Since the thirty-four industrialized countries signed the Kyoto Protocol in 1997, the idea of buying and selling carbon emission rights—the so-called carbon market—has been the main strategy of the United Nations for combating climate change. Named for the third annual Conference of the Parties to the United Nations Framework Convention on Climate Change, or COP3, the Kyoto Protocol gained momentum in 2005, when enough countries ratified the agreement. Ever since, carbon markets have been at the heart of multilateralist diplomacy on climate change, as represented in the Paris Agreement of COP21 in 2015. At COP 29, held in 2024 in Baku, Azerbaijan, the project to administer a global carbon market was finally achieved. Under the UN’s auspices, a country can meet its carbon emission reduction targets by purchasing the results of emission-reduction projects carried out in other countries. Because mitigation costs are usually lower in poorer countries that emit less, rich high-emission countries will be able to meet their contribution to global goals without reducing their own emissions by purchasing global carbon credits.
The apparent achievement, however, has worked more to shift the discussion away from what really works in combating the climate crisis than to advance meaningful solutions. Rather than public planning aimed at making energy, production, and infrastructure systems independent of fossil fuels, the UN’s strategy for mitigating climate change has been to induce uncoordinated decisions by promoting marginal changes in the current relative price system—in the form of raising the price of carbon emissions and reducing the prices of sustainable alternatives—through the carbon market. Since decarbonizing energy systems involves making investment decisions with interdependent future impacts that cannot be reflected in current market prices, these prices have proven unable to guide and trigger the necessary investment decisions. In the over quarter-century it has taken the UN to achieve it, we’ve seen that a global carbon market is not able to achieve decarbonization at the speed and depth needed on a worldwide scale.
The climate goes to market
Carbon markets—purported pricing of the social costs of emissions—have been for decades a favored mitigation strategy in global climate governance. This solution is based on the diagnosis that unchecked emissions are a “market failure.” In economic jargon, the presumption is that markets normally equalize social and private contributions through varying prices to balance supply and demand. When a commercial transaction generates collateral economic benefits or damages to parties not involved, effects not captured by the price of the good or service traded, economists describe the outcome as a market failure. Suppose the explanation for the problem is limited to the fact that market prices do not pass on accurate information about their social contribution to suppliers. In that case, the solution is to bring (or “internalize,” in economic jargon) such un-priced “externalities” into market prices, thereby correcting the failure.
To correct the market failure of climate change, according to carbon-market logic, it is sufficient to raise carbon’s price according to this previously unpriced social cost. If emissions cost as much as the economic damage they cause, and that damage is high, then energy producers and users will emit less. Once calculated, the social cost of carbon, previously “external” to the economic activities of the supplying agents, could be charged to each of them. The increased cost of emissions would lead economic agents to review their production and consumption patterns to reduce them. As a result, private consumption and investment would be gradually directed toward low-carbon activities and products, limiting or even reversing global warming and improving social welfare.
The pricing and charging of the social cost of carbon can be implemented by both the government (through taxes) and the private sector. All forms of pricing and internalization of the previously unpriced social costs of carbon, whether voluntary or mandatory, entail new costs for the companies involved. As a result, once emissions are priced, whether through compulsory taxation schemes or voluntary associations, emitters would seek ways to lower these new costs by either reducing or offset their emissions. Reduction involves so-called green investments (such as energy efficiency gains and clean technologies), while offsetting encompasses mitigation projects (environmental conservation projects, or participation in regulated or voluntary carbon markets). If offsetting is cheaper, more feasible, and faster for an emitter than making its own green investments, then there are strong incentives to offset rather than reduce emissions.
This is the argument in favor of carbon markets: they are the fastest and most cost-effective institution for combating emissions. The strategy would be easier to implement than restrictive or punitive regulation. It would be cheaper and quicker for society, because markets mobilize private sector resources through the decentralized operation of the profit motive.
Fixing the price
The original sin of offsetting as a way to pay for the social cost of carbon is that, ultimately, this mechanism contributes to delaying green investments. There is clear evidence that markets and carbon taxes have failed to price emissions in line with the climate mitigation goals set out in the Paris Agreement. In 2015, the Intergovernmental Panel on Climate Change (IPCC)—the UN’s research group that informs the COP meetings—estimated that to limit global warming to 1.5°C, a ton of emissions should cost between $170 and $290 ($226 and $385 in 2024). In 2017, the World Bank’s High-Level Commission on Carbon Pricing estimated that the price of emissions between 2020 and 2030 would need to be between $50 and $100 per metric ton ($63 to $127 in 2024 values) to keep global warming well below 2°C.
