Green is Gold: What Projected Carbon Market Boom Signals on Prosperity and The Planet

In 2015, the Paris Agreement marked a watershed moment in global efforts to combat climate change. Ratified by 196 parties at COP 21, it aimed to address the urgent need for action on reducing greenhouse gas emissions. Nations began submitting their Nationally Determined Contributions (NDCs), outlining their individual plans to mitigate emissions. Simultaneously, non-state entities such as corporations, businesses, organizations, and even individuals stepped up to the challenge, declaring carbon neutrality and NetZero targets. This movement was driven not only by a sense of responsibility but also by the growing demand from investors and consumers for environmentally sustainable practices.

One of the key features of the Paris Agreement, Article 6, envisioned a global carbon market to facilitate voluntary cooperation between nations in reducing emissions. This led to the rapid growth of carbon markets, providing incentives for emission reductions and fostering international collaboration. However, despite this momentum, the juggernaut faced brakes in early 2022, when various geopolitical factors along with operational issues, brought difficult times to the carbon markets, especially voluntary market.

Now, the industry has shown resilience and is bouncing back. Several studies have projected a strong resurgence in carbon credit prices, indicating renewed investor confidence and commitment to climate action. Despite setbacks, the Paris Agreement continues to serve as a cornerstone for global climate efforts, driving momentum for a low-carbon yet robust global economy via carbon credits.

Sunny Skies and Favourable Winds Ahead

A recently published report by Trove Research brings about great news for the markets. The report published estimates of the prices for tradable carbon credits under Article 6 of the Paris Agreement.

If the market operates efficiently, Article 6 prices may fall within the range of $36 to $45 per tonne of CO2 equivalent in 2030, increasing to $43 to $54 per tonne by 2035, as per the report.

Companies are looking forward to continue making their climate-related commitments. Approximately 9,500 companies have set climate targets. While the number of issued credits slumped in 2023, and the annual credit demand flat, as compared to the peak of 2021, they were still higher than 2020.

With the pace of surplus carbon credits growth slowing, especially for nature-based credits, the demands being steady will result in better pricing. The report also showed an encouraging trend showing that despite a grim year, prices of carbon credits with integrity ratings reflect better.

Carbon credits are eventually finding their footing amid policy discussions.

The market's trajectory in 2024 holds significant importance for its future, particularly regarding the trust placed in carbon credits. According to BloombergNEF's Long-Term Carbon Offsets Outlook 2024, rebuilding confidence may incentivize companies to procure billions of carbon credits each year. This could potentially push prices up to $238 per ton and propel the market's annual value to exceed $1.1 trillion by 2050.

As per another report by Statista, carbon prices within various emissions trading systems globally are anticipated to rise between 2026 and 2030, compared to the period from 2022 to 2026. A survey conducted among members of the International Emissions Trading Association suggests that the average carbon price within the EU Emissions Trading System (EU ETS) is expected to increase from approximately 84.4 euros per metric ton of CO? between 2022 and 2025 to nearly 100 euros per metric ton of CO? between 2026 and 2030.

These reports are only few of many that have posed similar projections indicating the worst for VCM is over.

Weathering the Storm

The industry started facing challenges right with the onset of 2022. Geopolitical tensions, such as the Russia-Ukraine war and Israel-Palestine conflict, which further worsen with Iran escalating the military actions. This has disrupted energy markets and impacted the demand for carbon credits, particularly in the European Union, the largest consumer of Verified Carbon Market (VCM) credits.

Concerns over the quality and credibility of carbon credits arose with the emergence of Carbon Credits Rating Agencies. This created confusion and undermined confidence in the market. Additionally, criticism from the Western media and academic institutions regarding greenwashing practices further dampened spirits.

However, with the relentless efforts of environmentalists and the industry leaders, the industry withstood the difficult times. While geopolitical issues were out of the actionable scope for the environmentalists, to address concerns over the quality of carbon credits and combat greenwashing practices, several solutions were implemented. The establishment of the International Carbon Credits Verification Mechanism (ICVCM) could ensure rigorous standards and verification processes for carbon credits, enhancing their credibility and reliability. Additionally, the creation of the Voluntary Carbon Market Integrity (VCMI) initiative set industry-wide standards and best practices to promote transparency and accountability.

Interventions from compliance programs at both national and international levels, such as CORSIA and Article 6 of the Paris Agreement, played a crucial role in regulating carbon markets and ensuring adherence to established standards. While the fruits of the actions are yet to be tasted, they have started to show, as predicted in the forecast by these studies. By implementing these measures, stakeholders can foster trust in carbon markets, mitigate concerns over quality, and combat greenwashing practices effectively.