In the long term, stronger demand could bring carbon credit prices past the US$200/tonne threshold – but in 2024, the focus needs to be on restoring trust in the carbon market, according to a new report.
BloombergNEF’s latest Long-Term Carbon Offsets Outlook shows great promise for the future of the carbon market, with prices rising rapidly post-2030 to reach US$238 a tonne in 2050. In the firm’s ‘high-quality scenario’, the market would be valued at US$1.1 trillion annually by mid-century.
However, this success hinges almost entirely on what happens in the coming year, as initiatives like the Integrity Council for Voluntary Carbon Markets (ICVCM) and the Voluntary Carbon Markets Integrity Initiative (VCMI) attempt to restore eroded trust in the quality of carbon offsets.
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If these initiatives fail to raise quality standards in the market and convince buyers that their offsetting activities result in actual gains for the climate, the outlook is completely different, with prices reaching just US$14/ton in 2050 and the market peaking at US$34 billion a year.
“If buyers can’t trust the quality of the credits they’re buying and risk greenwashing accusations, then the market will never reach its potential. Credits will never be more than discretionary spend in this case,” warned Kyle Harrison, Head of Sustainability Research at BNEF.
Is carbon offsetting too much of a risk for CSOs?
Several journalistic investigations and academic studies have found discrepancies between the carbon avoidance or removal claims made by project developers selling carbon offsets and their actual impact. As a result, many companies decided to stop using carbon offsets as part of their decarbonisation strategies, seeing this activity as a reputational risk.
In addition, increased scrutiny from regulators on firms using carbon offsets as a “right to pollute”, making climate claims without taking action to reduce their impact, means carbon offsetting now also presents legal risks.
The EU recently passed a new law banning unsubstantiated climate claims, including those based on offsetting schemes (while at the same time making carbon removals, a type of carbon credit that can demonstrate long-term CO2 storage, an integral part of its net zero strategy).
But defenders of carbon finance mechanisms argue that carbon offsets have a crucial role to play in ensuring a just transition. “The real point of the carbon market isn’t necessarily to allow companies to meet their climate targets: it’s to channel funding to where it’s needed in the Global South. There needs to be a paradigm shift in that debate,” Phil Brady, EVP, Marketing and Communications at Emergent Climate, a non-profit set up in 2019 with the goal of bringing an end to deforestation, told CSO Futures last year.
Companies dedicated to carbon market integrity
Companies that have chosen to continue to use carbon credits are also involved in integrity initiatives. Bain & Company, BCG, Better Drinks, Natura and Sendle all became early adopters of VCMI’s Claims Code of Practice in late 2023, aiming to test and refine the guidance on how to use high-quality carbon credits.
BCG’s Chief Sustainability Officer David Webb told CSO Futures in January that low-quality nature-based offsets are “always a risk we have to guard against”. “From our vantage point, we screen very heavily to make sure that we know what we're getting into,” he added, recognising that companies also have to be willing to pay a higher price for quality offsets or removals.
Private sector involvement is crucial in helping a high-integrity carbon market achieve its full potential, according to Harrison: “The lack of progress at COP28 on Article 6 has been a wakeup call to the importance of the voluntary carbon market. The private sector has been hard at work to position carbon credits as a complement to a suite of other decarbonisation options, including the compliance market. Their success may just be the difference between the private sector achieving or not achieving its net-zero goals.”