Despite its drawbacks and limitations, the UNFCCC’s Clean Development Mechanism (CDM) under the Kyoto Protocol demonstrated that carbon trading can significantly and cost-effectively contribute to global carbon mitigation targets.
Despite its drawbacks and limitations, the UNFCCC’s Clean Development Mechanism (CDM) under the Kyoto Protocol demonstrated that carbon trading can significantly and cost-effectively contribute to global carbon mitigation targets.
It also ensures flexibility within the broader framework of regulatory requirements to comply with the goals and commitments outlined in the Nationally Determined Contributions (NDCs). If well-designed and implemented, carbon markets have the potential to provide multiple co-benefits, particularly for developing countries.
These aspects underscore the importance of carbon markets within the framework of the Paris Climate Agreement. Article 6 of the Agreement introduces the concept of Cooperative Mechanisms, which include both Market Mechanisms (as detailed in Articles 6.2 and 6.4) and Non-Market Mechanisms (outlined in Article 6.8).
The primary objective of Article 6 is to facilitate international cooperation and the application of market-based strategies aimed at reducing global greenhouse gas emissions. This approach is based on the understanding that developing countries have the potential for economically viable reductions in GHG emissions, which can be realised through private-sector investments.
Pakistan, like many developing nations, has substantial yet largely untapped potential for carbon investments, along with several inherent advantages. The country has committed in its NDCs to reduce its projected emissions by 50 per cent by 2030. While significant initiatives are being implemented across various sectors, including energy, transportation, and agriculture, some areas, particularly industry, have seen limited engagement. Although isolated efforts exist within the industrial sector, its substantial potential indicates that more action is needed.
Currently, the industrial sector contributes approximately 25.76 MtCO2e to the overall emissions inventory, with projections suggesting that energy, agriculture, and industry will be the primary contributors in the future. Pakistan experienced one of its most devastating climate-related disasters in 2022 when floods affected 33 per cent of its population, resulting in an estimated $40 billion in damages. In response to the catastrophic floods, which left about one million people without basic shelter, food, and protection, international donors pledged over $9 billion in aid.
Ranked among the top ten countries most vulnerable to climate change, Pakistan stands to benefit significantly from international carbon markets. Potential carbon reduction initiatives can lead to essential improvements in energy efficiency and processes across various industries, aid in the transition to sustainable energy sources, and support the ongoing development of the agricultural sector.
There are also considerable, largely untapped opportunities for decarbonising urban transportation, which could play a crucial role in helping Pakistan meet its NDCs through a combination of concessional financing and carbon-focused investments. However, establishing carbon markets is a complex endeavour that requires support for the industrial sector and the broader private sector.
In 2010, the Pakistani government allocated financial resources for carbon trading in its annual budget. However, by 2012, Pakistan’s participation in CDM projects was below one per cent, in stark contrast to China and India, which accounted for 60 per cent and 30 per cent of the global CDM project share, respectively. In FY2015-16, Pakistan’s finance ministry allocated Rs34 million (around $340,000) for initiatives aimed at achieving carbon neutrality and facilitating carbon credit trading within the industrial sector.
The Pakistan Climate Change Act of 2017 established a comprehensive legal and institutional framework for addressing climate change, assigning the Ministry of Climate Change (MoCC) the responsibility of creating a national registry and database to monitor greenhouse gas (GHG) emissions. In 2018, the National Committee on the Establishment of Carbon Markets (NCEC) was established to assess the country’s capacity for participating in both domestic and international carbon markets, including the implementation of a domestic emissions trading scheme (ETS) targeting major emitters in the power and industrial sectors, responsible for 168 million tons of CO2 equivalent emissions.
Due to the slow pace of financial assistance, which has addressed less than one-fourth of the assessed damages, Pakistan is currently focusing on shifting its business model towards the carbon credits market. Carbon credits or offsets are traded after being certified by a regulatory authority or an independent organisation. Carbon offsetting allows entities to compensate for their greenhouse gas emissions by supporting initiatives that reduce emissions elsewhere, such as investing in renewable energy or forest conservation.
Looking ahead, a strategic set of measures is recommended to enable Pakistan to participate effectively in carbon trading and access international carbon markets. First, the existing policy, legal and regulatory frameworks are inadequate for facilitating carbon trading. It is essential to revise these frameworks following international best practices, such as the European Union’s cap-and-trade system, while also implementing rigorous monitoring, reporting, and verification (MRV) protocols for greenhouse gas emissions.
Second, Pakistan should establish an independent regulatory authority in collaboration with the Ministry of Climate Change and relevant provincial departments to ensure the transparent and efficient functioning of carbon markets. The government could also consider delegating significant responsibilities from the Ministry of Climate Change, including climate finance and access to international funds such as the Global Environment Facility and the Green Climate Fund, to enhance the development and operation of carbon markets. This approach would integrate climate change initiatives into economically and socially vulnerable sectors, promoting low-carbon and climate-resilient development while maximising benefits from the global carbon market, particularly for communities affected by climate change.
Third, participation in carbon markets can help Pakistan achieve its NDCs, targeting a 20 per cent reduction in emissions below Business as Usual (BAU) levels by 2030. Lastly, Pakistan has the opportunity to transform the outcomes of initiatives such as the billion-tree plantation project into tradable assets in international carbon markets, similar to Indonesia’s success in generating substantial carbon credits through sustainable forestry management practices.
Various sectors within Pakistan’s economy present appealing opportunities for carbon investments, attracting both local and international investors. In addition to strengthening technical and regulatory frameworks, fostering international partnerships and promoting collaboration will be essential for success.
The writer works on climate finance, carbon markets and sustainable development across disaster risk reduction and climate change.
