ECOSPERITY WEEK: Carbon markets face governance risks seen in financial markets

Carbon markets are now grappling with the same governance, legal, and financial risks that have long challenged global financial markets, industry experts at Innovate4Climate during Ecosperity Week in Singapore said during a May 22 panel, raising questions about market integrity and long-term viability.

One of the prominent themes throughout the discussion was that integrity now sits at the center of the carbon market, as the market attracts more compliance buyers and institutional capital, with confidence in the credibility of carbon credits becoming essential.

Juan Carlos Arredondo, director of knowledge and policy at Abatable, a member of the Technical Advisory Body for the CORSIA carbon-cutting scheme, explained that within such systems, liability revolves around two fundamental questions: whether credits genuinely represent real emissions reductions, and whether host countries correctly account for those transfers under the Paris Agreement framework.

"These concerns are especially important for airlines and compliance buyers that must rely on credits remaining valid over long periods of time," said Arredondo.

"If a host country later revokes authorization or fails to properly apply corresponding adjustments, uncertainty quickly emerges regarding who bears responsibility and how replacement obligations should be handled."

Platts, part of S&P Global Energy, assessed the CEC price that represents fully eligible Phase 1 CORSIA credits at $12/mtCO2e on May 22, the lowest level since Jun 18 2024 on muted demand as end-buyers (airlines) stay largely absent from the market.

Arredondo emphasized that integrity cannot be resolved solely through financial compensation, and in many cases, invalid credits must be replaced with new units.

Weighing permanence, delivery risks

In addition, buyers are increasingly differentiating between projects based on permanence, delivery certainty, governance quality, and long-term credibility.

"For years, the voluntary carbon market often assumed that one metric ton of carbon reduction was effectively equal to another, regardless of differences in project quality or execution risk, " said Sebastian Cross, co-founder and chief innovation officer at BeZero Carbon.

"That assumption contributed significantly to credibility concerns across the sector."

Higher-quality projects are increasingly able to command better prices, encouraging developers to prioritize integrity and transparency over simply maximizing issuance volumes.

Platts assessed Indonesia's Katingan Mentaya project at $11.50/mtCO2e, at a premium to other REDD+ projects in Southeast Asia. The premium is primarily driven by the project's strong third-party ratings profile, as market participants weigh in factors such as co-benefits, permanence, and additionality.

Katingan Mentaya has been described in project-linked reporting as carrying AA ratings from major third-party ratings agencies.

Indonesia's Rimba Raya Biodiversity Reserve, which carries a lower rating, was priced at $4.70/mtCO2e. However, comparable projects such as Malaysia's IFM Kuamut Rainforest Conservation Project were assessed at about $26/mtCO2e for removals and $16.50/mtCO2e for avoidance credits.

That transition is being accelerated by the growing influence of ratings agencies, according to Cross, who are evaluating delivery risk, permanence risk, project execution, and the probability that emissions reductions will actually materialize.

Cross observed that the market is gradually beginning to resemble more mature financial systems where risk pricing and quality differentiation are standard components of investment decisions.

Building institutional structures

A second major theme of the discussion focused on governance and the institutional structures needed to manage disputes and accountability as carbon markets scale internationally.

Judy Ndichu, carbon market lead representing Kenya's Office of the Special Envoy for Climate Change, argued that the goal is not to eliminate conflict entirely but to create systems capable of managing disputes transparently.

Drawing on Kenya's experience with both the Clean Development Mechanism and voluntary carbon markets, Ndichu explained that conflicts can emerge between project developers and local communities, between governments and private actors, or between countries over accounting obligations and corresponding adjustments.

"Rather than waiting for disputes to arise, Kenya has focused on building governance systems designed to reduce uncertainty before conflicts emerge," said Ndichu.

"These include carbon market regulations, stakeholder consultation requirements, grievance procedures, and the development of a national carbon registry to improve transparency around projects and transactions."

The need for institutional certainty was similarly echoed by Chris Canavan, CEO of the Global Carbon Market Utility, who compared carbon markets to sovereign bond markets.

"In sovereign debt markets, investors operate within clearly defined legal frameworks that establish ownership rights, dispute procedures, and applicable jurisdictions in advance," said Canavan. "Risk still exists, but participants understand how those risks will be handled if disputes occur."

Carbon markets, he argued, increasingly require similar legal infrastructure to attract long-term institutional investment.

Overall, the panelists agreed that mature markets are not defined by the absence of risk; rather, they are defined by the presence of institutions capable of managing those risks effectively.

The growing focus on insurance structures, arbitration frameworks, registry infrastructure, credit ratings, and governance systems is a sign that carbon markets are beginning to function like the global financial system.