Voluntary carbon credits have experienced a significant decline in prices, leading to increased scrutiny of the market. However, compliance prices are expected to rise, with Germany raising its carbon price to 50 euros and Canada planning to increase theirs in 2024. Many had hoped that the recent COP28 conference would address concerns about the reliability of carbon credits by establishing regulatory measures. Unfortunately, these expectations were not met, resulting in carbon prices dropping to their lowest levels, particularly for Nature Based Carbon Offsets (NGEO).
The NGEO carbon prices have experienced a meltdown, plummeting by a massive 81% in trading to reach their lowest level ever, at just $0.07. Over the past two years, there has been a significant decrease in demand for carbon credits, leading to a sharp decline in prices. This diminishing demand can be attributed to the absence of standardized regulations governing carbon markets. Recent news and studies have raised concerns about the reliability of the system, highlighting the lack of rules in place.
Carbon markets allow for the offsetting of carbon emissions through tradable entities known as carbon credits. Each credit represents the removal or reduction of carbon dioxide from the atmosphere, often achieved through actions like tree planting. There are two types of carbon markets: mandatory and voluntary. Mandatory or compliance markets are regulated by governments or international bodies using instruments like carbon taxes to regulate energy-intensive industries. On the other hand, voluntary markets allow companies and individuals to trade credits without compulsion. It is this voluntary sector that is currently under scrutiny.
In the compliance sector, things are taking a different turn. Germany recently approved an increase in carbon prices, surpassing their previous plans. The country voted to raise the carbon levy on fossil fuels used in housing and transportation. Initially, the German government agreed to raise prices to 40 euros per ton in 2024. However, the price is now set to reach 45 euros starting next month, representing a 50% increase from the current price. This figure will further rise to 50 euros in 2025. The new carbon price is part of Germany’s national deal to mitigate a budget crisis and will also contribute to funding Germany’s climate and transformation fund.
Similarly, in Canada, the federal government has decided to raise the carbon tax from $65 per tonne in 2023 to $75 in 2024. Canada’s carbon price has experienced the most significant increase this year, going from $50 to $65 per tonne of carbon emissions. This price will continue to rise by $10 each year until it reaches $170 per tonne in 2030. The House of Commons recently debated whether to eliminate the carbon tax or not, with Canada’s NDP proposing to remove the tax from all forms of home heating. The outcome of this debate will have an impact on the country’s ability to achieve its climate goals.
Despite the challenges faced by the voluntary carbon market, there is still hope for its future. A BloombergNEF report projected that the total value of carbon credits issued and sold to companies for their decarbonization goals could reach $1 trillion by 2037. Under stricter supervision, where companies can only purchase vetted carbon credits, offset prices could surge to over $250 per tonne. However, some key players have cautioned against the voluntary market’s reliance on bilateral transactions for inexpensive credits, as this may jeopardize its future. They stress the need for transparency, clear quality definitions, and easier access to high-quality supply, warning that the upcoming years could present challenges similar to those seen in 2022.
Hopes were initially pinned on a resolution during the COP28 conference, which was intended to address these issues. However, the conference proved unsuccessful in adopting the standards outlined in Article 6 of the Paris Agreement, which provides rules for carbon trading. As compliance prices are set to surge in the near term, voluntary carbon credits, particularly NGEO, face a crisis due to plummeting prices and the lack of regulations. The COP28 conference’s failure to provide resolutions has left uncertainties surrounding the reliability of the market. Now, hopes are placed on clearer regulations and greater transparency to stabilize these crucial markets amidst mounting climate commitments.