What will it take for hydropower to succeed in carbon markets?
Carbon markets are entering a defining phase. Designed to channel finance towards emissions reductions, they have long been seen as a way to scale up climate action. Yet their effectiveness ultimately depends on rests on trust. When confidence in market integrity weakens, so does the value of the credits themselves. , and when that breaks down, so does the value of the market itself. After years of scrutiny and reform, the important question today is what it will actually take to make carbon markets credible, writes Tashi Pem.
Lessons from a credibility gap
The track record is hard to ignore. The Clean Development Mechanism (CDM), once the world's largest carbon market, mobilised billions in investment and supported thousands of projects.
But it also exposed fundamental weaknesses. Concerns over additionality, overstated emissions reductions and the inconsistency of environmental and social safeguards eroded confidence among buyers and policymakers. In some cases, projects were criticised for causing harm to local communities and ecosystems, let alone failing to deliver meaningful climate benefits.
The consequences have been long-lasting. Confidence in the market weakened, demand for credits fell, and many projects were unable to move forward. This experience highlights the importance of getting the fundamentals right. Without robust safeguards and verifiable outcomes, carbon markets risk undermining the very climate goals they are intended to support.
A higher bar under the Paris Agreement
A different framework is now taking shape. Under Article 6.4 of the Paris Agreement, a new generation of carbon markets is being built with stronger rules and greater oversight. Projects are expected to demonstrate that emissions reductions are real and additional, that they contribute to sustainable development, protect ecosystems, and engage meaningfully with affected communities. The bar has been raised, and rightly so.
For hydropower, this shift presents both a challenge and an opportunity. As a renewable energy source, hydropower has a critical role to play in decarbonising power systems and supporting energy security. But it has also faced scrutiny over its environmental and social impacts, and participation in carbon markets will depend on demonstrating that projects are developed and operated responsibly.
Redefining credibility in carbon markets
Accounting for emissions reductions alone is no longer sufficient. Buyers, regulators and host countries are increasingly looking for assurance that projects meet high standards across environmental, social and governance (ESG) dimensions. This shift is explored in our recent briefing on Strengthening hydropower's credibility in carbon markets, which examines how these expectations are being operationalised in emerging carbon market frameworks.
Importantly, framework to support this expectation already exist. Sector-specific frameworks such as the Hydropower Sustainability Standard (HSS) provide independently verified assessments of project performance across a wide range of sustainability topics, offering a way to demonstrate that projects are aligned with good international practice.
Critically, this kind of assurance complements (rather than replaces) the requirements of carbon market mechanisms. Where carbon methodologies focus on quantifying emissions reductions and testing additionality, sustainability frameworks address the broader risks that have historically undermined market confidence. Together, they form a more complete picture of project integrity.
The implications for developers are significant. In a more demanding market environment, credibility will directly influence both access to carbon finance and the value of credits. Projects with strong ESG performance are more likely to gain approval, attract buyers and command a premium. Those without it may face delays, discounts or exclusion.
Building a credible market ecosystem
Building credible carbon markets means creating systems that reward integrity and transparency, and governments, financial institutions and standard-setters all have a role to play. Credibility can be strengthened through clear guidance on safeguards, alignment with national development priorities, and investment in the data and monitoring systems needed to support robust reporting.
The stakes are high. Carbon markets are often positioned as a key tool for mobilising climate finance, particularly in emerging economies where investment needs are greatest. Getting this right could support both emissions reductions and sustainable development at scale. Getting it wrong will affect confidence in climate action far beyond the market itself.
The opportunity for hydropower
For hydropower, there is a clear path forward. The sector has an opportunity to demonstrate that it can meet the highest standards of performance in how projects are designed, implemented and managed. By combining rigorous carbon accounting with credible sustainability assurance through the HSS, hydropower can help define what high-integrity carbon credits should look like, and in doing so, raise expectations for the market as a whole.
Restoring trust in carbon markets will require consistent effort, transparent processes and a willingness to learn from past mistakes. But the direction of travel is positive. With stronger frameworks in place and growing demand for credible credits, there is a real opportunity to ensure that carbon markets deliver meaningful outcomes for people and the planet.
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