The call by International Monetary Fund managing director Kristalina Georgieva for a wider global embrace of carbon pricing has underlined the growing focus by policymakers on making emitters pay more of the cost of rising greenhouse gas concentrations in the world's atmosphere.

The idea of attaching a price to a tonne of carbon emissions, either through an emission trading scheme or a carbon tax, has grown significantly in recent years, according to the World Bank’s annual market report. It says about a quarter of global emissions were covered by carbon pricing in 2023, compared with just 7% a decade earlier.

Global revenue from carbon pricing grew by more than 10% to reach $95bn in 2022, bolstered by a sevenfold increase in receipts since 2107 from the world’s largest such policy mechanism, the European Union Emissions Trading System.

Despite the progress on carbon pricing, Jennifer Sara, the World Bank’s global director for climate change, insists that “to really drive change at the scale needed, we will need to see big advances both in terms of coverage and price".

The need for broader worldwide acceptance of carbon pricing schemes was echoed by Georgieva just before December's COP28 climate conference in Dubai. Even with government subsidies for the fossil fuel sector amounting to $1.3trn last year, reflecting notably measures to protect households and businesses from soaring energy prices following Russia's invasion of Ukraine, Sara argued that “a carbon price has proven to work” - pointing to a 37% reduction in emissions covered by the EU scheme since it was introduced in 2005.

However, the fact that three-quarters of the world’s emissions are not covered by carbon pricing reflects the scale of the political hurdles that remain. Carbon taxes are unpopular with voters worried about their energy bills as well as energy-intensive industries that fear a loss of competitiveness. Companies' concern is understandable given the IMF’s view that the price of carbon needs to rise from around $20 a tonne today to at least $85 by 2030.

Many companies face the alternative of buying carbon credits on the voluntary market to offset their emissions - an option complicated by the failure of COP28 delegates to establish rules for a long-promised centralised carbon offsetting system overseen by the UN.

Though championed by leading sustainability influencers such as former Bank of England governor Mark Carney, offsets have been dogged by bad publicity about the true effectiveness and probity of forestry plantation and nature protection schemes. An investigation last year led by NGO Corporate Accountability described most of the leading offset projects as “junk”, while prosecutors in Brazil's Amazon have filed lawsuits against three carbon credit projects, alleging that the obscure companies behind the offsetting projects had seized public land for use to generate carbon credits.

Despite the support of international financial and development institutions, putting a price on carbon is proving a headache that threatens to slow efforts to decarbonise the global economy.

The surge in debt-for-nature swaps over the past three years has eased the debt burden of developing countries, channelled billions of dollars into conservation projects, and generated a considerable international attention. The problem is that not all the publicity has been positive, and it appears to be getting worse.

Two landmark deals this year, in Gabon and Ecuador, have highlighted the strengths and emerging weaknesses of such debt swaps, which typically involve the issue of so-called ‘blue bonds’ – effectively, green bonds for projects relating to marine ecosystems.

For Gabon, Bank of America issued $500m of blue bonds for restructuring existing general-purpose government debt, with the African country's government promising to spend $125m of the savings to enlarge a marine reserve and tighten fishing regulations. However, the restructuring of general debt is not in itself a sustainability purpose and, further, is at odds with voluntary guidance from the International Capital Market Association that such labelling should be used only for projects where all the money is spent on sustainable activities.

The Nature Conservancy, a US non-profit that has facilitated more than $1bn worth of debt-for-nature swaps, including the Gabonese deal, has since decided to drop its use of the word ‘blue’. The deal has also been challenged over the extent to which it has reduced the country’s debt burden.

Ecuador’s debt-for-nature swap reduced its foreign debt by around $1bn and provides $323m to protect the Galapagos Islands, courtesy of refinancing through a $656m bond issue whose returns to investors are guaranteed by the Inter-American Development Bank. However, critics point to a lack of transparency in the deal as well as a loss of sovereignty since the conservation activities will be carried out by a Delaware-based company rather than the Quito government.

Do nature swaps reduce countries' debt?

