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Washington DC 15 September 2021—In the first eight months of 2021, voluntary carbon markets have already posted a near-60% increase in value from last year, driven by corporate net-zero ambition and growing interest in carbon markets to achieve Paris climate goals, a new report finds.
“We’re seeing record market volume and value in 2021,” said Stephen Donofrio, a lead report author and Director of Ecosystem Marketplace. “The markets are on track to hit $1 billion in transactions this year if current levels of activity and growth continue. It’s not just companies who are buying carbon credits as a small piece of their corporate net-zero strategy. There’s an increase in speculators purchasing credits. The combined value of those deals is becoming a serious source of finance for green projects around the world.”
Data from the State of the Voluntary Carbon Markets 2021 shows that as of 31 August 2021, voluntary carbon markets had already posted $748.2M USD in sales for 239.3 million credits, each representing one ton of carbon dioxide equivalent, reflecting a 58% year-to-date jump in value (up from $472.9M), and growth in credit volume of 27% over 2020 performance (up from 188.2 million credits transacted). 2020 was already a banner year for voluntary carbon markets, continuing 2019’s strong growth trajectory despite the emergence of COVID-19, says Donofrio—making 2021’s performance all the more striking.
The most active buyers in the market are the energy, consumer goods, and finance and insurance sectors. All are sectors that face challenges in quickly cutting climate impacts both in direct as well as financed emissions, says Donofrio, since a large share of their emissions come from an infrastructure or technological base they can’t quickly upgrade, or from parts of their supply chain or portfolio they have less influence over than direct operations. Carbon offsets are being purchased by companies to immediately reduce their net emissions footprint as they work to abate these more costly and difficult-to-address emissions in the medium to longer term.
The world needs to cut climate pollution in half from current levels by 2030, and bring them down to net zero by 2050, to meet the Paris Agreement’s 1.5°C target. To support such rapid decarbonization, voluntary action through the carbon markets will need to increase 15-fold by 2030 and 100-fold by 2050 from 2020 levels, according to the Taskforce on Scaling Voluntary Carbon Markets (TSVCM), an initiative led by Mark Carney, UN special envoy for climate action and former Governor of the Bank of England. The TSVCM is currently forming an independent Governance Body tasked with ensuring carbon credit quality and standardization.
“Ecosystem Marketplace’s latest report provides insights into the swift growth of voluntary carbon markets and emphasizes the need to guide the markets to deliver the highest quality possible,” says Annette Nazareth, Operating Lead for the Taskforce on Scaling Voluntary Carbon Markets and former SEC commissioner and Senior Counsel at Davis Polk & Wardwell. “I’m delighted to see the significant market momentum of the past year, as ever more companies and individuals are taking action. The new Governance Body being established by the TSVCM will play a key role in ensuring the large volume of carbon credits traded are of high quality and integrity.”
Tightening supply lifts prices for many credit types
“Carbon credit projects and retailers are struggling to keep up with demand in a hot market,” says Patrick Maguire, a lead author of the report and Senior Manager of Ecosystem Marketplace.
A tightening supply has also driven up prices for many types of credits. The weighted average price per ton for credits from forestry and land-use projects that reduce emissions or remove carbon from the atmosphere has been on a steady upward path, rising from $4.33 per credit in 2019 to $4.73 per credit so far in 2021, with a spike to $5.60 per credit in 2020. Prices for waste disposal credits (from projects such as landfill methane capture or diversion of organic waste for composting/digestion) and clean-burning cookstoves have also jumped so far in 2021 from their 2020 levels, by 42% for waste disposal and 16% for clean cookstoves.
“Whether higher prices will entice new supply to enter the market quickly enough to meet rising demand is still an open question,” says Maguire. “Most carbon projects typically take years to develop.”
But higher prices are certainly good news for project developers. The vast majority of credit transactions are for projects based in Asia, Latin America, and Africa, report authors say.
“Voluntary carbon projects have played a tremendous role in financing innovative projects for communities on the frontlines of the climate crisis,” says Jennifer Morris, Chief Executive Officer of The Nature Conservancy. “While the increased demand is encouraging, we need to move further, faster – it is imperative that this upward trend in prices reported by Ecosystem Marketplace accelerates if the voluntary carbon market is to play its full role in supporting sustainable development around the world.”
Demand for credits from nature-based solutions continues to be particularly high, says Donofrio. Projects that reduce emissions by protecting or sustainably managing at-risk forests, grasslands, and other ecosystems saw the volume of demand more than double in 2021 from 2020’s already-record high levels. Transactions of REDD+ credits, which generate emissions reductions by harnessing carbon finance to protect tropical forests from human-caused destruction or degradation, exploded in 2021, growing 280% between 2020 and 2021 year-to-date.
“We simply can’t meet the Paris goals without nature-based solutions,” says Dan Lambe, President of the Arbor Day Foundation. “Voluntary carbon markets are an important tool to help the world move much faster to restore and protect nature. It’s certainly exciting to see the markets reaching this new level in Ecosystem Marketplace’s latest market update.”
Experts see renewable energy’s 2021 rally as a “last hurrah” in voluntary carbon markets for some regions
2021 may also mark the peak of renewable energy (RE) as a major share of the carbon markets, for projects originating in developed countries. RE volumes rose from 42.4 million credits in 2019 to 80.3 million credits in 2020 and remained steady at 80 million credits in 2021, making it the second-largest market category after Forestry and Land Use. Prices for RE credits tumbled from $1.42 per credit in 2019 to $0.87 per credit in 2020 before rising to $1.1 per credit as of September 2021.
“A surge in transactions coupled with falling prices is consistent with a shift in renewable energy credits coming from Asia, now that the financial additionality case is harder to make for RE in developed countries,” says Maguire.
All carbon projects need to demonstrate “additionality,” meaning that they could not exist without carbon finance, in order to sell credits. As renewable energy becomes increasingly competitive with other forms of energy, as it has in developed economies, it no longer needs carbon finance to survive. “RE projects may continue to meet additionality criteria in some places such as less developed countries,” Maguire says, “but particularly in developed countries we don’t expect to see significant new supply in the coming years.”
Net zero and carbon neutral ambition, global attention to climate talks, point to a strong final quarter
The report’s writers say that all signs point to continued market growth through in the final quarter of 2021. Global climate talks in November 2021 are also expected to be a key moment for new net-zero commitments to be announced.
“The challenge for voluntary carbon markets today is no longer finding credit buyers,” says Michael Jenkins, CEO of the nonprofit group Forest Trends, Ecosystem Marketplace’s parent organization. “Now, we all need to guide the markets to deliver the highest quality possible, with the greatest benefit possible for planet and communities. Market data and transparency help us ensure that level of integrity.”
Additional quotes
“By some estimates the voluntary carbon markets are starting to grow at speed and scale. With COP26 coming in less than two months, it is time to enhance the rules that can build higher levels of confidence, integrity and quality, while helping to unleash higher financial flows that can support stepped up climate action.”
– Professor Edgar Hertwich of the Norwegian University of Science and Technology and a lead author of the UN Intergovernmental Panel on Climate Change’s Fifth Assessment Report (AR5)