Despite the wide variation among estimates of carbon’s social costs, carbon markets have nevertheless failed to meet either set of price targets. In 2024, only seven carbon pricing mechanisms worldwide—which together covered less than 1 percent of global emissions—reached the World Bank’s minimum price. The prices of all 75 carbon pricing mechanisms in place fell below the minimum IPCC threshold.)http://hdl.handle.net/10986/41544(<)/a(>).” class=”footnote” id=”footnote-3″ href=”#footnote-list-3″>3 Uruguay’s carbon tax came closest to the IPCC figure, pricing the emission of one metric ton of greenhouse gases at $167.17. At the other end of the spectrum, however, Indonesia’s carbon market charged only $0.61 for the same ton.
The global carbon market approved in Baku will not overcome this problem. International competition to reduce costs to attract private investment is a systemic feature of the world economy. It creates a coordination problem, making it impossible to establish a single international price for carbon. International divergence in carbon prices undermines an effective system for reducing global emissions.
Compounding the absence of a single carbon price is the fact that, to work in theory, charging for the social cost of carbon depends on periodically raising its price. In practice, price increases—when they occur—are quite gradual and unstable (and therefore reversible within unpredictable time frames). This is because price instability is a characteristic of financial markets that trade quotas or credits,)http://dx.doi.org/10.2139/ssrn.3547414(<)/a(>).” class=”footnote” id=”footnote-5″ href=”#footnote-list-5″>5 but also reflects effective corporate political pressure to subordinate the pace of the energy transition to the economic viability of polluting companies—charging low taxes and offering many licenses.In an attempt to reconcile capital accumulation and the gradual resolution of the climate emergency, advocates of carbon markets argue that the prices charged for emissions should be neither too high nor too low, and should progress at a pace compatible with the deadlines to which countries have committed to achieve their climate goals. Too-low price levels may discourage agents from emitting less; in effect maintaining or even increasing the economy’s emissions trajectory. Very high price levels, on the other hand, can disproportionately affect both end consumers, to whom part of the mitigation costs are passed on, and exporting sectors, which compete with goods and services produced in geographies that do not necessarily adopt the same emission restrictions. The fragmented nature of carbon markets thus contributes to the difficulty of a single carbon price ever emerging—or reaching estimates of social cost.
Pricing outside the market
In an attempt to reconcile capital accumulation and the gradual resolution of the climate emergency, advocates of carbon markets argue that the prices charged for emissions should be neither too high nor too low, and should progress at a pace compatible with the deadlines to which countries have committed to achieve their climate goals. Too-low price levels may discourage agents from emitting less; in effect maintaining or even increasing the economy’s emissions trajectory. Very high price levels, on the other hand, can disproportionately affect both end consumers, to whom part of the mitigation costs are passed on, and exporting sectors, which compete with goods and services produced in geographies that do not necessarily adopt the same emission restrictions. The fragmented nature of carbon markets thus contributes to the difficulty of a single carbon price ever emerging—or reaching estimates of social cost. According to these findings, achieving a projected average decrease of 50 percent by 2030 (compared to 2020), in line with the Paris Agreement, requires a global emissions-weighted carbon price across the global economy of more than $175 per metric ton. This is far from current prices.
In practice, energy’s inelastic demand means that even if prices rise, users of dirty technologies and fossil fuels will continue to pay, even if they become poorer, because they cannot find feasible substitutes. There are no easily accessible substitute technologies and infrastructure, let alone ones with costs comparable to fossil alternatives.
A key problem preventing rapid decarbonization through increased investment is the low profitability observed and expected from renewable energy companies. While the annual return on green energy fluctuates between 6 percent and 8 percent on average, private banks seek to finance projects with returns above 10 percent, a figure typically achieved by fossil fuel companies. The fundamental reason for the unattractive profitability has to do with the structure of the electricity market, which is increasingly separated into generation, transmission, and distribution markets. While oil and gas companies operate in oligopolistic markets, protected by OPEC and with a significant amount of investments already amortized, barriers to entry into renewable production are very low, as the necessary capital goods are available on the international market. As a result, short booms in uncoordinated investment are followed by long periods of overproduction, low prices, and low profit rates.
