Carbon Markets: Welfare Opportunities for Rural Communities

Carbon pricing and markets can contribute to improved social well-being, but they require political willingness and technical advice in their design, ensuring adequate accountability, accounting, and fair benefit sharing.


Despite years of struggle for political-regulatory reforms and exposure to the changing climate, the pandemic, along with armed conflicts and the global economic crisis revealed conditions of vulnerability among the poorest communities and minorities exposed to economic fragility. Certain populations are more vulnerable to the risk of an environmentally degraded world than others. Therefore, the mechanisms of action to fight climate change, such as establishing carbon prices, are potential tools to strengthen equity. In this sense, carbon prices and their offsetting mechanisms raise a new and implemented model for social welfare in disadvantaged communities. This article describes the connections between carbon price and fairness and proposes recommendations for its refinement.


Social injustices such as racism or sexism fiercely exist within some populations devastated the most by global crises like climate change. The relationship between social injustice and climate change is particularly relevant in rural areas across developing countries. The presence of illegal activities, the performance of institutions, inequity in the distribution of land (problems related to social justice and governance), and in some cases armed conflict, have determined the deforestation rates and consequently, their greenhouse gas (GHG) emissions. Considering these phenomena, we propose the importance of designing optimal political instruments that address risks, the climate, and social justice.


For example, pandemics are impacted by environmental degradation. Deforestation has contributed to the spread of viruses by facilitating the capture of pangolins, which studies have shown led to the transmission of SARS CoV to humans. The same deforestation that accounts for agricultural activities causes 24% of global GHG emissions. The modification of the climate also changes the spread of diseases, especially in poor populations lacking health infrastructure—such is the case of Dengue that could affect 4.1 billion people by 2055 and 5.2 billion people by 2085 in scenarios of increasing global temperature, compared to 3.5 billion people by 2085, considering the population growth variable. Other common consequences of climate change include increased exposure to respiratory and mental illnesses, unemployment, damage to infrastructure and homes, as well as water and food shortages.


The agricultural, forestry, and other land use (AFOLU) sector contributes to 24% of global GHG emissions from anthropogenic sources, dominated by deforestation in the tropics. From 1750 - 2011, 180 Gigatons of carbon (GtC) was released into the atmosphere due to changes in land use, mainly deforestation. Within the next 100 years, the forest cover will be reduced by approximately 500 million hectares, which is 1/8 of the current forest cover, impacting the supply capacity of water regulation and the provision of wood, among other fundamental services.


To solve the AFOLU emissions problem and its adverse impacts on communities’ well-being, federal incentives such as the carbon tax offsetting option and international mechanisms, such as the global carbon markets, are being created. Among the investment possibilities of resources from these instruments, we identify that nature-based solutions address the common causes and consequences of pandemics and climate change, with the aim for social change.


The instrument publicized as the most effective for mitigating climate change is carbon pricing under the argument that it helps countries steer their economies towards a carbon neutral growth path through two main mechanisms: the carbon tax and cap and trade systems. The structures of carbon taxes and emissions Cap and Trade Systems vary in their implementation within specific countries. As of June 2022, there are 46 national and 36 sub-national carbon pricing initiatives, generating $44 trillion in 2019. The main differences between the carbon pricing instruments are the emission sources they cover. Therefore, differences exist amongst the economic sectors they affect, the cost per ton of carbon, and the destination of the resources.


An analysis of the operational carbon tax structures and cap and trade systems first identifies their fundamental objective of sending an economic signal to discourage carbon-intensive activities, especially burning fossil fuels. The estimated ideal price for achieving the Paris Agreement temperature target (1.5°C) is at least $40-80 / tCO2 by 2020 and $50-100 / tCO2 by 2030 (11). However, in developing countries (for example within Latin America), carbon prices range between $3 (Mexico) and $6 (Argentina) / tCO2e. Chile, Colombia, and Mexico (national and subnational) designed taxes with offsetting options where the investments will be focused in the AFOLU sector, creating an alternative way to invest carbon tax revenue. The specific destination investments through offsetting systems can strengthen the operation of carbon price mechanisms by:


  • Adjusting the inequities generated in the transmission of the price to the end-user (repressiveness) in rural communities.

  • Enhancing climate action by creating a fixed income that can meet the adaptation requirements to climate change and its expected consequences for an economic crisis, conflicts, or pandemics, including a remarkable impact on local populations when exhibiting a lower capacity for adaptation.


Good accounting promotes long-term social justice action Behavioral changes occur in communities and could result in the feasibility of certified results in carbon markets, supporting the offsetting carbon price options. Communities are the leading actor in the mitigation of the AFOLU sector. Still, they are currently focused on specific project activities: participation, inventories, execution of territorial actions, and receiving partial benefit-sharing. However, these are not all the scopes that can be fulfilled. In addition, the communities should be the administrative umbrellas of the projects with technical support elements. For this reason, in an ideal scenario, the communities would make all the decisions and maintain/sustain governance regarding all the steps, except those of greater technical specificity. There is an intent to allocate the delivery of monetary transfers to the poorest and most vulnerable households—a context in which AFOLU mitigation projects have an opportunity. From this angle, fair agreements between the community and technical intermediaries (mainly the private sector) are fundamental in setting the community's role and prioritizing the investment within the territory. Following the structure of the carbon tax and analyzing the design of the contracts between communities and intermediaries, it is possible to establish better standards for the execution of an AFOLU project (Figure 1) and the functions that the community has been developing—both in the current scenario and in an ideal scenario (scope in gray).




