The Least Developed Countries Report 2024: Leveraging Carbon Markets for Development

In this report, the United Nations Development and Trade (UNCTAD) looks at how carbon markets can increasingly play a critical role in helping Least Developed Countries (LDC) actualise the Sustainable Development Goals through a mixture of climate action and capital participation.

As the world confronts intertwined climate and finance crises while seeking to advance on the Sustainable Development Goals (SDGs), carbon markets are increasingly seen as key drivers of climate ambition and capital flow.

They enable countries to trade carbon credits – permits to offset a specific number of emissions – allowing sellers to earn revenue and contribute to climate action.

The least developed countries (LDCs) are already engaged in carbon markets and among the early movers in emerging trading mechanisms under Article 6 of the Paris Agreement.

The Least Developed Countries Report 2024 examines how these markets could bridge gaps between economic growth and climate action in LDCs and mobilize capital for sustainable development.

It makes clear that while carbon markets offer promise, they are not a substitute for official development assistance or climate finance. Instead, they serve as one of many tools to support LDCs’ green structural transformations and global emissions goals.

Navigating fragmented, complex global carbon markets

While LDCs contribute less than 4% of global emissions, they bear some of the most severe climate impacts.

Under certain conditions, carbon markets offer these countries a potential pathway to bridge critical funding gaps, helping finance renewable energy, conservation and infrastructure projects, while supporting emissions reductions and technology transfer.

However, global carbon markets remain fragmented and uncertain, split between compliance markets under the Paris Agreement and voluntary markets driven by private entities.

Compliance markets, structured around Emissions Trading Systems (ETSs), differ in scope, design and pricing. In December 2023, for instance, the European Union’s ETS traded at $77.36 per ton of CO2 – over ten times the price in the Republic of Korea’s ETS.

Voluntary markets present their own challenges. After peaking in 2021 at 362 million metric tons of carbon dioxide equivalent (MtCO2e), demand has since declined amid concerns about greenwashing. By 2023, the stock of unretired credits reached 877 MtCO2e. Carbon futures prices tumbled to historic lows in 2023 and 2024, deepening market uncertainty.

While participation in carbon markets under Article 6 of the Paris Agreement could unlock significant financial benefits for LDCs, access alone is not enough. Resilient policies, high standards and a cohesive market framework are essential to support equitable participation.

Seizing opportunities and overcoming challenges in carbon markets

Carbon markets offer LDCs a potential pathway to additional finance for climate resilience and sustainable development, but capturing significant revenue remains challenging. Most carbon credit revenues benefit others, while structural barriers limit returns for LDCs.

So far, these markets have provided limited funding compared to other sources. In 2023, LDC-sourced carbon credits were valued at $403 million – just 1% of net bilateral official development assistance and far below the $1 trillion needed annually for some SDG targets, such as inclusive and sustainable industrialization (SDG 9.2).

Market concentration in LDCs poses challenges. Since 2020, voluntary markets have been LDCs’ primary credit source, focused mainly on nature-based solutions (52%). Under the Clean Development Mechanism (CDM), however, renewable energy dominates at 41%, offering promising support for LDC energy needs.

Geographic concentration is also evident. Just six LDCs account for over 75% of all voluntary market credits and 80% of CDM credits.

LDCs have significant land-based mitigation potential, equal to 70% of global aviation’s 2019 CO2 emissions. Yet, from 2020 to 2023, only 2% of this potential was realized, limited by low project feasibility and low carbon prices. If prices remain around $10 per ton, 97% of the mitigation potential will likely remain unused by 2050.

Transferred emissions add another challenge, as emissions transferred out of an LDC don’t count toward its targets, often requiring the country to pursue additional, costlier mitigation efforts to meet its own climate goals.

For LDCs, effectively leveraging carbon markets requires strategic management of these opportunities and risks.

Drawing lessons from LDCs’ experiences in carbon markets

Evidence is limited that LDCs gained significant capabilities from hosting carbon projects under the Kyoto Protocol, which could ease their transition to Article 6 of the Paris Agreement. Case studies suggest that the anticipated benefits of carbon markets – such as technology transfer, education and community development – are uncertain for LDCs.

LDC participation in the Kyoto Protocol’s Clean Development Mechanism (CDM) was hindered by structural constraints, like their small economies and limited capacity to attract foreign investment.

By the end of 2023, the 45 LDCs accounted for just 1.5% of the 7,842 CDM projects. They registered only 217 projects from 2004 to 2020, with most occurring after 2013.

Although 32 of the 45 LDCs have some CDM experience, most of the activity was concentrated in just 12 countries. The majority hosted fewer than five projects. External developers managed most compliance aspects, resulting in limited skill-building for LDCs in project design and oversight, as well as few financial or technological co-benefits.

These findings highlight the need for greater attention to ensuring carbon markets contribute effectively to sustainable development, with more emphasis on equitable terms to support meaningful LDC participation.

Many LDCs still lack the infrastructure, technology and institutional capacity needed for meaningful participation. Strengthening their domestic regulatory institutions and frameworks for carbon markets will be essential but requires significant upfront investment.

Strengthening domestic policies and institutions for carbon market success

Among the 45 LDCs, 32 plan to leverage carbon markets to meet their Nationally Determined Contribution (NDC) targets, requiring $1.48 trillion by 2030 to achieve these commitments.

Effective participation demands strong state involvement, particularly for LDCs, to manage partnerships for transferred mitigation outcomes (Article 6.2), global carbon trading (Article 6.4) and non-market approaches (Article 6.8) that support finance, technology and capacity-building.

Participation in Article 6 mechanisms requires substantial infrastructure, including national registries and rigorous monitoring, reporting, and verification protocols. While some LDCs are updating policies in preparation, additional resources are crucial to bridge gaps in institutional readiness.

While carbon market revenues can support domestic climate efforts, they should not replace climate finance, as carbon markets do not adhere to the principle of common but differentiated responsibilities, which acknowledge LDCs’ lower historical emissions and current development needs.

To optimize resources, LDCs could explore regional frameworks with shared inventories, monitoring bodies and standards, leveraging South-South cooperation to manage costs.

Article 6.8 of the Paris Agreement provides a framework for non-market approaches, which could further unlock financial, technological and capacity-building support for LDCs. This could complement carbon market activities and support broader climate and structural transformation. However, current resource commitments toward these initiatives have fallen short of the identified needs.