Patch Insights: February 2024

Patch Insights offers trends and takeaways from the voluntary carbon market, curated by the Patch team. From policy news, to demand trends, to project developer updates, each month we’re sharing what stood out as we work together to scale global climate solutions.

This month we’re looking at market demand, supply constraints and the impacts on availability and pricing that we anticipate in 2024, and beyond.

A current squeeze on high-integrity nature-based removals ??

Demand for carbon credits dropped between 2021 and 2022 by about 4%. Much of that reduction was driven by two factors: 1) concerns over the integrity of REDD+ credits and 2) the collapse of the crypto bubble. These dynamics resulted in relatively low prices for nature-based credits specifically.

But not all nature-based solutions are created equal! We’re seeing a price increase on highly rated natured-based removals, given supply of these credits a limited and demand is high.

Forecasters from BCG, EY, MSCI and others project the the broader price decrease will not last long, more on why below.

Skyrocketing demand is soon to come ??

Despite the demand drop, in 2022 the primary market (retired credits only) was worth $1.5 billion and capital investments in the market added up to $7.5 billion. A capital investments to sales ratio of 5:1 is a signal of massive growth potential. (For reference, mature markets are typically negative in the ratio of sales to investment.)

Right now, carbon credit supply exceeds demand. But Trove Research (now a part of MSCI) estimates that will invert by 2030 in a low-demand scenario. A 1.5°C-aligned pathway would see this inversion by 2025.

Expect price increases for durable CDR and nature-based solutions ??

This EY carbon credit price outlook over the next 30 years across 4 different climate scenarios is aligned to the very near term spike in demand forecasted above.

Carbon credit supply, however, is inelastic, which means the increase in demand will likely result in average prices rising soon.

Our takeaway? 2024 is a crucial year to signal demand for climate solutions for both the planet and buyers pocketbooks. Sustainability leaders would be prudent to take advantage of current pricing and the ability to lock in their own supply.

Interested in digging deeper on demand trends? Check out the Buyers guide to carbon credits (part 3) for our outlook on pricing and supply.