International climate policy is undergoing a significant transformation as carbon offset programs established a quarter-century ago under the Kyoto Protocol are being systematically dismantled. The decision follows years of mounting evidence and widespread criticism that these pioneering market-based mechanisms failed to deliver on their environmental promises and, in some cases, may have increased global greenhouse gas emissions. The phased elimination marks a pivotal shift away from a flawed first-generation approach toward a more stringent and accountable system designed under the Paris Agreement.
At the heart of this transition is the Clean Development Mechanism (CDM), once the world’s largest carbon offset market. Established to provide industrialized countries with a flexible, cost-effective way to meet climate targets by funding emission-reduction projects in developing nations, the CDM ultimately failed to ensure the environmental integrity of many of its credits. After generating billions of credits, a collapse in prices and a crisis of confidence in their value led policymakers to design a successor intended to correct the fundamental flaws of the past, though questions about the new system’s effectiveness remain.
A Market Undone by Flawed Assumptions
The central failing of the Clean Development Mechanism was its inability to consistently prove “additionality.” For a carbon credit to be legitimate, it must represent an emission reduction that would not have occurred without the financial incentive from selling the credit. However, a vast number of projects registered under the CDM were found to be non-additional, meaning they would have been built anyway. This allowed industrialized countries to use these “fake” credits to justify their own ongoing emissions without causing any actual reduction in pollution where the project was located, undermining the core purpose of the Kyoto Protocol.
This systemic issue was compounded by perverse incentives created by the program’s rules. The CDM rewarded emissions reductions but did not penalize increases, which could encourage firms to first increase their pollution to receive more credits for reducing it later. The mechanism also favored projects that could deliver a high volume of cheap credits, such as industrial gas or hydropower dam projects, rather than smaller-scale renewable energy or energy efficiency initiatives that offered greater sustainable development benefits for local communities. This focus on cost-effectiveness for buyers in developed nations often came at the expense of genuine climate and community benefits in host countries.
The Collapse of Confidence and Value
The systemic flaws in the CDM eventually led to a market collapse. A glut of low-quality, cheap credits flooded the market, causing the value of a certified emission reduction (CER) to plummet. Prices fell from around $20 per metric ton in 2008 to less than $1 by 2013, leaving thousands of projects with billions of worthless credits. This price crash decimated the program’s ability to provide meaningful financial incentives for new climate projects.
The oversupply and lack of integrity eroded confidence among investors, policymakers, and environmental organizations. Civil society groups became vocal critics, urging United Nations negotiators to terminate the flawed mechanism when the Kyoto Protocol’s commitment period ended in 2020. They argued that allowing the CDM and its billions of “junk credits” to persist would seriously undermine the more ambitious goals of the Paris Agreement by providing a meaningless loophole for countries and corporations to avoid making substantive cuts to their own emissions.
A New Framework Under the Paris Agreement
In response to these failures, international negotiators designed a successor system under Article 6 of the 2015 Paris Agreement. This new framework aims to learn from the mistakes of the Kyoto era by establishing more rigorous rules for international carbon markets. The Article 6.4 mechanism is the direct replacement for the CDM, creating a centralized UN-governed body to approve and issue a new generation of carbon credits.
A central feature of the new system is a mechanism to prevent the “double counting” of emission reductions. Under the old rules, both the country buying the credit and the country hosting the project could potentially claim the same reduction. Article 6 introduces a strict accounting process known as a “corresponding adjustment,” which ensures that an emission reduction is claimed by only one country toward its national climate target, known as a Nationally Determined Contribution (NDC). The new rules also require greater involvement from the host country, which must formally approve projects and authorize the transfer of credits.
Challenges of Transition and Legacy
While the new Article 6 framework is designed to be an improvement, its launch is not without controversy. One of the most contentious issues has been how to handle the thousands of projects and credits left over from the Clean Development Mechanism. As a compromise, negotiators agreed to allow some legacy CDM projects to transition into the new system.
This decision has raised alarms among environmental watchdogs, who fear that the toxic legacy of the CDM could poison the new market from the start. An analysis by Carbon Market Watch of the first project transitioning from the CDM to the Article 6.4 mechanism found it could be poised to issue 26 times more credits than scientific methodologies justify. Critics argue that unless the methodologies and assumptions from the CDM are thoroughly revised and updated, the new market risks repeating the same mistakes, generating credits that lack real climate benefits.
The UN Supervisory Body tasked with finalizing the rules for the new mechanism is continuing its work through 2025, including revising old CDM methodologies and developing requirements for new projects, such as those involving carbon removal. The ultimate success of this 25-year effort to build a functioning global carbon market will depend on whether these new rules can restore credibility and ensure that every credit traded represents a real, verifiable, and permanent reduction in greenhouse gas emissions, safeguarding environmental integrity as the world works to meet its climate goals.
