What’s Needed to Scale Carbon in 2024

Pricing

Short Version

The global carbon credit market, valued at about $978.56 billion in 2023, is poised for significant growth, projected to reach $2.68 trillion by 2028, with an 18.23% compound annual growth rate (CAGR). This expansion underscores a commitment to eco-consciousness and is contingent on the market's integrity. Essential to this growth is a robust regulatory framework for compliance carbon markets (CCM) and effective management of voluntary carbon markets (VCM), ensuring ethical and sustainable market scaling. These efforts are crucial in shaping a carbon-neutral future and advancing the fight against climate change.

For detailed insights into the market's current status and future outlook, refer to "Global Carbon Credit Market 2023: Sector to Reach $2.68 Trillion by 2028 at a CAGR of 18.23%", featured in Research and Markets' report on Yahoo Finance, accessible here: [Global Carbon Credit Market 2023](Global Carbon Credit Market 2023: Sector to Reach $2.68 Trillion by 2028 at a CAGR of 18.23% ).

Long Version

As of 2022, the global carbon credits market was valued at approximately $2 billion. It is projected to experience remarkable growth, reaching an estimated $143.5 billion by 2032, with a compound annual growth rate (CAGR) of 55.5%. This growth is driven by the increasing demand for carbon credits, which are essentially permits where one credit represents the removal of one ton of carbon dioxide from the environment oai_citation:1,Error.

The Taskforce on Scaling Voluntary Carbon Markets (TSVCM), supported by the Institute of International Finance (IIF) and McKinsey, anticipates a significant escalation in carbon credit demand. It's estimated that this demand could increase by a factor of 15 or more by 2030, and by up to a factor of 100 by 2050. Consequently, the market for carbon credits could surpass $50 billion in 2030 oai_citation:2,Error.

The scaling potential of the carbon credit market is closely tied to its credibility, which hinges on making the market more transparent, verifiable, and environmentally robust. The current market is fragmented and complex, with challenges such as questionable emissions reductions represented by some credits, limited pricing data, and risks for suppliers related to the financing of carbon-reduction projects. To scale effectively, these issues must be addressed by market participants, standard-setting organizations, financial institutions, and other stakeholders [oai_citation:3,Carbon credits: Scaling voluntary markets | McKinsey](A blueprint for scaling voluntary carbon markets to meet the climate challenge ).

In terms of supply, McKinsey's analysis indicates that by 2030, the annual potential supply of carbon credits could be between 8 to 12 gigatons of CO2. These would primarily come from four categories: avoided nature loss, nature-based sequestration, avoidance or reduction of emissions, and technology-based removal of CO2 from the atmosphere. However, factors like the development speed of projects, concentration of potential supply in a few countries, and risks associated with project financing could limit the actual supply to between 1 to 5 gigatons of CO2 per year by 2030 [oai_citation:4,Carbon credits: Scaling voluntary markets | McKinsey](A blueprint for scaling voluntary carbon markets to meet the climate challenge ) [oai_citation:5,Carbon credits: Scaling voluntary markets | McKinsey](A blueprint for scaling voluntary carbon markets to meet the climate challenge ).

Moreover, the scarcity of high-quality carbon credits due to varying accounting and verification methodologies, as well as poorly defined co-benefits, poses additional challenges. This scarcity is compounded by long lead times for verifying new credits, unpredictable demand, and difficulties in fetching economical prices for the credits. Such issues result in a market characterized by low liquidity, scarce financing, inadequate risk management services, and limited data availability [oai_citation:6,Carbon credits: Scaling voluntary markets | McKinsey](A blueprint for scaling voluntary carbon markets to meet the climate challenge ).

To overcome these challenges, it is proposed that verification methodologies and processes be strengthened and streamlined. Providing clearer demand signals would give suppliers greater confidence and attract necessary financing, thus aiding in the development of a large-scale, effective voluntary carbon market [oai_citation:7,Carbon credits: Scaling voluntary markets | McKinsey](A blueprint for scaling voluntary carbon markets to meet the climate challenge ).

In summary, the carbon credit market, while currently relatively small, is on the verge of substantial expansion. However, achieving this potential requires addressing significant challenges related to market fragmentation, credibility, and supply constraints. With concerted efforts from various stakeholders, these challenges can be overcome, paving the way for a robust and scalable carbon credit market that effectively contributes to global climate action.

Based on a comprehensive analysis of multiple sources, the outlook for carbon prices in 2023 presents a multifaceted picture, reflecting various global dynamics and regional differences:

1. World Bank - State and Trends of Carbon Pricing 2023: This report outlines that direct carbon pricing instruments now cover nearly a quarter of global greenhouse gas emissions, with revenues from carbon taxes and Emissions Trading Systems reaching about $95 billion. It highlights the expansion of such instruments in both emerging and high-income economies, with notable implementations in Austria, Indonesia, the United States, Mexico, and the upcoming reintroduction of carbon pricing in Australia  .
2. Voluntary Carbon Markets in 2023 - Bain & Company: This report indicates that the average credit price in the voluntary carbon market has slightly decreased to $6.97 per ton in 2023, with nature-based solutions being a primary driver of market value. The report suggests a complex future for carbon markets with increasing importance, potential for integrity enhancement, and challenges related to market fragmentation and disagreements over credit claims  .
3. Carbon Market Prices Forecast - Energy Monitor: According to a survey by IETA and PwC, carbon market participants expect prices to fall in the next two years but rebound in the latter half of the decade. European respondents expect EU Allowance prices to average €84.40 ($90.12) between 2023 and 2025, a slight decrease from the current price of €85.50. Similar trends are expected in other regions, with varying degrees of price changes anticipated in the California carbon allowance, the northeastern US RGGI market, the UK ETS, and New Zealand’s NZU   .
4. IEA - World Energy Outlook 2023: This outlook suggests that the legacy of the global energy crisis may be ushering in the end of the fossil fuel era. The report indicates a sufficient momentum behind clean energy transitions for global demand for coal, oil, and natural gas to reach a high point before 2030. Investment in clean energy, particularly in solar PV and electric vehicles, has risen significantly, providing a pathway to limit global warming to 1.5 °C, albeit with substantial challenges remaining .
5. Long-Term Carbon Offsets Outlook 2023 - Bloomberg via Yahoo Finance: This report forecasts the carbon offset market could be valued at half a trillion dollars annually by 2050, with demand rising into the billions of tons of carbon dioxide equivalent within the next decade. The report presents three scenarios for carbon offset prices: a voluntary market scenario with a wide variety of offset types leading to lower prices, a removal scenario focusing solely on carbon removal offsets leading to higher prices, and a bifurcation scenario where the market splits into two, with different price trajectories for high-quality and other offsets         .These sources collectively provide a nuanced view of the carbon market in 2023, suggesting a period of transition with both challenges and opportunities ahead. The reports indicate a mix of short-term price declines and long-term bullishness in various carbon markets, underpinned by a growing emphasis on clean energy transitions and the evolving role of carbon pricing mechanisms globally.