Can Carbon Markets Deliver More? OECD Backs Government-Led Crediting to Accelerate Climate Action

An OECD report finds that scaled-up carbon crediting could unlock billions in climate finance by rewarding governments for economy-wide emission reductions, but its success depends on stronger environmental integrity, transparent accounting, and robust governance. The report urges policymakers, development partners, and private investors to strengthen monitoring systems, align carbon markets with the Paris Agreement, and invest in high-integrity crediting mechanisms to accelerate credible, large-scale climate action.

Global carbon markets are approaching a pivotal transition as governments increasingly replace individual projects as the primary drivers of climate mitigation. A new OECD Environment Working Paper argues that "scaled-up crediting", where entire countries, states, sectors, or public policies generate carbon credits, could become a major source of climate finance if environmental integrity is strengthened. While project-based carbon markets have mobilised billions of dollars over the past two decades, the OECD believes they are insufficient to deliver the structural economic transformation required to meet the Paris Agreement. The report concludes that rewarding governments for measurable emission reductions across forests, power sectors and public policies could significantly expand climate action, but only if carbon credits remain credible, transparent and scientifically robust.

Governments Move to the Centre of Carbon Markets

The OECD finds that scaled-up crediting has moved beyond theory and is beginning to establish itself within international carbon markets. Since 2020, approximately 154 million carbon units have been issued under scaled-up mechanisms, representing around 6% of total global carbon credit supply. More than 80 national and sub-national jurisdictions have participated in these initiatives, although many remain in pilot or technical assistance phases. Governments and corporate buyers have already committed nearly USD 2 billion to support these programmes, primarily targeting reductions in deforestation and forest degradation.

Unlike conventional carbon projects that reward individual renewable energy plants or forestry initiatives, scaled-up crediting allows governments to generate credits by outperforming agreed greenhouse gas emission benchmarks across entire jurisdictions or sectors. This creates incentives for policy reforms, stronger enforcement, infrastructure investments and long-term planning rather than isolated mitigation projects. The report argues that this model aligns more closely with the large-scale structural changes needed to achieve net-zero emissions.

Forestry currently dominates implementation. More than 99% of all scaled-up credits issued so far originate from jurisdictional forest programmes such as the Forest Carbon Partnership Facility (FCPF) and ART TREES. Policy-based crediting remains limited, with Uzbekistan's energy subsidy reforms under the Transformative Carbon Asset Facility (TCAF) representing the only operational example, while sector-wide electricity crediting standards remain under development.

Stronger Carbon Integrity Becomes the Biggest Policy Challenge

The OECD stresses that the future success of scaled-up crediting depends less on market expansion than on environmental credibility. Carbon credits must represent real, measurable, additional and permanent emission reductions. Without robust methodologies, expanding carbon markets risk undermining confidence among investors, governments and climate negotiators.

One of the report's strongest findings concerns emission baselines. Many existing forest crediting systems rely heavily on historical deforestation trends, yet future emissions are influenced by volatile commodity prices, changing land-use policies, economic growth and extreme weather. Historical baselines therefore risk either over-crediting governments for reductions that would have occurred anyway or discouraging participation if targets become unrealistically difficult.

The report recommends more sophisticated model-based baseline systems that incorporate environmental and socioeconomic variables. However, these require advanced data systems, technical expertise and institutional capacity that many developing countries currently lack. Similarly, proving "additionality", that emission reductions occurred because of carbon market incentives rather than existing climate policies, remains technically challenging. The OECD recommends stronger third-party verification, clearer implementation plans and improved methodologies while acknowledging that greater rigour may also increase administrative costs.

Another critical policy issue involves alignment with the Paris Agreement. Governments must integrate scaled-up crediting into their Nationally Determined Contributions (NDCs), greenhouse gas inventories and Article 6 accounting rules. International transfers of carbon credits require corresponding adjustments to prevent double-counting of emission reductions, making institutional coordination essential.

Climate Finance Could Expand, But Capacity Gaps Remain

For policymakers and international development partners, the report presents scaled-up crediting as an opportunity to reshape climate finance. Developing countries often face fiscal constraints that limit investments in forest protection, clean energy and institutional reforms. Carbon revenues linked directly to government performance could provide a valuable source of non-debt financing while strengthening national climate strategies.

The report notes that future demand could increase significantly before 2030, particularly from the aviation industry's Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), which could require more than 100 million carbon credits annually if fully implemented. This growing demand may provide developing countries with long-term revenue opportunities while encouraging stronger climate governance.

However, the OECD cautions that financial incentives alone will not deliver success. Many governments lack the technical expertise, monitoring systems, governance capacity and inter-agency coordination needed to implement jurisdiction-wide mitigation programmes. Development partners, including multilateral development banks, bilateral donors and climate funds, will therefore play a critical role by financing institutional strengthening, measurement systems, digital monitoring infrastructure and technical assistance alongside results-based payments.

The report also recommends targeted support packages rather than one-size-fits-all funding. Jurisdictions with strong political commitment, credible governance and significant mitigation potential should receive priority to maximise climate returns while ensuring efficient use of limited donor resources.

Private Investment Opportunities Depend on Market Credibility

For private-sector stakeholders, the OECD identifies both significant opportunities and notable risks. As governments increasingly adopt jurisdictional carbon programmes, demand for advanced monitoring technologies, satellite-based forest surveillance, emissions accounting software, verification services, consulting expertise and carbon market infrastructure is expected to expand substantially.

Private companies may also become larger purchasers of high-integrity jurisdictional credits to meet voluntary climate commitments or future compliance obligations. Stable demand from corporate buyers could strengthen long-term investment certainty for government-led mitigation programmes.

At the same time, investors face growing scrutiny regarding carbon credit quality. Concerns over over-crediting, weak baselines, inconsistent methodologies and governance failures could reduce market confidence if integrity standards are not strengthened. Companies participating in carbon markets will therefore need increasingly rigorous due diligence, transparent reporting and alignment with internationally recognised standards to protect both financial returns and corporate reputation.

The OECD concludes that scaled-up crediting has the potential to become one of the most important climate finance instruments of the coming decade. Success, however, will depend on balancing market growth with scientific credibility. Governments should strengthen national climate institutions, improve emissions data, integrate carbon markets into broader development strategies and ensure equitable benefit-sharing with local communities. International development partners should expand technical and financial support while promoting common standards across jurisdictions. Private investors should prioritise high-integrity credits and support innovations that improve transparency and monitoring. If these reforms are implemented together, scaled-up crediting could move beyond individual carbon projects to finance the large-scale policy transformations needed to achieve the Paris Agreement's long-term climate objectives.