The United States Agency for International Development (USAID) held five co-design sessions and completed a comprehensive literature review between January and May 2024 to determine the key elements of a call for innovations through the Safeguarding Carbon Markets Challenge (SCM Challenge). The SCM Challenge is the latest activity under the Countering Transnational Corruption Grand Challenge for Development (CTC Grand Challenge). Through this literature review and the co-design sessions, the CTC Grand Challenge team engaged diverse global and local perspectives to determine where innovation might be needed in climate finance and carbon markets and how to incentivize it.

The team focused the first co-design session on climate finance with carbon markets as one potential area of interest. As a result of the insights gained in that session, the following four sessions focused exclusively on carbon markets, from a recommendation to narrow the scope within climate finance and that carbon markets present a unique opportunity to innovate to preserve the benefits of critical finance for global climate mitigation efforts.

The co-design sessions and literature review provided the CTC Grand Challenge team with an understanding of both potential areas of innovation and challenges in the carbon markets space. Key results underscored that:

  • In the last three years, average annual climate finance flows reached approximately $1.3 trillion as mitigation efforts accelerate to achieve net zero greenhouse gas emissions by 2050.1 Addressing corruption has the potential to maximize the impact of these investments and raise additional future funds for climate finance.
  • High-integrity carbon markets represent a promising channel to unlock capital and demand for lasting and independently verified emissions reductions, with a myriad of additional benefits for local communities. However, corruption risks can undermine the trust in and effectiveness of carbon markets because they are difficult to measure, regulate, and monitor, and they still lack strong governance, reporting, monitoring, and auditing systems.
  • Carbon markets are at varying stages of development across individual countries, as some countries have more advanced markets, regulatory systems, and the capacity to trade in carbon credits, while others do not. Regardless of where they are in their development process, all markets present opportunities for corruption that warrant attention.
  • While the literature on concrete cases of high-level corruption in carbon markets is still limited, most focus on opportunities for embezzlement, rent-seeking, fraud, and land grabbing.
  • It is essential to work with local leaders, communities, and civil society organizations to define the problem, determine the opportunities for corruption in country or regional contexts, and identify potential solutions grounded in the realities of the local context.

These discussions helped to form the foundation of the SCM Challenge, which launched in June 2024.