Carbon credit prices are set to rise significantly in the coming years as more ambitious climate goals are set and achieved, according to a report published by Bloomberg with support from Carbon Growth Partners. The report, titled “Investing in Carbon Markets: Cleared for Take-Off,” emphasizes the importance of carbon credits in achieving net zero emissions and emphasizes the need to invest in the market to meet growing demand and close the emissions gap.
In 2023, the carbon market faced significant challenges, but a surge in corporate demand and stricter carbon credit generation rules will shift the market from oversupply to scarcity. This will drive up carbon prices, particularly for nature-based credits, which could exceed $55 per tonne of carbon dioxide in voluntary carbon markets. The report highlights the significance of carbon credits as a crucial tool in bridging the emissions gap, with a 350% increase in annual retirements since 2016.
To limit global warming to 1.5°C, substantial further growth in offsetting efforts is necessary, requiring total emission reductions of 150 billion tonnes of CO2 equivalent by 2030, a 45% decrease from 2019 levels. The report also states that over $44 trillion in investment will be needed in renewable energy by 2030. However, challenges such as higher borrowing costs, competition for limited capital, and economic slowdowns may lead to a scaling back or deferral of investments in internal decarbonization by companies. This will drive a significant increase in corporate demand for carbon credits as a supplementary strategy throughout the decade.
Many corporations are intensifying their emission reduction commitments, with 6,323 entities taking action under the Science-Based Targets Initiative. These entities emit around 32 billion tonnes of greenhouse gases each year, including Scope 1, 2, and 3 emissions. Collectively, these commitments suggest a substantial potential demand for carbon credits, even with conservative action scenarios. If businesses with approved Science-Based Targets Initiative targets choose to offset 20% of their emissions, annual demand for credits could reach six times the total annual supply from existing and pipeline projects.
A new source of demand for carbon credits comes from investors who recognize the potential of the expanding carbon market. While institutional investor involvement has been limited so far, there is a growing interest in the sector. Many investors see the opportunity to generate financial returns while supporting climate solutions. Major players such as Citi Group and JP Morgan have committed substantial sums to carbon credits, with Citi Group stating that the market is “here to stay” and JP Morgan investing $200 million in carbon removal credits to decarbonize operations. State Street has also announced its role in offering carbon asset fund administration and depository services, facilitating the integration of carbon-related assets into investment portfolios.
Other institutional investors, including Temasek, AXA, CPP Investments, and TPG, have also made significant investments in various carbon-related ventures. Some of these companies have chosen to fund forest protection projects that generate carbon credits. This trend indicates a growing interest in using carbon markets for diversified financial returns and climate impact mitigation.
The report by Bloomberg, supported by Carbon Growth Partners, highlights the essential role of carbon credits in combating climate change and draws attention to the increasing participation of institutional investors. This market shift underscores the pivotal role of carbon credits in closing the emissions gap and achieving climate targets.