What’s Next for Climate Finance?
As global attention shifts toward finance solutions for climate and biodiversity, understanding the carbon markets’ evolution and future is more urgent than ever.
Pedro Moura Costa, BVRio Director co-founder & SIM CEO, a pioneer in carbon finance, speaks with journalist Melina Costa about the lessons from three decades of working in the sector. From the early days of the Clean Development Mechanism to the rise and fall of voluntary markets, and now the emerging role of Article 6 under the Paris Agreement, Pedro shares a frank assessment of what he thinks works, what doesn’t, and what’s needed next.
Below is an edited version of the original interview aired in Portuguese on Economia do Futuro Podcast, hosted by Melina Costa, and published here in English with permission.
Melina Costa: Pedro, few people have as much experience in carbon markets as you. Can you tell us about your journey, from that first carbon project in Malaysia in the 1990s to where you are today?
Pedro Moura Costa: It’s been quite a journey. I moved to Malaysia in 1991 and got involved in what became the world’s first carbon-financed project. It was linked to a Dutch power plant that wanted to offset emissions. In 1992, we signed a second contract, now with an American company that wanted to offset its coal-based power plant. I spent five years there and then moved to the UK, where I was among the few people worldwide working with carbon credits.
After consulting for institutions like the UN and World Bank, I worked with Costa Rica in the creation of its national programme for payment for environmental services, a pioneering initiative focused on forest protection and reforestation. To support that, I developed the world’s first independent carbon verification service, which I licensed to Swiss verification company SGS, and this has shaped how CDM credits were certified later on (the “Certified Emission Reduction credits).
Costa Rica was a major player in the Kyoto negotiations, pushing for land-use inclusion. Ironically, Brazil resisted, citing sovereignty over the Amazon. Ultimately, land use was excluded from Kyoto, and forests were left out. Unfortunately, more than 100 million hectares of forests have been lost since Kyoto.
Melina: And that’s when you started EcoSecurities?
Pedro: Yes. I was inspired by the idea that a developing country could sell environmental services on equal terms, not dependent on donations. EcoSecurities grew quickly, with over 700 projects in 54 countries. We listed on the London Stock Exchange in 2005. At its peak, we had offices in 33 countries and big teams in China, Latin America, Europe…
Everything changed with the 2008 financial crisis. Carbon prices crashed, I tried to reprivatise the company together with BTG (one of the first transactions of the recently created bank), but we eventually sold the company to the American bank JP Morgan. After 25 years abroad, I returned to Brazil and founded BVRio. I thought I was done with carbon – famous last words.
Melina: But you came back to it.
Pedro: In 2018, together with a former colleague, I bought EcoSecurities back, as the company had been sold twice in the meantime. We revived it to focus on the voluntary carbon market, since Kyoto had ended and Paris wasn’t operational yet. We now have teams in 15 countries, preparing to support future compliance markets under the Paris Agreement.
Melina: Looking back at the CDM, how do you see its evolution, and Brazil’s role in it?
Pedro: Brazil was very active in the CDM’s market and governance, though China dominated the market. China’s coal-based energy meant projects there generated more credits than equivalent projects in Brazil, where the energy mix is cleaner.
Brazil’s biggest CDM contributions were landfill gas projects. Fun fact: the first project ever registered under the Kyoto Protocol was in Nova Iguaçu (Rio de Janeiro), Brazil, a landfill gas capture project. I wrote the methodology myself, and EcoSecurities developed the project
Melina: But forests were left out.
Pedro: Completely. That didn’t change until 2015–2018, when the voluntary market rediscovered forests under the umbrella of “nature-based solutions”. REDD+ (avoided deforestation) projects started gaining ground, including in Brazil.
Melina: REDD+ projects aim to protect forests under threat of deforestation, right?
Pedro: Exactly. You implement measures to reduce deforestation risk. But the voluntary market is very trend-driven. One year it’s REDD+, next it’s reforestation, then industrial reductions. I was in Glasgow when Jeff Bezos pledged $9 billion for tropical forest protection, and only two years later, REDD+ was out of fashion.
Yet protecting standing forests is a lot more urgent than planting trees. A tree takes 20 years to grow, but can be cut in 20 minutes. Prevention is more effective than restoration.
Melina: Let’s talk about the credibility issues of the voluntary market, especially post-Glasgow.
