A Green Future for All: How Financial Services Can Build More Inclusive Carbon Markets

Executive Summary

Carbon markets have emerged as an opportunity to fund the global transition to a sustainable economy. Emerging markets and developing economies (EMDEs) are well positioned to generate large amounts of carbon credits (UNDP 2023), with the potential to leverage revenues from the sale of these credits to support a green transition. This is especially important given that experts project a substantial rise in demand for these credits over the next decade. The value of carbon credit sales on voluntary carbon markets reached USD 2 billion in 2021 and is expected to rise to USD 10–40 billion by 2030 (Porsborg-Smith et al. 2023), while the value of trading on compliance markets grew to USD 949 billion in 2023 (Twidale 2024). Furthermore, across the developing world, revenues from the sale of carbon credits are increasingly being used to finance a green transition (Leapfrog, CGAP, and Temasek 2023).

As carbon markets channel critical climate financing to EMDEs, there is an opportunity to ensure these funds support a transition that is not only green but also just. Evidence suggests that a green transition can yield important development impacts, helping to improve health outcomes, create new economic opportunities, contribute to women’s empowerment, and enable those most vulnerable to climate change to adapt and become more resilient. However, for people living in poverty, and women in particular, availability, affordability, and the risks involved in adapting longstanding behaviors can put a green transition out of reach. Carbon markets can help to address these barriers, leveraging global demand for carbon credits to fund access to sustainable green technologies, tools, and practices for people who would otherwise be excluded from a green transition.

However, this potential can only be realized if carbon markets are truly inclusive of and impactful for people living in poverty. Although CGAP’s research identified several emerging examples of inclusive carbon projects, many projects nevertheless fail to include or meaningfully benefit communities in EMDEs. Without explicit and credible plans to include and benefit underserved communities, carbon markets run the risk of exploiting vulnerable populations to benefit wealthy investors. Additionally, evidence suggests that women face challenges to participating in and benefiting from carbon projects, thus threatening to further jeopardize their access to the benefits of a green transition.

Inclusive financial services can support efforts to build more inclusive carbon markets and maximize their contributions to the Sustainable Development Goals (SDGs). From Sub-Saharan Africa to South Asia and beyond, there are emerging examples of carbon projects that leverage credit, savings, and payment products to reach excluded communities and deliver concrete improvements to the lives and livelihoods of the people most vulnerable to the accelerating climate crisis, including women. Evidence on the role of financial services presents an opportunity for financial service providers (FSPs) to deepen their engagement in the climate space and for carbon project developers and other climate stakeholders to leverage the power of inclusive financial services to advance climate resilience, adaptation, and a just transition.

Fostering greater collaboration between FSPs and carbon project developers will be key to building more inclusive carbon markets. Carbon markets are complex, and CGAP’s research suggests that many FSPs will require capacity building and partnerships with project developers to meaningfully engage in this emerging space. At the same time, FSPs are well-positioned to support the success of inclusive carbon projects, pointing to an opportunity for project developers to leverage partnerships with FSPs to build higher value, more sustainable, and more impactful carbon projects. Additionally, more innovation will be required to maximize the impact of financial services. This includes designing and testing new financial services use cases that better meet the needs of carbon project participants. Furthermore, there is a need to develop new products, services, and approaches that enable women to equitably participate in and benefit from carbon projects.

Finally, it is critical to address the funding barriers that prevent inclusive, financial services-enabled carbon projects from achieving scale. Faced with high costs, volatile prices, and a lack of access to affordable capital, inclusive carbon projects often struggle to prove their models and scale. This is where development funders and investors have an important role to play: technical assistance and grant capital can support early-stage innovation and the development of new models that unlock opportunities for people living in poverty to participate in and benefit from carbon projects. Impact investors can deploy patient capital that provides promising projects with the runway they need to prove their models. At the same time, donors and development finance institutions can help unlock project financing through de-risking and blended finance facilities to enable proven projects to scale.

This paper highlights both the challenges to and opportunities for developing inclusive carbon markets, emphasizing the opportunity for financial services to play a role in overcoming barriers to inclusion and driving impact at scale. It underscores the potential for a diverse range of stakeholders—including carbon project developers, financial service providers, investors, and development partners—to contribute to a just, green transition. By leveraging financial services and collaborative approaches, these stakeholders can promote carbon markets that not only support a just, green transition, but also improve the lives and livelihoods of underserved communities.