Carbon Market Effectiveness in Emerging Economies

Compliance Design Choices, Offsetting and Harmonization

05 May, 2026 | Low-carbon Economy

Aparna Sharma, Mari Luomi, Darshna Singh

Overview

This paper examines how emerging economies can design effective emissions trading systems (ETSs), drawing on insights from a KAPSARC-CEEW workshop and a comparative analysis of China, India, Viet Nam, and Türkiye. It finds that these systems benefit from alignment with national development goals and generally adopt phased implementation, often beginning with intensity-based targets, free allocation, and limited coverage to balance economic and environmental goals. Over time, ETSs tend to evolve toward greater stringency, broader sectoral scope, and improved market functioning through iterative learning. A central finding is that robust monitoring, reporting, and verification systems are essential for effective ETSs. The paper also evaluates the role of offsetting, using carbon credits from outside the ETS scope, highlighting their potential to enhance flexibility while cautioning against risks to environmental integrity. Finally, it underscores the growing influence of global dynamics, including carbon border measures and market cooperation, in shaping domestic carbon market strategies. Overall, ETS effectiveness depends on adaptive, context-specific design rather than a single universal model.

Key highlights

Emissions trading system (ETS) effectiveness depends on design choices aligned with national development and policy contexts.
Emerging economies favor phased, intensity-based systems to balance growth and mitigation.
Robust measurement, reporting, and verification (MRV) systems are foundational to credibility, compliance, and market performance.
Offsetting can improve flexibility but risks weakening domestic mitigation if overused.
Carbon market linkage offers efficiency gains but requires a staged approach, aligning existing systems and enabling partial linkage, while designing new systems for linkage from the outset.
Harmonization and EU Carbon Border Adjustment Mechanism pressures are accelerating carbon market development and cooperation.

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Aparna Sharma

Programme Lead

aparna.sharma@ceew.in

"Carbon markets in emerging economies are not just climate instruments, they are development tools. Their effectiveness depends on context-specific design, robust MRV systems, and phased implementation, while carefully balancing flexibility mechanisms like offsets. As global trade dynamics such as CBAM evolve, credible domestic systems could act as a tool that support growth today and enable deeper international cooperation in the future.”

FAQs

What is an emissions trading system (ETS), and why is it important for emerging economies?

An ETS is a market-based mechanism that caps emissions and allows entities to trade allowances or credits. It is important for emerging economies because it enables cost-effective emissions reductions while supporting economic growth, particularly in contexts where development and industrial expansion remain priorities
How are ETSs in emerging economies different from those in developed countries?

ETSs in emerging economies tend to be phased, intensity-based, and initially limited in scope, reflecting the need to balance emissions reduction with economic growth. Over time, these systems evolve toward greater stringency, broader coverage, and improved market functioning.
Why is measurement, reporting, and verification (MRV) critical for ETS effectiveness?

Robust MRV systems ensure data accuracy, transparency, and compliance, forming the backbone of credible carbon markets. Without strong MRV, carbon markets risk weak enforcement, low trust, and poor environmental outcomes.
What role do pilot phases and prior mechanisms play in ETS development?

Pilot phases and prior mechanisms help build institutional capacity, data systems, and market readiness. They allow policymakers to test design features and refine systems iteratively before full ETS implementation.