Creation of capabilities in carbon markets as a tool for social justice The offsetting in the carbon tax and the implementation of Emissions Trading Systems (ETS) created a stable demand that allows maintaining the operation of a transaction system while other market opportunities are open, especially those that are structured from the UNFCCC or CORSIA. Developing countries are interested in these mechanisms, and the success of including projects in these international instruments will depend on the projects being able to demonstrate sufficient quality and fulfillment of international requirements. For instance, this is evident in the international mechanisms' articles 6.2 and 6.4 of the Paris Agreement, as well as the CORSIA mechanism for international civil aviation.

Despite this current carbon demand and future international market opportunities, recent forestry carbon results are receiving criticism. It is common to hear that REDD+ programs and offsets from the forestry sector create gaps in the monitoring of optimal compliance with the agreed arrangements, such as exaggerated increases in carbon credits. For example, the Guardian and Unearthed, Greenpeace's investigative arm, published an investigation where they reported some proponents of REDD+ projects inflated the real figures for carbon reduction. In this circumstance, the Dinamica EGO software was used to predict the reduction of deforestation due to the offset project. However, this software is not designed for that purpose but instead, to model environmental conditions under certain parameters. Another example is the one registered in ProPublica which compares the carbon stored with the regional average, which appeared considerably low. This increases the difference, and therefore, the credits granted. These situations in independent accredited markets considerably harm the credibility and viability of REDD+ projects because they generate the perception that projects start as an alternative to reduce CO2 emissions and become highly profitable businesses based on ghost carbon credits. The current certification system cannot avoid flawed projects, meaning that the chain of independent entities is insufficient to guarantee quality. A new neutral position could be executed from a public office, but it needs to avoid more bureaucratic steps to certify the carbon. The social change to justice requires constant investment in the long term. This option in the context of carbon markets needs the results to be transferred directly to communities that possess enough quality, compared to mitigation results within other sectors. The current independent certified methodologies implemented allow the inclusion of hot air, undermining the future possibility of climate justice financing. The solution to this is effectively controlling atypical baselines in the government. Developing countries raised the interrelation between voluntary and public control, but currently, it is not fully operable. This quality plan is urgent when countries need to guarantee that financial flows are directed towards more vulnerable populations. This plan should include both social and quality actions. Recommended social justice actions Directing forest carbon projects towards maximizing their social justice capabilities by appropriating them in community-based organizations guarantees the quality of the results through a robust Measurement, Reporting, and Verification (MRV) connection between private actors and government registries. This is an action that brings equity to populations with structural inequities.

  • Analyze the costs of developing forest mitigation activities to promote a fair distribution of benefits.

  • Developing safeguards with the scope of the contracts between communities and intermediaries.

  • Design robust norms pertinent to developing frameworks of social safeguards (including rules on fair treatment). Support with updating the detailed methodologies certification programs for the inclusion of regulations to guarantee better contracts and new benefit-sharing models.

  • Strengthen capacities in public institutions for monitoring safeguards.

  • Analyze current and available contracts to recommend improvements and promote them with official regulations.

  • Support communities and develop capacity-building processes on the carbon tax, its non-causation mechanism, and other potential markets.

  • Developing guides for the national interpretation of safeguard impacts and the contracts between communities and intermediaries.

  • Support communities and develop capacity-building processes on the carbon tax and offsetting mechanisms.

  • Analyze the costs of developing forest mitigation activities to promote a fair distribution of benefits.

  • Plan for information and dialogue with taxpayers, including the assessment of the safeguards and benefits sharing in companies' procurement processes.

  • Transparency in the monitoring system in compliance with the principle of transparency that operates and guarantees easy access to information on projects both in the repositories of the Conformity Validation Bodies and in the certification programs in such a way that any actor can reconstruct the validation and verification process and question it.

  • Include evidence in the validation and verification audit steps about project compliance according to social safeguards. Recommended actions regarding quality The carbon offsets will only be operable if they have enough quality to maintain their demand in the long term. This quality is based on an accountability system and environmental integrity. To guarantee environmental integrity and a reliable accountability system, additional rules need to be defined to integrate the various levels of accounting, management, and incentives. Such rules are referred to as “nested systems” that nest projects or programs within national or state level REDD+ accounting systems. To generate a market operable in the long term, developing countries needs to connect their AFOLU projects with the local governance, the private sector, and civil society to collaborate in achieving climate goals ensuring high quality results through:

  • Implementing national registries to identify the mitigation projects, including AFOLU. This registry could include the track of criteria for evaluating the quality of the projects.

  • Creating public capacities to evaluate and act upon, ensuring the quality of the procedures in the design project baseline. Acting over atypical projects without including new steps in the certification chain.

  • Supporting the updating of the detailed methodologies of the certification programs for the inclusion of rules to guarantee better baselines.

  • Including the assessment of the conservative baselines in companies' procurement processes.

 

CCAP’s mission is to support every step of climate action, from ambition to implementation. A recognized world leader in climate policy and action, CCAP creates innovative, replicable climate solutions, strengthens capacities, and promotes best practices across the local, national, and international levels to accelerate the transition to a net-zero, climate resilient future. CCAP was founded in 1985 and is based in Washington, DC.