In view of fierce competition, renewable energy generators lack the market power to impose prices and raise profit margins in the face of corporations that dominate the transmission infrastructure, forcing them to pass on cost reductions to prices, thereby maintaining low profit rates. To make matters worse, the market structure means that renewable energy production (solar and wind) is most abundant when energy demand is lowest, which tends to limit prices further: while supply is highest during daylight hours and in warm seasons, demand is highest in cold seasons and during the dark hours of the day immediately before and after the workday. Due to the high cost of storing renewable energy, companies must dispatch energy as it is generated, even if it means accepting unfavorable prices. Furthermore, renewable generation is very land-intensive, which leads producers to seek areas where land is cheaper, generally far from both existing transmission networks and the more densely populated areas where demand is concentrated.
The strategy for transitioning to renewable energy should not, therefore, begin with raising carbon prices and waiting for the market to offer an alternative solution in the short term. Instead, it must involve government planning for the supply of new green technologies and substitute infrastructure based on sustainable energy. Only after these technologies and infrastructure are accessible can raising carbon prices induce rapid substitution. Until then, consumers and user companies will be hostage to dirty options. Since the main route to decarbonization in most countries involves the electrification of systems and the conversion of sustainable energies into the primary source of electricity, governments should not rely on the magic power of the pricing system to deliver alternative networks out of thin air. Waiting for the creation of alternatives to fossil fuels through market mechanisms delays decarbonization and prolongs the price inelasticity of demand for dirty fuels. And structural inertia is not limited to the electricity system. Fossil fuels are integrated into a socio-technological system with enormous interdependencies, resulting in positive externalities that “lock” users into the existing network and, if not rendering it unviable, greatly hinder the transition to an alternative system through price signals.
From the year of the Kyoto Protocol (1997) to 2024, fossil fuel consumption increased by 58 percent (just under half of the cumulative growth of global GDP, around 120 percent). As a result, gains in energy efficiency and the use of clean technologies have only marginally reduced the share of fossil fuels in the global energy mix. In the year the Kyoto Protocol was signed, fossil fuels accounted for 85.8 percent of the worldwide energy mix, falling to just 81 percent in 2024.
Forest scarcity
In view of this failure, the scale required for carbon market offset projects—through environmental conservation, forest regeneration, or reforestation—to ensure net-zero emissions is absolutely unfeasible. Offsetting cannot function as an alternative to decarbonizing energy, production, and infrastructure systems simply because there is not enough land to replant forests.
To understand why, we must look at not only the disappointing speed of the energy transition, but also the progress of efforts to recapture carbon represented by global carbon credits. Shell, the world’s fourth-largest oil and gas company by market capitalization, purchases carbon credits through forest protection and reforestation, for example. Meeting Shell’s reforestation targets would require, between 2020 and 2030, an area three times larger than the Netherlands, where the company is headquartered.)https://actionaid.org/publications/2021/not-their-lands-land-impact-royal-dutch-shells-net-zero-climate-target(<)/a(>).” class=”footnote” id=”footnote-11″ href=”#footnote-list-11″>11Shell itself claimed that it would be necessary to reforest 700 million hectares—an area equivalent to Brazil—by the end of the century to avoid warming above 1.5 °C, in conjunction with several other mitigation initiatives (such as transitioning to sustainable energy and forest restoration). Even if the other initiatives are successful, Shell’s estimate of the impact of reforestation is highly unrealistic: it assumes an annual carbon sequestration rate of 17 tons per hectare, a figure close to that achieved during the growth of native and biodiverse tropical forests.) https://www.ft.com/content/8bcf131f-c820-493f-8ea6-6a35440facd3(<)/a(>).” class=”footnote” id=”footnote-12″ href=”#footnote-list-12″>12 Since most reforestation opportunities are in temperate forest areas in the Northern Hemisphere, there is no room to replant tropical forests on this scale. Achieving even less than a third of Shell’s estimate (in a realistic scenario) would require reforesting perhaps more than three times the size of Brazil—assuming the success of the other mitigation initiatives envisaged by the company.
