he rapid developments around carbon markets signal a growing economic opportunity. They are a vital tool for the developing world in reducing greenhouse gas emissions and combating climate change. From California in the United States to the European Union; and from China to the Middle East, these markets are expanding rapidly. This shows their potential to drive environmental and economic benefits. It is high time Pakistan followed suit, leveraging the lessons learnt globally to establish a robust carbon market that addresses both provincial and federal policy gaps.

Globally, the carbon market is witnessing substantial growth. In the United States, California’s carbon price is projected to rise from $34 per metric tonne in 2023 to an average of $42 in 2024 and $46 by 2025. The European Union, seeing a slight dip from €85 per tonne in 2023 is expected to average €71 this year. The price is projected to soar to €149 per tonne by 2030. These upward trends signify a strong commitment to carbon pricing as a means to reduce emissions in compliance with the market framework. Pakistan can harness this momentum by establishing its own carbon market, starting with a well-defined voluntary market as a stepping stone for more stringent compliance markets. The goal can be achieved through an effective carbon pricing mechanism that reflects the true cost of carbon emissions.

New carbon markets are continually emerging, tightening supply and setting precedents. Washington state’s recent cap-and-invest scheme, saw auction prices surpassing $50 per tonne. Such initiatives provide a blueprint for Pakistan to design its market, potentially linking it with established systems like the California-Quebec market to enhance stability and reduce compliance costs. The linkage would not only bring economic benefits but also align Pakistan with international carbon market standards.

The voluntary carbon market is also evolving, with a focus on high-integrity carbon credits. Projects involving enhanced rock weathering and bioenergy with carbon capture are gaining traction due to their ability to offer measurable CO₂ reductions. For Pakistan, investing in these technologies could be a game-changer. It could helping the country meet its net-zero targets. By prioritising carbon removal projects, Pakistan can contribute to global efforts to limit warming while driving local innovation and job creation.

Carbon border adjustment mechanisms, too, are gaining traction. The European Union has taken the lead in this regard. The UK, Canada and Australia are following suit. These mechanisms impose costs on carbon-intensive imports, levelling the playing field for domestic industries. For Pakistan, adopting the CBAMs can protect local businesses from unfair competition and incentivise industries to reduce their carbon footprint, fostering a more sustainable and decarbonised industrial sector.

Carbon markets offer a unique opportunity for investors, serving as a hedge against inflation and interest rate risks while supporting low-carbon technologies. The growing alignment between compliance and voluntary markets, supported by robust policies, makes carbon credits an attractive investment. For Pakistan, this could unlock significant financial flows into green technologies and infrastructure, driving sustainable development.

However, the path to establishing a carbon market in Pakistan is fraught with challenges. Provincial and federal policy gaps need to be addressed to create a cohesive framework. Effective coordination between the federal and provincial governments is crucial to ensure uniformity in regulations and enforcement across voluntary and compliance markets. The Delta Blue Forest has been a successful example in the voluntary carbon market mechanism. However, the surrounding community was not adequately involved. There have been complaints that their livelihoods were compromised. This has highlighted a significant shortfall in equitable development. Linking the elements of equitable development with carbon market is the key to harness the true potential of carbon credits in terms of climate action as well as effective internalisation of economic externalities in the form of GHG emissions.

Carbon markets offer a unique opportunity for investors, serving as a hedge against inflation and interest rate risks while supporting low-carbon technologies. The growing alignment between compliance and voluntary markets, supported by robust policies, makes carbon credits an attractive investment. 

There is also a lack of capacity in the development of projects within the carbon markets, such as registry development. This capacity needs to be addressed at both the provincial and federal levels. Moreover, comprehensive data collection and monitoring systems are needed to accurately measure emissions and track progress.

As Ministry of Climate Change and Environmental Coordination proceeds with crafting policies for carbon markets in Pakistan, ensuring ownership and consistency is crucial for gaining confidence domestically and attracting international attention. Areas with highest integrity standards are going to be those with highest carbon prices. Generally, projects with co-benefits command higher carbon prices. These could include positive impact on communities or biodiversity, measured through progress on sustainable development goals. Engineered carbon credits typically cost more than nature-based credits since they are new and the cost curves have not normalised.

Whether jurisdictional or project-based, credits from governments tend to be higher priced than those generated by private project developers. Currently, there are few jurisdictional credits on the market. In terms of carbon removal versus carbon avoidance projects, carbon removal projects usually command a price premium. Other factors, such as ratings by external agencies or recent news stories, can also influence prices. Negative news coverage of specific projects tends to depress prices. Poor ratings are likely to have a similar effect, though the carbon rating sector is new and not yet widely consulted.

Verra is a verified carbon credit programme widely used in greenhouse gas crediting for voluntary set-ups. It provides finance for activities that reduce and remove emissions, improve livelihoods and protect nature. Verra is expanding its methodologies to include emerging technologies such as CCUS (PLEASE SPELL OUT), hydrogen fuel, grid energy storage optimisation and cement industry decarbonisation. In order to build effective carbon markets, Pakistan needs to develop its own capacity in creating a crediting system, so that it does not have to rely solely on international crediting systems.

In examining the provincial and federal policy gap, referring to best practices would be instrumental, such as Canada’s patchwork fragmented approach. If provincial needs are not addressed, the risk of developing inconsistent systems will lead to significant challenges such as carbon leakage, compliance difficulties and missed emissions reductions. To ensure effective emissions reductions and attract investment in low-carbon projects, a unified approach is essential for a cohesive national strategy in which every stakeholder and the governments work together and have clearly defined roles and responsibilities, to formulate and implement effective policies that address the unique challenges faced by different regions of the country.

It is crucial to understand that before formulating a policy on carbon markets, the provinces need to identify the potential areas or sectors to be considered in these markets. These could include industry, waste and AFLOU (agriculture, forestry and other land use). This will help policymakers identify specific opportunities and challenges that could arise in the development of projects.

The government of Pakistan has recently constituted a committee to secure consensus on draft policy guidelines for trading in carbon market. Addressing provincial and federal policy gaps, coordination and confidence building measures are essential to create a robust, fair and effective carbon market.

The writer is leading Pakistan Industrial De-carbonisation Programme at Sustainable Development Policy Institute (SDPI). She can be reached at Saleha@sdpi.org and tweets @SalehaSqureshi