A total of 77 organisations and nearly 200 academics and civil society figures signed a statement warning of the potential dangers of the deal. Iolanda Fresnillo, policy and advocacy manager at Eurodad, a network of debt and development organisations, argues that swaps are proposed “as a solution to the debt problem, when their impact is often minor and their costs high... [and] they are a smokescreen for not addressing the need for substantial debt cancellation in southern countries".

Cost has been a regular criticism of debt-for-nature deals, partly because of the number of intermediaries involved and the complexity of the transactions. Complexity usually equates to fees, which were extremely large for Belize in 2021 as the Central American country retired a proportion of its debt.

Buying out $553m of debt for $364m is estimated to have cost $85m, rather than the $10m initially expected, making it “one of, if not the most expensive debt restructurings in recent history relative to the size of the transaction”, says Daniel Munevar, economic affairs officer at the United Nations Conference on Trade and Development.

Opposition to debt-for-nature deals goes beyond the detail of specific country arrangements, with a broad range of stakeholders objecting to swaps as a point of principle. The Climate Action Network, which brings together more than 1,900 civil society organisations in over 130 countries, insists that debt-for-nature or climate swaps “are not an adequate solution to the debt and climate crises”, insisting that the focus should be simply on debt cancellation.

Greenpeace, along with 30 other environmental, debt justice and fisheries groups, tried in vain to persuade the 2022 United Nations COP 15 biodiversity conference to reject the concept, arguing that "they lack transparency and give undue power to foreign organisations over the policies of marine resources management of developing and small island states".

For investors, blue bonds need careful assessment, not only in judging the returns but also to the potential for reputational damage that could arise from a project that fails to deliver a sustainable outcome. For highly indebted developing nations seeking to refinance their debt, as was the case for Belize, the calculation has been described in much simpler and more brutal terms: "How desperate is your country?"

Renewable energy may hold the key to tackling climate change but concern is growing that a lack of grid capacity to accommodate output from new wind and solar generating facilities will frustrate investors and environmentalists alike.

The latest victim of the infrastructure challenge is UK-based Octopus Energy, whose plans to develop a solar farm in north-east England have slammed against a grid connection date from the authorities of 2037, due to the need for new substation facilities and power lines.

The firm says it is considering asking for permission to build its own electricity pylons – effectively ending the national monopoly held by National Grid. “At the moment, it is easier to build a lot of infrastructure in France and Germany than here in the UK”, says Octopus CEO Greg Jackson, who adds that his company has access to billions of pounds in capital.

Jackson’s frustration is shared by Matthias Taft, CEO of Munich-base BayWa r.e., whose planned wind farm project in south-west France would take only a year to build but has been given an eight-year wait for a grid connection. “We will fail with the energy transition,” Taft warns, unless governments and the EU take decisive action.

The projects are just two examples of an international problem laid bare last October by the International Energy Agency. Its report found that 80 million kilometres of transmission infrastructure need to be replaced by 2040 to meet national climate targets and that infrastructure investment needs to double by 2030 to more than $600bn a year.

Meanwhile, some 1,500GW of renewable energy projects are currently queuing for grid connections around the world, prompting IEA executive director Fatih Birol to warn: “We must invest in grids today or face gridlock tomorrow.”

The collective handwringing over grid capacity also extends to the European Commission, where Kadri Simson, the EU commissioner for energy, acknowledges that “when there is no certainty about connection timelines or costs, planned generation projects are simply abandoned” To solve the problem, he is urging a combination of increased funding for infrastructure - totalling €584bn by 2030 - along with technological innovation, market reform and cross-border interconnections.

Fresh investment is also urgently needed in the United States, where almost two terawatts of wind, solar and battery storage projects are now waiting in interconnection queues across the country, according to the American Council on Renewable Energy. Along with increased spending on infrastructure, the solution will also require action by the Federal Energy Regulatory Commission to expedite the approval process for grid connections.

On the positive side, consultants at Deloitte believe that the Biden administration’s Inflation Reduction Act and Infrastructure Investment and Jobs Act “could start tackling transmission issues in 2024”, while a number of regulatory measures are intended to ease interconnection issues. As elsewhere, the appetite for renewable energy shows no sign of easing, but the grid capacity challenge has yet to be resolved.