ICIS VIEW: Outlook for voluntary carbon markets

Author: Chetan Patel

2021/06/21

LONDON (ICIS)--Carbon markets – whether compliance or voluntary – are crucial in achieving net zero targets be that at a corporate or national level.

While both compliance and voluntary markets have been around for some time, rapidly developing “green energy” policy has seen compliance markets such as the EU ETS surge in both volume and value over the past years.

In comparison, the voluntary carbon market (VCM) remains relatively nascent, with trading still opaque and several different market standards and credit types making determining supply and demand balances difficult.

Presently, VCMs remain in its infancy, with no clear price direction making setting emissions reduction targets difficult from a valuation perspective.

The demand side is dominated by rapidly growing decarbonisation targets across value chains with specific focus on removal of scope 3 emissions, although the credibility of these claims is still questioned.

While the outlook remains uncertain, initiatives such as the Taskforce on Scaling Voluntary Carbon Markets (TSVCM), sponsored by the Institute of International Finance, are setting out to establish the credibility of offsets.

WHAT ARE CARBON OFFSETS?

Participation in the voluntary carbon market allows corporations to offset emissions across their value chain that may otherwise not have been reduced.

Companies can do this by purchasing carbon credits from approved projects, where one credit represents one metric ton of CO2 equivalent that is either prevented from being emitted or removed by carbon-reduction. Credits are derived and - subsequently fund – projects that are specified and verified by independent standards such: VERA and Gold Standard.

These projects can be either nature based (linked to reforestation and avoiding deforestation), negative emissions (carbon capture and storage, bioenergy) and renewable energy (hydro, wind and solar with community benefits).

Pricing is largely opaque at the moment with prices varying considerably according to project type, age, accreditation, additionality and other benefits such as community, biodiversity and land-use.

This high degree of variability represents one of the main challenges the market has as average prices across these different types can vary between $4.5-10/tCO2e, according to think tank Trove research.

A lack of a clear pricing signal means that companies will find it challenging to determine how much of their investment in cutting emissions would come from offsetting.

DEMAND DRIVERS

Demand for carbon credits is expected to continue to rise as corporations look towards credits to offset emissions across value chains.

Carbon offsets are expected to be a crucial part of a company’s decarbonisation strategy in addition to green energy procurement and direct emissions reductions, especially in the case of reducing scope 3/supply chain emissions.

Oil and gas companies are expected to be one of the key drivers of this demand, with most major firms setting emissions reductions targets. LNG companies have already started to decarbonise the shipping value chain with “carbon neutral” LNG by use of credits to offset the equivalent carbon emissions.

According to recent research by Trove Research, demand for voluntary carbon credits has been rising rapidly, doubling over the last three to four years, reaching 95MtCO2e in 2020, up from 75MtCO2e in 2019.

Growth has been particularly focused around nature-based projects, with corporates willing to pay a premium for credits that have more credible and tangible benefits.

OUTLOOK

Despite the challenges, the outlook remains positive for VCMs although much depends on the development of demand in the corporate sector.

Overall, the growth in demand will depend on a combination of policy which places increasing pressure on corporations to decarbonise at a rapid scale, while also hinging on the adoption of this policy amongst smaller companies.

The VCM market is expected to be worth upwards of $50bn by 2030, with demand being driven in large by net zero policy, according to research by TSVCM.