The year 2023 is proving to be a critical moment for the carbon credit market. Once considered a vital tool in the fight against climate change, voluntary carbon markets are now facing a crisis of confidence and a significant decline in price and demand.
Voluntary carbon markets (VCMs) experienced rapid growth from 2019 to 2021, with VCM credits jumping by 86% in 2021 compared to 2019 levels. This surge was driven by increasing corporate commitments to achieve net-zero emissions and optimistic projections about the market’s potential size. Companies like Citibank, Pfizer, and Pacific Gas and Electric (PG&E) set ambitious targets to reach net zero emissions by 2050 or 2040. However, in 2022, the growth of VCMs began to slow down, and this trend continued into 2023.
Several factors have contributed to this decline, including the increasing complexity of market mechanisms and the role of carbon credits in broader sustainability strategies. Moreover, high-profile corporations such as Shell, Nestlé, EasyJet, and Fortescue Metals Group have recently withdrawn from carbon offset schemes. This withdrawal is partly due to growing skepticism about the effectiveness of these projects and concerns about greenwashing.
Shell, for example, announced that it was moving away from offsets and claims of carbon neutrality that relied on them. Nestlé decided to focus more on reducing greenhouse gas emissions within its own supply chain and operations, rather than investing in carbon offsets. EasyJet also shifted its strategy towards direct measures of reducing environmental impact, rather than relying on offsets. As a result, there has been a significant decrease in demand for offsets, with estimates suggesting a 25% decline from 2021 levels by the end of 2023.
The decline in demand has had a dramatic effect on prices. The world’s largest spot carbon exchange, Xpansiv’s CBL market, saw prices of carbon offsets fall by over 80% in an 18-20 month period. This price decline reflects the broader challenges facing the voluntary carbon market, including questions about the actual environmental impact of the credits and the integrity of projects claiming to offset emissions.
Notably, the prices of Nature-Based Global Emissions Offsets (NGEOs) have experienced a sharp decline. These offsets, which were trading at a premium over other offsets last year, dropped from around $15 in June 2022 to $1 in June 2023. One major reason for this downward trend is the tough macroeconomic environment, which has caused stagnation in demand. Additionally, the poor outcome for the voluntary carbon market at COP27 and COP28 has cast doubts on how carbon offsets fit into corporate net-zero plans.
While the voluntary carbon market faces challenges, compliance markets like the EU ETS have seen record-breaking carbon prices. The EU carbon prices surged past 100 euros in February 2023 but have since dipped back to low levels at 78 euros. The EU plans to phase out free carbon allowances and introduce a new carbon tax, known as the Carbon Border Adjustment Mechanism (CBAM), to ensure fair carbon pricing for imported goods from carbon-intensive industries. The UK is also set to launch its own version of CBAM.
Furthermore, several African nations, including Zimbabwe, Tanzania, Zambia, and Kenya, are preparing to participate in the carbon market by creating their own carbon credit exchanges. Asian countries like Indonesia and Japan are also joining the carbon market bandwagon.
The future of carbon markets now stands at a critical juncture. They must regain credibility and functionality amidst growing scrutiny and regulatory changes. How these markets evolve in response to these challenges will significantly impact their role in global climate strategies.
Despite the challenges, there is some positive news in 2023. Xpansiv’s CBL spot exchange recently set a daily trading volume record of 2.13 million tons of carbon credits, indicating robust corporate engagement in the market. This suggests that there is still potential for the carbon market to rebound and play a significant role in addressing climate change.
In conclusion, the carbon credit market is currently facing a crisis of confidence and a decline in price and demand. High-profile corporations withdrawing from carbon offset schemes and growing skepticism about the effectiveness of these projects have contributed to this decline. However, compliance markets like the EU ETS are seeing record-breaking carbon prices, and new players are entering the carbon market. The future of carbon markets depends on their ability to regain credibility and functionality in the face of challenges and scrutiny.