How putting a price on carbon is changing corporate behaviour

 

Letter to Editor

LET’S be blunt. The idea of creating a market for the right to pollute has always smelled a little fishy. To many, carbon markets seem like a financialist’s sleight of hand, a way for the world’s biggest emitters to buy their way out of meaningful change.

And in their early, Wild West days, that critique was often valid. But to dismiss them entirely now is to ignore a tool that is rapidly evolving and, despite its flaws, is becoming a critical engine for climate action and sustainable development.

The journey of carbon markets is a story of trial, error, and painful maturation. The first major chapter was written with the 1997 Kyoto Protocol, which established a system of international carbon credits.

The theory was elegant: set a cap on emissions and let the market find the cheapest ways to cut them. The practice, however, was messy. A flood of questionable credits, a lack of transparency, and weak oversight led to scandals and a crisis of credibility. The market was, in many ways, a toxic asset.

But here’s the finding that might surprise the skeptics: carbon markets didn’t die. They learned. They evolved. The launch of the European Union Emissions Trading System (EU ETS)—the world’s first major carbon market—was rocky, but it proved a concept: putting a price on carbon changes corporate behavior.

When the price is right, it makes dirty operations unprofitable and clean technology suddenly competitive. It’s a relentless financial incentive that operates 24/7. The key finding from over a decade of data?

A robust carbon price drives decarbonization faster and more efficiently than vague regulations alone. The real evolution, however, is happening in the so-called “voluntary market.” This is where the narrative shifts from mere compliance to strategic opportunity.

Companies like Microsoft and Stripe aren’t just buying credits to offset their footprints; they are strategically investing in high-quality carbon removal projects to future-proof their businesses and lead their industries. They are creating demand for a new commodity: verified atmospheric cleanup.

This is where the “sustainable development” piece clicks into place. A modern, high-integrity carbon credit is no longer just about a tonne of CO₂. It’s a bundle of benefits. It’s a credit from a project that protects a mangrove forest in Vietnam, which not only sequesters carbon but also buffers coastal communities from storms and supports local fisheries.

It’s a clean cookstove project in Kenya that reduces indoor air pollution (saving lives) and deforestation, while generating carbon revenue to make the stoves affordable. The finding here is profound: when done right, carbon finance directs capital directly to the Global South communities on the front lines of the climate crisis, funding both mitigation and adaptation.

Of course, the caveat is “when done right.” The market is still plagued by old credits, overstated claims, and a lack of standardization. But the findings from initiatives like the Integrity Council for the Voluntary Carbon Market (ICVCM) are clear: the bar is being raised.

New technologies like satellite monitoring and blockchain are bringing unprecedented transparency, making it harder for bad actors to hide. So, what’s the verdict? Carbon markets are not a silver bullet. They are a pragmatic, if imperfect, tool in a toolkit that must include regulation, innovation, and public investment.

Their role in climate mitigation is to accelerate the transition by making carbon pollution expensive and clean solutions profitable. Their role in sustainable development is to unlock trillions in private finance for projects that would otherwise never get built.

The evolution is far from over. But the finding is this: we can’t afford to let the perfect be the enemy of the good. A flawed, evolving carbon market that is actively driving down emissions and funding sustainable development is infinitely better than a theoretically perfect system that exists only on paper.

The market has grown up. It’s time our conversation about it did, too. All forward looking industries must evaluate their opportunities to trade carbon, not only to comply with global climate ambitions but more so for brand strengthening.

Future business competitiveness will be increasingly defined by their carbon performance and record. 

Professor Dato Dr Ahmad Ibrahim is an Adjunct Professor at the Ungku Aziz Centre for Development Studies, Universiti Malaya.

The views expressed are solely of the author and do not necessarily reflect those of  MMKtT.

- Focus Malaysia.