Key Insights From The World Bank Report On International Carbon Markets

In its latest report, State and trends of carbon pricing: International carbon markets 2024, the World Bank reflects on progress and challenges in global carbon pricing, highlighting the fact that despite growth, current carbon prices remain too low to align with the Paris Agreement.

“Carbon markets can be a vital tool for achieving climate goals and supporting vulnerable communities. These markets are at a pivotal moment, where the path forward is filled with both promise and challenges,” Hania Dawood, Manager for Climate Finance and Economics at the World Bank, said in the announcement of the report on Tuesday.

Below are a few key trends outlined in the report:

Implementation Gaps and Mixed Results

There is a clear gap between nations’ climate commitments and their actual policies. Carbon pricing instruments now cover 24% of global emissions, with the potential to reach 30% if more countries adopt carbon taxes and emissions trading systems (ETS).

However, ETS prices have fluctuated, notably falling in the EU, New Zealand, and South Korea, while carbon taxes saw only modest increases.

Middle-income countries like Brazil, India, and Türkiye are advancing carbon pricing initiatives, contributing to the 75 active global schemes. These efforts show promise, especially in power and industrial sectors.

Generally, more progress is needed on Article 6 of the Paris Agreement, with hopes that COP29, to be held in Baku, the capital of Azerbaijan, in November, will resolve key operational issues, including transparency, environmental integrity, and preventing double counting.

Relevant: World Bank: Global Carbon Pricing Revenue Tops $100 Billion But Falls Short On Impact

Revenue Growth and Market Challenges

Carbon pricing revenues hit a record $100 billion in 2023, driven by high EU prices. However, the overall impact remains limited, with only modest contributions to national budgets.

In voluntary carbon markets, the value of traded carbon credits dropped from $1.87 billion to $723 million in 2023 due to environmental integrity concerns, among other challenges that continue to undermine confidence.

As a result, the weighted average prices have remained below $6/ton of carbon dioxide equivalent (tCO2e) since July 2023.

Increased scrutiny in the Reducing Emission from Deforestation and Forest Degradation (REDD+) sector has led to a decrease in the issuance of REDD+ credits; however, overall issuance and retirement levels are generally stable.

Corporate Investment in Carbon Credit Projects

Major companies like Google, Microsoft, and Meta launched the Symbiosis Coalition in 2024, committing to nature restoration projects with a target of generating 20 million tons of CO2 by 2030.

Similarly, the NextGen consortium aims to invest in technological carbon removal projects, with plans to purchase 1 million tons of CO2 removals by 2025.

These long-term offtake agreements signal corporate buyers’ growing interest in having greater control over the projects generating the credits in a bid to mitigate quality-related risks.

This increased sophistication of buyers and their direct involvement in projects are seen as another indicator of progress, since such buyers are ready to pay large premiums for credits with perceived higher quality and development impact.

Due to the general perception of higher quality, technology-based removals, such as direct air capture (DAC) and storage and enhanced weathering (EW) and biochar, trade at significantly higher prices.

Carbon Market Bottlenecks

Key challenges include slow progress in environmental integrity, lack of comprehensive carbon market legislation, and high investment risks.

The lack of legal clarity around carbon credits and of coordination in capacity building efforts, as well as fragmented and diverse approaches to deployment of market infrastructure are also identified as critical points.

Addressing these bottlenecks is essential for scaling carbon markets and unlocking greater demand, especially in developing countries.

Read more: Investors Back $225M World Bank Bond For Amazon Reforestation And Carbon Removal