Carbonomics 101: Three trends that could define the future of voluntary carbon credit markets

The future of voluntary carbon markets is looking bright and will bring major changes for companies and asset owners on the road to net zero.

In the 10th article in this series, we take a closer look at how voluntary carbon markets – and the regulatory environment surrounding them – could change in the years to come.

Carbon markets will give way to a more inclusive sustainability credit landscape

Through voluntary carbon markets, tens of billions of pounds will be deployed by those making net-zero commitments to projects that reduce or remove greenhouse gasses (GHGs) from the atmosphere. Companies may purchase voluntary carbon credits to compensate for an equivalent mass of emissions. Such carbon credits should be considered as part of an institution’s comprehensive climate strategy, which includes elimination, reduction, and substitution of carbon-intensive activities.

But a more sustainable future isn’t just delivered through climate change mitigation alone. Indeed, the United Nations lists 17 interlinked Sustainable Development Goals (SDGs) to strive for – from eliminating poverty and starvation, to reducing gender inequality and improving health outcomes and biodiversity conservation. As we’ve written elsewhere, a number of initiatives already aim to ensure that a project’s underlying high-quality carbon credits also deliver on a wider range of sustainability objectives. These can include benefitting local communities or improving local biodiversity.

We think the voluntary carbon market will continue along this path, eventually morphing into a broader sustainability-themed credit market. This could create more opportunities for organisations to deploy capital towards projects that address a wider range of ESG risks. It could also improve strategic alignment of those credits to the underlying business model of companies that buy them.

More projects to satisfy growing demand

Demand for voluntary carbon credits has doubled every three to four years to reach 95 metric tonnes of carbon dioxide equivalent (MTCO2e) in 2020 according to Trove Research, and it looks set to rise further still. A recent World Economic Forum (WEF) report estimates that by 2030, market demand could reach between 1.5 and 2 GtCO2e (billion tonnes [Gt] of CO2-equivalent emissions) worth of credits.

It may seem obvious, but a natural consequence of growing demand for high-quality carbon credits – and to support the diversification of the credits and broadening sustainability objectives they aim to achieve – is that more projects are required, globally. This is not something that happens quickly but instead is the result of a significant amount of localised due diligence, working closely with local stakeholders, third-party verification and ongoing monitoring and reporting.

That, in turn, will have wide-ranging implications for companies and the market more generally, driving demand for new skills and talent; greater consistency in accounting and verification techniques; and enhanced trade infrastructure to promote transparency and market efficiency.

Aligning carrot-and-stick carbon policies

Decarbonisation targets are ramping up across the globe as countries race to put the world back on a pathway towards limiting global temperature rises to 1.5oC by 2050. The enormity of that challenge has spawned impressive technological innovation. It has also led to a wide range of policies designed to penalise contributors to climate change and incentivise the transition to a low-carbon economy.

Looking ahead, the ‘carrots and sticks’ of carbon policy must be better aligned in order to give net-zero a real chance.

One of the main sticks in the policy toolkit is carbon taxes. But these are adopted by few countries; only 27 countries have them in place. And just 40 countries have put some kind of price on carbon. The price placed on carbon is too low to meaningfully curb emissions in line with the 2015 Paris Agreement targets by 2050, according to the International Monetary Fund (IMF). Crucially, that price isn’t aligned to the price of carbon found in voluntary carbon credit markets because they are determined by markets, not policymakers. Nevertheless, there is a strong expectation that carbon prices will continue to rise and should eventually converge.

At the same time, policymakers need to ensure effective incentives are in place to reward companies and individuals for making the transition to a more sustainable economy. Measures that incentivise low-carbon technology development (and help share the risk of development), and adoption, other emissions-cutting practices (the carrots) need to be extended to broader swathes of the economy, and more quickly.

Towards a more just transition

Without radical change, GHG emissions will continue to rise, hastening climate change and exacerbating the socioeconomic tensions it’s already creating. That’s why a just transition towards a net-zero economy is so urgent. By enabling organisations to funnel capital towards emission-reduction activities beyond their immediate capabilities, voluntary carbon credit markets will play an essential role facilitating that transition in the years to come.