What can we learn from carbon markets history as we head towards Phase 3.0?

I’ve spent the past 20 years watching – and experiencing – the highs and lows of the dynamic global carbon markets. The period has facilitated unprecedented levels of finance into emissions reduction projects – but has also come with unexpected complexities.

As we’re progressing towards what I call “Phase 3.0” of the market and the operationalisation of Article 6, I’ve been reflecting on what we can learn from the past as the market continues evolving into its next iteration.

I see the trajectory of these evolving markets in four distinct phases:

• Phase 1.0: After the Kyoto Protocol, we saw the establishment of a harmonised international carbon market with a single price - providing sustainable carbon finance streams to accelerate decarbonisation activities. The voluntary market was only in its infancy and a secondary consideration.
• Phase 2.0: Where we are now! The market, largely dominated by voluntary action, grew quickly from 2018, spurred by a rise in corporate climate pledges throughout the COVID-19 pandemic as businesses reassessed their impact on the planet. However, the market is highly fragmented and heterogeneous (different prices, policies, regulations, technologies, types, and countries etc.) - complicated even further by the development of new, national-level compliance markets.
• Phase 3.0: One we’re hopefully moving towards, where Article 6 of the Paris Agreement comes into full force – delivering a regulated compliance market that allows countries to mobilize capital and take action at scale, due to clear and robust demand and price certainty. The current fragmentation of the market will dissipate, and the voluntary market will play an active role in corporate decarbonisation efforts in sectors that sit outside of compliance markets.
• Phase 4.0: The desired state - a fully operationalised, globalised, and highly effective #Article6 market. With a consolidated price of carbon, each actor in the market will have a clear price signal, mobilising hundreds of billions of $ to accelerate the low carbon transition and deliver on net zero ambitions early.

💡 What does this mean?

We all need to be rowing in the same direction - otherwise we run the risk of going in circles, repeating old mistakes.

Though we all have a shared vision in the form of the Paris Agreement and limiting global warming to 1.5 degrees, there are different opinions on how this should be delivered.

So what can we do to deliver the highly effective carbon market 3.0?:

• Be brave in doubling down on short, medium, and long term commitments to climate positive and net zero outcomes.
• Build trust in the process that will enable policy makers, regulators, negotiators, and leaders to rapidly operationalise Article 6 – ideally in Baku and on the road to Belem.
• Focus on how the carbon markets have worked well in the past and how this can help shape the future.
• Start to operationalise now: learn from the pioneering bilateral agreements and look to scale, scale, scale.