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  • Pedro Barros

The International Carbon Market Landscape

Amid global environmental concerns, the international carbon credit trading scene has emerged as a critical arena to combat climate change. With regions around the world implementing various carbon trading schemes, the concept of carbon markets has gained significant prominence. In this article, we will explore the international carbon market landscape and analyze how different countries are shaping their approaches to manage emissions and promote sustainability.


California: A Leader in Carbon Markets


A leading figure in the international carbon market scene is California, USA. The state's carbon market has garnered global attention for its innovative approach to emission reduction. By early 2022, Californian authorities reported that local projects had generated over 250 million carbon credits. In partnership with Quebec's carbon market, these regions collaborate by purchasing carbon credits from each other. This cross-border cooperation demonstrates how regions are uniting to tackle emission challenges.


The EU-ETS: Europe's Carbon Market Giant


A pioneering example in the international carbon market scene is the European Union Emissions Trading System (EU-ETS). Launched in 2005, this initiative regulates emission trading across 31 European countries. The EU-ETS covers over 10,000 industrial facilities and imposes emission limits on participating entities. Companies exceeding these limits can purchase carbon credits from other facilities, fostering emission reduction across various sectors.


Latin America and the Caribbean: Immeasurable Potential


The carbon market in Latin America and the Caribbean is poised to become one of the leading global suppliers of carbon credits. However, its consolidation requires coordinated efforts from countries and institutions in the region. As the market organizes and grows, carbon prices remain volatile and relatively low. Expectations are for these values to evolve to a range between USD 75 and USD 100 per ton by 2050, to achieve the much-desired carbon neutrality.


It's evident that various countries and entities are actively entering this market, indicating potential fragmentation. A healthy competition is shaping up not just among nations but also among companies, banks, and other institutions.


The opportunity to develop a Latin American regional market emerges as a vast prospect. Creating a market based on economies of scale and cost reduction could boost competitive advantages and open doors for financing sustainable projects. This would not only amplify efforts in conservation and regeneration of natural capital but also leverage the region's economic and technological progress.


The adoption of Article 6 of the Paris Agreement laid the groundwork for fierce competition in this market, potentially reaching an impressive estimate of 22 trillion dollars by 2050. However, as with any ambitious venture, there are obstacles to overcome. Diversity of interests, subregional markets, and limited resources are just a few of the challenges. Yet, various initiatives, both political and private, are propelling Latin America to become a leader in the global carbon market.


In 2022, the Inter-American Development Bank (IDB) organized discussions highlighting the opportunities presented by carbon credit markets in Latin America and the Caribbean. The Latin America Climate Summit 2022, hosted in Rio de Janeiro, brought together regional and global experts, IDB leaders, and influential figures from neighboring banks and entities. The event addressed concrete solutions and challenges to transform the immense potential of carbon markets into tangible impacts for the economy and the environment.


In pursuit of a green economic transition, Morgan Doyle, IDB Group Representative in Brazil, stated: "Brazil, like all of Latin America, has the conditions to be the epicenter of a green economic transition. With carbon credits, powerful initiatives will be made viable that combine environmental conservation and socio-economic development, benefiting not only the region but the world with new success stories."


Furthermore, CAF, the development bank of Latin America, is also playing a crucial role in this scenario. Through the Latin American and Caribbean Initiative for the Development of the Carbon Market (ILACC), CAF aims to become the region's "green bank." Its commitment involves financing green projects worth US$ 25 billion over the next five years, with 40% of its operations by 2026 dedicated to sustainable growth.


ILACC seeks to strengthen carbon markets among its member countries, promoting competitiveness in the supply of carbon credits and reducing greenhouse gas emissions. With a focus on voluntary and regulated markets, the initiative aims to positively impact job creation, income generation, innovative technologies, green business clusters, and the fight against poverty. The project aspires to a coherent and innovative response to the global demand in addressing warming-related issues.


The carbon market in Latin America and the Caribbean is entering a crucial phase, with ongoing efforts to explore its potential and promote a more sustainable and prosperous future for the region and beyond.


Contributors: Camila Hillesheim Kraus and Pedro Guilherme Kraus

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