Mitigation and adaptation will require major finance and investment, with estimates of hundreds of billions of dollars per year. Carbon markets could generate at least a significant portion of the finance and investment required, but to do so will require that markets expand their coverage, both geographically and within sectors and activities of the economy. To be successful, market-based instruments must lead to real reductions in greenhouse gas emissions and be acceptable to both the buyer and seller.

This background paper examines the impact the carbon market could have on funding mitigation and adaptation in developing countries. A number of options are presented, and discussion focuses on their advantages, disadvantages, and where and to what they could be applied. The paper is informed by the considerations of supply and demand and by those the options would fit into the framework of the UNFCCC.