CARBON FINANCE AND SUSTAINABLE DEVELOPMENT: A REVIEW OF LITERATURE

Abstract

Carbon finance has emerged as a critical market-based mechanism for addressing climate change and supporting the transition toward a low-carbon economy. Growing concerns regarding greenhouse gas emissions, global warming, and environmental degradation have increased the importance of financial instruments and policies that promote carbon emission reduction and sustainable development. This study reviews the existing literature on carbon finance to examine its evolution, major thematic areas, empirical findings, and future research directions. The review focuses on key dimensions of carbon finance, including carbon pricing, carbon taxes, emissions trading systems, carbon markets, carbon accounting, carbon disclosure, and sustainable finance. The findings indicate that carbon finance plays a significant role in climate change mitigation by creating economic incentives for emission reduction, encouraging investments in clean technologies, enhancing environmental transparency, and supporting sustainable economic development. The review further reveals that carbon pricing mechanisms and emissions trading systems have become central policy tools for achieving environmental objectives, while carbon accounting and disclosure practices contribute to improved corporate sustainability performance. Despite considerable progress, challenges related to market volatility, regulatory uncertainty, carbon credit quality, and limited evidence from developing economies continue to constrain the effectiveness of carbon finance mechanisms.  The study identifies important research gaps and proposes future research directions to strengthen the contribution of carbon finance toward climate resilience, environmental sustainability, and low-carbon economic transformation.