Unveiling Carbon Market Chronicles 2023: Exploring the Inflection Points of 2024

"MSCI Carbon Markets Review Highlights Progress and Challenges in Voluntary Carbon Market in 2023, Anticipates Inflection Points in 2024"

The voluntary carbon market (VCM) experienced a mix of progress and obstacles in 2023, according to a recent webinar by MSCI Carbon Markets. The review highlights key developments from the past year and identifies potential turning points to watch for in 2024. Notably, 2023 saw the lowest number of credits issued in three years, but it ended with a record number of monthly retirements. This article will provide a recap of the webinar, focusing on carbon credit issuances and retirements, demand, key market players, investments, major policy developments, and the outlook for 2024.

In 2023, credit issuances reached the lowest annual total in three years, experiencing a 25% year-on-year decline. This decrease in supply was mainly due to nature-based and renewable energy projects issuing their lowest amounts in five and four years, respectively. However, energy efficiency projects, primarily driven by cook stove projects, doubled their credit supply compared to 2022. The MSCI report also revealed that retirements rallied in Q4 2023, becoming the second-highest quarter on record. This momentum seems to have carried into January 2024, with retirements potentially exceeding the 17 MtCO2 set in 2022. In December 2023 alone, there were 36 megatons of credit retirement, setting a new monthly high that was 25% above the previous record.

The voluntary carbon market is dominated by four major registries: Verra, Gold Standard, ACR, and CAR. These registries accounted for over 90% of the credits retired last year. Retirements from these “Big 4” registries actually increased by 6% in 2023, while retirements from the next ten prominent names slightly declined.

Among the top 10 credit retirees, Delta Airlines claimed the first spot, maintaining its position as the largest corporate retiree in 2021 and 2022. While some companies dropped out of the top 10 last year, others remained, and new ones entered the market. Shell topped the list in 2023 with around 16 million metric tonnes, followed by Volkswagen with over 8 MtCO2e. Overall, there were more joiners than leavers in terms of retiring credits.

A nascent market gaining significant interest in 2023 was the carbon removal (CDR) market, focusing on high permanent engineered carbon removals. This includes biochar and direct air capture, which typically command premium prices due to their higher quality and durability. Although the number of CDR transactions slightly declined year-on-year, the quantity of credits increased significantly to 5.4 million.

In terms of carbon credit prices, the declining trend observed in 2022 continued into the first half of 2023. However, the drop in average prices was only 16% compared to 2022. In Q4 of last year, all project types experienced lower prices, resulting in overall price declines for the year. REDD+ projects saw the least drop, at 15%, while renewable energy projects experienced the largest decrease, at 39%. Energy efficiency and REDD+ projects faced increased media and academic scrutiny in 2023, leading to weaker prices. However, nature restoration and non-CO2 gas projects rebounded in November and December. By the end of the year, energy efficiency, REDD+, and non-CO2 gas projects had converged around the same price level of $4.65, suggesting a potentially weak market environment.

Major policy developments in 2023 included the EU’s green claims directive, which aims to empower consumers for the green transition by banning misleading claims based on carbon offsetting. The VCMI carbon integrity claims, the Claims Code of Practice (CCPs), also had a significant impact on the VCM. Additionally, national governments introduced landmark regulations for market trading and standards. For example, the US Commodity Futures Trading Commission (CFTC) proposed guidance for trading voluntary carbon credit derivative contracts. In the Global South, national carbon credit markets saw growth, and several African countries proposed carbon pricing systems and schemes. Verra, the leading carbon certifier, updated its standards in response to increased scrutiny of carbon credits certified by the organization. At the COP28 climate summit, carbon markets faced challenges in reaching agreements under Article 6, which focuses on market mechanisms. However, progress was made under Article 6.2, while Article 6.4 remained unresolved due to integrity concerns.

Looking ahead, Guy Turner, the Head of Carbon Markets at MSCI, posed the question of whether the market could reach an inflection point in 2024. Several potential inflection points were identified, including new sources of demand driven by CORSIA, VCMI, SBTi, and more compliance markets. Quality initiatives are also moving into implementation, with a growing interest in jurisdictional soil carbon and blue carbon. Increasing clarity for corporations regarding claims and disclosures on the use of credits is expected, with the EU and UK leading the way. However, the market may face challenges due to the turning macroeconomic cycle and political uncertainties.

In conclusion, the voluntary carbon market experienced both successes and challenges in 2023. Record retirements and the rise of CDR investments shaped the market amidst uncertainties. As 2024 unfolds, potential inflection points will play a crucial role in determining the future trajectory of the global carbon market.

Matt Lyons

Matt Lyons

Matt Lyons is the founder of Forestry & Carbon. Matt has over 25 years as a forestry consultant and is invoilved in numerous carbon credit offset projects.

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