Future Demand, Supply and Prices for Voluntary Carbon Credits – Keeping the Balance

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https://trove-research.com/research-and-insight/carbon-credit-demand-supply-and-prices-june-2021/

Future Demand, Supply and Prices for Voluntary Carbon Credits – Keeping the Balance

Executive summary 

This report presents a detailed analysis of the future demand and supply for voluntary carbon credits conducted by Trove Research and University College London.

Currently the voluntary carbon market (VCM) is small with demand around 95MtCO2e/yr, representing 0.2% of global greenhouse gas emissions. However, our analysis shows that demand is likely to increase significantly, driven by a growing number of corporate Net Zero commitments. This in turn will increase scrutiny that real emissions reductions are being achieved. 

As demand for carbon credits increases, the costs of undertaking real emission reduction projects will need to rise as lower cost projects are used up. If the financing of voluntary projects is to genuinely reduce emissions beyond those that would otherwise have occurred, today’s average prices of $3-5/tCO2e will need to increase to $20-50/tCO2e by 2030 and potentially $100/tCO2e if governments undertake lower cost projects first. Prices are then expected to keep rising to 2050. 

In the modelling, VCM demand scenarios are created to 2050 based on potential future need for offsetting business sector Scope 1 and 2 emissions, Scope 3 emissions for oil companies, and compliance demand from the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). 

Global supply curves are calculated from 2020 to 2050 for four technologies that are likely to make up a substantial part of new voluntary carbon credit projects: forest preservation (REDD+), reforestation, Carbon Capture & Storage and Renewable Energy deployment in Least Developed Countries. 

The land-based supply curves use satellite imagery of global land cover at 350mx350m resolution and data on carbon sequestration by trees, coupled with economic analysis of the foregone profits from using the land for agriculture. Alternative land-uses and agricultural land values depend on the most likely crops grown and animals farmed in each country. 

The analysis also examines the implication of only allowing projects to generate credits if they contribute to emission reductions in excess of a country’s Nationally Determined Contribution (NDCs) under the Paris Agreement. Key insights and recommendations are as follows: 

Demand for voluntary carbon credits 

• The Voluntary Carbon Market (VCM) is currently small in relation to anticipated demand. With demand of 95MtCO2e/yr in 2020, the VCM currently represents only 0.5% of the reductions pledged in country NDCs by 2030, and 0.2% of the reductions needed to achieve the 1.5C Paris temperature goal pathway in 2030 (differences relative to BAU in 2030).
• With increasing pressure on corporations to show climate action, VCM demand is expected to grow x5-10 over the next ten years, x8-20 by 2040 and x10-30 by 2050. With this increase in demand the VCM would account around 5% of the emission Pg. 03 Executive summary 3 reductions required under country’s NDCs in 2030 and 2% of the reductions required to meet the 1.5C Paris goal pathway in 2030. 

Future carbon credit prices 

• Current prices in the VCM are unsustainably low ($3-5/tCO2e weighted average) and need to increase significantly if they are to have high environmental integrity. Low prices are in part due to an excess of supply in relation to demand, alongside issues of additionality, with credits able to be created at very low costs. We estimate that without this surplus, prices would be at least $10/tCO2e higher. 
• With projected increases in VCM demand, average VCM prices should rise to $20- 50/tCO2e by 2030 driving real investment in new projects to reduce emissions. With a further increase in demand by 2040, carbon credit prices would be expected to rise in excess of $50/tCO2e. 
• If the tests for additionality in the VCM require projects to be over and above what countries have pledged in their NDC, then carbon credit prices would increase further. In the extreme case where all Nature Based Solutions (NBS) projects within a country’s NDC are assumed to be undertaken by governments and not eligible for the VCM, new VCM projects would be higher in the range $30 to 100/tCO2e by 2030 - depending on the level of demand. 
• As the cost of using carbon credits rises, corporate investments in permanently reducing greenhouse gas emissions within their value chain, will become more attractive. 

Role of Nature Based Solutions 

• In the period to 2030 the VCM could be supplied entirely by Nature Based Solutions. Whilst CCS and supporting renewable energy in LDCs will be important carbon reduction activities in the long term (after 2030), reforestation and REDD+ type projects offer significant supply at lower cost in the short to medium term (up to 2030). 

Recommendations 

From the modelling and analysis conducted in this project we make five recommendations for the development of the VCM: 

1. Price as a measure of environmental integrity 

If average prices remain significantly below the forecast levels ($30-50/tCO2e in 2030), the credibility of credits in delivering additional emission reductions should be questioned. There are opportunities for low-cost projects, with favourable combinations of land values and plant growth rates, but some projects in the market today are low-cost because of questionable additionality claims. Genuine low-cost opportunities will run out as demand increases putting upwards pressure on prices.

2. Reducing emissions before the use of the VCM 

Reducing greenhouse gas emissions through renewable energy, energy efficiency and nonCO2 abatement should be prioritised ahead of encouraging companies to use carbon credits Pg. 04 Executive summary 4 through the voluntary market. This should happen through regulation and publicly-backed financial incentives. In doing so the volume of carbon credits available to the voluntary market would reduce. 

3. The importance of Nature Based Solutions (NBS) 

On the basis of costs and co-benefits, protecting existing forests and restoring degraded land with above and below ground carbon mass should be prioritised as part of the Voluntary Carbon Market. This is justified on economic grounds, as the costs of these measures are cheaper than the alternatives. High-quality NBS can also provide important additional biodiversity and social benefits. 

4. Managing the VCM 

Improved and independent regulation of the VCM is needed. In particular, corporate buyers should be encouraged to invest in new, high quality projects. The excess of supply in the VCM continues to suppress carbon credit prices. This is unhelpful for directing corporate capital to the most beneficial projects to reduce carbon emissions. Over time the market will need to move to funding only projects that remove carbon dioxide from the atmosphere, rather than reducing emissions elsewhere, in order to achieve net zero emissions globally. 

5. Accounting treatment of carbon credit transactions under the Paris Agreement 

The application of Corresponding Adjustments to transactions in the VCM should be carefully considered. Requiring host governments to adjust their national emission inventories through the use of Corresponding Adjustments, could increase voluntary carbon credit prices substantially. This may be justified to retain overall integrity of global carbon transactions, under some types of carbon credit claims. 

Acknowledgements 

This report has been prepared by the core team at Trove Research and University College London, together with a number of external experts. We are grateful for all those that have contributed, in particular Professor Sam Fankhauser at the University of Oxford for his comments. The core team includes: Guy Turner – Trove Research, Elyas Helmke – Trove Research, Teki Anna Tetteh-Wright – Trove Research, Caroline Pitt – Trove Research, Atta Oraee – Trove Research, Dr Alexander Koch – Trove Research, Professor Mark Maslin – UCL, Professor Simon L. Lewis – UCL, Dr Steven Pye – UCL, Michael Liebreich – Liebreich Associates