The Development of Carbon Markets in Upper‐Middle‐Income Countries

Abstract

Upper-middle-income economies face a specific set of trade-offs when reducing carbon emissions, which differ from the trade-offs faced in low- and high-income economies. To mobilize domestic funds, middle-income countries are developing carbonmarkets to attract private sector investment. This study advances a theoretical framework for carbon market development andexplores the process in Brazil, Indonesia, and Malaysia. The case of Malaysia is examined in depth due to the slow developmentof its carbon market compared to its peers. Analysis reveals that Malaysia faces a carbon market dilemma due to high domesticemissions and internal challenges related to energy market regulation and land ownership, which have hindered the emergenceof a pro-carbon market coalition. In contrast, Brazil and Indonesia have been more active in the international voluntary carbonmarket and have implemented key regulations with domestic political support. This study provides insights into the challengesand opportunities of carbon market development in middle-income economies, highlighting the importance of resource endow-ments and an enabling coalition for successful implementation.