JULY 31 — The idea of trading pollution permits came from the hard-nosed world of economics. In the late 1960s, Canadian economist John Dales, a professor at the University of Toronto, in his book, “Pollution, Property & Prices”, proposed that if you cap total pollution and issue tradable permits, you harness market efficiency to clean up the environment. The logic was simple: set a limit, hand out allowances, and let companies that can cut pollution sell their spare permits to those who can’t.
The United States first tested the idea on a major scale. The acid rain program under the 1990 Clean Air Act Amendments traded sulfur dioxide credits. It worked: emissions fell faster and cheaper than predicted. The financial industry, especially commodity traders and Wall Street firms, saw the potential immediately. They understood that if you could trade corn or oil, you could trade a ton of pollution. Europe picked up the baton for carbon in 2005 with the EU Emissions Trading System (EU ETS), and the Kyoto Protocol (1997) had already baked the concept into international climate law.
Today, the carbon market is a two-headed beast. On one side, you have compliance markets (like the EU ETS) where governments cap emissions and force heavy polluters—power plants, steel mills, airlines—to surrender allowances for every ton they emit. On the other side are voluntary markets, where corporations like Microsoft or Shell buy carbon credits from projects that allegedly remove or avoid emissions: planting mangroves, distributing clean cookstoves, capturing methane from landfills. These credits are meant to offset their unavoidable pollution.
The idea is gorgeous in theory. A forest in the Amazon earns a credit for every ton of CO₂ it sequesters. A European airline buys that credit. Money flows to the forest, keeping it standing. Carbon is priced. The planet wins. Or so the story goes. But here is where the elegant theory collides with messy reality. Three challenges keep the carbon market from being truly efficient and fair.
First, the credibility crisis: junk credits and hot air. For a carbon credit to be real, it must be additional—meaning the project would not have happened without the carbon money. Yet studies and investigative journalism have found that over 90% of voluntary forest credits from some registries are worthless. They claim to protect trees that were never under threat. They count carbon that was never stored. One infamous case: a Chinese factory destroyed HFC-23, a potent greenhouse gas, and earned millions in credits—even though destroying it was already legally required. That is not offsetting; that is double counting.
Second, the pricing puzzle. A truly efficient market needs a clear, stable price signal to redirect investment. But compliance prices vary wildly: EU carbon hit €100 per ton, while California lingers around US$30, and no price exists in most of the world. In the voluntary market, you can buy a credit for US$1 or US$50—a sign of chaos, not efficiency. When carbon is too cheap, industry shrugs. When it’s volatile, no one builds long-term decarbonisation plans around it.
Third, the equity trap. Fairness is the hardest nut. Who gets to pollute? Who gets paid to protect nature? The architecture of the carbon market was designed by wealthy nations and financial elites. In practice, rich countries buy cheap offsets from poor countries, exporting their guilt but not their technology. Local communities—whether farmers in Kenya or Indigenous guards in Brazil—rarely see the money. Worse, some “avoided deforestation” projects have led to land grabs and human rights abuses. The market, left to its own devices, tends to reward the sophisticated broker, not the frontline defender.
The carbon market is not a failure. The EU ETS has genuinely cut power sector emissions by nearly 40% since 2005. But to claim the market is working well would be a dangerous fiction.
We need three things. First, standardised, enforceable rules for what counts as a real credit—no more self-certification by dodgy registries. Second, a minimum global carbon price floor to stop the race to the bottom. Third, benefit-sharing guarantees so that the communities hosting carbon projects actually gain, rather than being sidelined.
The idea, born from a Canadian economist’s paper, was never stupid. But it was naive to think that markets alone can solve a moral and physical crisis of this magnitude. Carbon trading is a tool, not a saviour. And right now, the tool is rusty, poorly calibrated, and often held in the wrong hands. If we don’t fix it honestly—instead of slapping green labels on business as usual—then the only carbon market that matters will be the one where we trade blame while the world burns.
* Professor Datuk Dr Ahmad Ibrahim is affiliated with the Tan Sri Omar Centre for STI Policy Studies at UCSI University and is an Adjunct Professor at the Ungku Aziz Centre for Development Studies, Universiti Malaya. He can be reached at [email protected].
* This is the personal opinion of the writer or publication and does not necessarily represent the views of NewsPulse.