In even the most optimistic reading, forest offsetting cannot function as an alternative for decarbonizing energy, production, and infrastructure systems. Given the degradation of soils that once supported forests and competing land uses, it would be possible to reforest a maximum of 0.9 billion hectares worldwide, an area capable of absorbing 205 billion tons of carbon in the decades needed for the forests to reach maturity. This is equivalent to only five years of emissions at the current annual rate. The expansion of agriculture, mining, and urbanization has been the leading cause of deforestation between 1990 and 2020, reducing forest coverage worldwide by 178 million hectares.)https://doi.org/10.4060/ca8753en(<)/a(>).” class=”footnote” id=”footnote-15″ href=”#footnote-list-15″>15Even if we could immediately prevent further expansion of these economic frontiers over forests, worldwide forest cover could be reduced by an additional 223 million hectares by 2050 due to the impact of global warming on tropical forests alone. In sum, the socio-technological system based on carbon emissions simply cannot offset sufficient emissions through reforestation and forest restoration to restrict the process forecast to eliminate forests.
In practice, countless forest-conservation projects have been sold without proper proof of their effectiveness. In 2016, a study funded by the European Commission’s Directorate-General for Climate Action concluded that 85 percent of forest mitigation projects were unlikely to achieve “additional” (not overestimated) emissions reductions, compared to only 2 percent that were highly likely to do so. In 2023, a study by The Guardian and Corporate Accountability analyzed the 50 leading emissions offset projects in the world, concluding that 78 percent were useless, 16 percent were problematic, 6 percent lacked transparent information to allow judgment, and none demonstrated an unequivocal effective contribution.)https://www.theguardian.com/environment/2023/sep/19/do-carbon-credit-reduce-emissions-greenhouse-gases?CMP=Share_AndroidApp_Other(<)/a(>).” class=”footnote” id=”footnote-18″ href=”#footnote-list-18″>18
The impact of global warming on tropical forests means that reforestation is not only an unviable alternative to decarbonization. As a smokescreen to allow companies to profit longer from dirty energy, it is self-defeating. Even if the forests that host specific “offset” projects do not disappear in a hundred years, there is a disparity in duration that makes true offsetting unfeasible. Forest mitigation projects have a relatively short lifespan (a maximum of 100 years), but 40 percent of emitted carbon dioxide remains in the atmosphere for more than a century. Between 20 percent and 35 percent of emissions remain for millennia.
Public investment pays off
Among the top emitting corporations, many have financed political and ideological campaigns aimed at discrediting the existence and underestimating the risks of global warming. Where this has failed, they have financed campaigns to discredit public policies aimed at prohibiting emissions and planning investment strategies, coordinating decisions, and allocating resources directly or indirectly in pursuit of structural change. In the United States during the 2024 elections, fossil fuel corporations spent $445 million to elect Donald Trump and other politicians favorable to dirty energy.
If this is a symptom of unfair national political systems, in which economic power misinforms and manipulates public opinion and government and legislative decisions, international injustice is even greater. Between 1751 and 2010, just ninety institutions were responsible for 63 percent of greenhouse gas emissions—the vast majority global corporations headquartered in temperate regions less impacted by global warming. Between 2016 and 2022, 80 percent of global emissions came from just 57 such corporations. Although their subsidiaries and subcontractors produce at lower wages and environmental costs in the global South, it is these regions that will be hardest hit by the impacts of climate change.
These corporations have appropriated and abused a global common good: the capacity of the atmosphere, soil, and oceans to absorb greenhouse gases. While some of them intend to continue appropriating without limits, others agree to “offset” their future emissions—but not their past emissions—through mitigation projects that are miniscule in scale compared to total emissions. In one way or another, both groups are prolonging the life of a socio-technological system that guarantees them extraordinary profits while accumulating ever greater climate catastrophes.
This does not mean that carbon pricing and forest offset projects should be discarded. Once an alternative electricity system is in place, carbon pricing could ultimately contribute to accelerating systemic replacement. What should be discarded is the idea, prevalent in the mainstream media worldwide and even at the UN, that charging for the social cost of carbon and its “offsetting” can replace public planning for socio-technological transition.
This essay is an adaptation of note 12 of Transforma published in March 2025.