Pedro: Over the last 3-4 years, there has been a lot of misunderstanding about the meaning of “integrity” for carbon projects. Especially among the media and civil society, which equate integrity with perfection.
There needs to be recognition that forest projects are complex. One of the main requirements of forest conservation projects, for instance, is that they demonstrate “additionality”, that the forest would have been lost without the project. But it is impossible to prove this is the case, and different observers may use different assumptions to argue that the project is wrong. This makes companies risk-averse. Who wants to voluntarily take on reputational risk?
The market suffered a big reputational hit when The Guardian published a critical piece claiming most REDD+ credits were “junk”. That article alone wiped out demand and prices. Certification processes have also become too burdensome. Standards react to criticism by asking for more documentation, as if paper improves integrity. It can now take two years and hundreds of thousands of dollars just to get a project approved. We’re in a climate emergency, we don’t have time for that.
Melina: So you think the voluntary market is reaching its limit?
Pedro: I do. The market is small, $0.5–1 billion a year, far below expectations, and reducing. It may survive for small-scale philanthropy-like projects, but it won’t deliver the scale we need. The Paris Agreement negotiations speak of climate finance in the trillions. Voluntary markets can’t get us there.
Melina: What comes next?
Pedro: Article 6 of the Paris Agreement introduces two mechanisms. Article 6.4 is project-based, like the CDM. The other, Article 6.2, allows countries to trade mitigation outcomes (ITMOs) between countries. This second mechanism has much greater potential because it can operate at scale and isn’t tied to project-level additionality.
But there’s a catch. Under Kyoto, only developed countries had targets. Under Paris, all countries do. To avoid double-counting, this new scheme requires the use of “corresponding adjustments”. So if Brazil sells a mitigation credit to Switzerland, Brazil can’t count that reduction toward its targets.
Melina: That changes Brazil’s role from a global credit provider to something else.
Pedro: Yes. Brazil could still be a major credit provider, but for Brazil itself. If Brazil creates a domestic carbon market, it can generate strong internal demand. That’s preferable to selling our cheapest mitigation options abroad and being left with only the expensive ones. If international buyers want credits exported to their countries, they should be required to pay a transfer levy to be used by Brazil to invest in more expensive mitigation options.
Melina: Would international buyers still be interested if credits come with a “tax” to cover Brazil’s costs?
Pedro: Possibly not, but it’s a necessary safeguard. If a country sells its cheap mitigation and is left with only high-cost measures, it risks failing to meet its targets or going into debt.
Melina: There’s a lot of optimism in Brazil about becoming a carbon credit superpower. Does this risk getting ahead of ourselves?
Pedro: Yes, if we assume we’ll sell everything abroad. Instead, we should focus on creating a strong domestic demand through a regulated market. This also allows us to develop methodologies tailored to our context, rather than relying on overcomplicated systems like Verra, which aren’t fit for purpose in Brazil.
Melina: Beyond carbon markets, what about broader climate finance solutions?
Pedro: There are many. Carbon finance is a subset of a much wider concept of climate finance. Carbon markets are just one piece. We need to green the entire financial system, not just invest in green finance niches.
In this regard, over the last years, I have replaced carbon credits with other financial instruments that can be used to finance positive climate action. For instance, some 4 years ago, I co-founded the Responsible Commodities Facility, a fund that issues green bonds to finance zero-deforestation soy production in Brazil, protecting native vegetation. The government has also issued sovereign climate bonds, with repayment terms linked to environmental outcomes. Uruguay and Chile have done the same. Brazil’s bond was five times oversubscribed, which shows large investor appetite and demand.
Melina: You also helped conceptualise the Tropical Forest Forever Facility (TFFF). Why does that matter?
Pedro: TFFF is a response to the flaws in carbon markets, especially additionality and permanence. It proposes payments for forests based on the area conserved, with steep penalties for deforestation. That aligns incentives without needing to prove each forest is “at risk”.
Our original idea was to raise funds from high-emitting sectors, for example, oil and gas. If every barrel of oil contributed $1, we could cover conservation across the world’s three tropical forest basins. That $1 is less than daily oil price volatility. The current government is exploring a different funding approach based on a fund of sovereign funds. But the core idea stands: large-scale finance mechanisms for forest protection. I am glad our idea is becoming a reality, in one form or another.
Melina: Thank you, Pedro.
Pedro: Thank you.
