—must represent a real, verifiable, and permanent ton of CO2 removed from or avoided in the atmosphere. For years, the market has been plagued by allegations of “hot air”—credits from projects that would have happened anyway, a lack of “additionality”, or that overstate their climate impact. This erodes trust and deters corporations from participating meaningfully. In compliance markets, the integrity challenge is one of robust monitoring, reporting, and verification (MRV). Without airtight data and transparency, the entire system is built on sand. We cannot manage what we cannot measure, and we cannot trade what we cannot trust.
We must address the equity gap. A well-functioning global carbon market should not only be a tool for rich nations and corporations to offset their emissions cheaply. It must be designed to funnel finance to the Global South, where many of the world’s most cost-effective emission reduction and nature-based solutions are located. Current structures often fail to do this effectively. Complex methodologies, high transaction costs, and a lack of capacity can prevent communities in developing nations from accessing these markets fairly. If carbon markets become a new form of ecological colonialism, where the benefits flow north and the burdens remain south, they will have failed in their broader mission. A just transition is not an add-on; it is a prerequisite for a stable and effective global system.
These challenges are daunting, but they are not insurmountable. In fact, they present a clear roadmap for action. First, harmonization must be the priority. The principles agreed under Article 6 of the Paris Agreement provide the foundational framework for international cooperation. We must now move from agreement to implementation, establishing clear and consistent rules for accounting and transferring emissions reductions between countries. This will lay the groundwork for a more connected and efficient global market. Second, we must demand gold-standard integrity. Initiatives like the Integrity Council for the Voluntary Carbon Market (ICVCM) are crucial for restoring trust. Their “Core Carbon Principles” can set a new benchmark for quality. Simultaneously, advancements in satellite monitoring, AI, and blockchain can revolutionize MRV, providing the transparency and security needed for both compliance and voluntary credits.
Third, we must design for equity. This means simplifying access for developing countries, ensuring a fair share of proceeds goes to host communities, and prioritizing projects that deliver not just carbon benefits, but also biodiversity protection and sustainable development. The promise of carbon markets is too great to abandon. By confronting the issues of fragmentation, integrity, and equity head-on, we can transform them from a promising concept into the cornerstone of a truly greener, global economy. The time for a half-hearted approach is over. The moment for a robust, trustworthy, and inclusive carbon market is now.
The author is affiliated with the Tan Sri Omar Centre for STI Policy Studies at UCSI University and is an Adjunct Professor at the Ungku Aziz Centre for Development Studies, Universiti Malaya.
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