The global carbon credit market traded value was $978.56 billion in 2022, and is expected to reach $2.68 trillion by 2028, according to the Global Carbon Credit Market: Analysis by Traded Value, Traded Volume, Segment, Project Category, Region, Size and Trends with Impact of COVID-19 and Forecast up to 2028 report.
The report points out that there is increasing regulatory and stakeholder pressure on global corporations to lower emissions. These trends are driving demand for carbon credits, giving rise to two sets of markets, which could grow meaningfully in the coming decades. At present, the overall carbon market is mainly characterized by the degree of regulation, namely the regulated compliance carbon market (CCM) and the unregulated voluntary carbon market (VCM).
The CCM is more mature and has historically generated stronger mitigation actions and incentives to decarbonize the economy than the VCM. CCM most commonly takes the form of an Emissions Trading System (ETS), which is also known as a cap and trade program, the largest of which is the European Union ETS. Article 6 of the Paris Agreement also contemplates an international market that allows for voluntary cooperation between two or more countries on emissions reductions.
The global carbon credit market has been growing over the past few years, due to factors such as the rising carbon emission, increasing corporate efforts in carbon offsetting, increase in adoption of net zero targets, increasing demand for natural climate solutions.
Strong price actions across the world’s most liquid carbon markets put a spotlight on carbon as a barometer for global climate policy actions and as an emerging asset class.
High carbon prices are required for carbon removal forestry projects; for blue hydrogen to reach cost parity with grey hydrogen; to decarbonize the hard-to-abate sectors such as steel and cement. The longer nations defer taking action, the higher and faster carbon prices would have to rise to achieve the current climate objectives.
Challenges and trends
However, some challenges are impeding the growth of the market such as insufficient governance, no standard measurement of quality, etc. Since the lack of governance and unified standards make it difficult for market participants to verify the quality of a given carbon credit, it became a hurdle for market growth.
The market is projected to grow at a fast pace during the forecast period, due to various market trends like increasing the number of VCM platforms, increasing corporate efforts in carbon offsetting, carbon as a new investment asset class, article 6 agreement redefining global carbon offset markets, etc., according to the report.
The emergence of carbon credit rating agencies would help to address one of the biggest hurdles in the VCM- the ability of market actors to assess “quality”. Similar to credit rating agencies, these companies use a standardized set of criteria and methodologies to compare credits across different project types.
At present, quality is being grouped bluntly using project categories, i.e. removal vs. avoidance, or reforestation vs. renewable energy, when in reality, high and poor-quality credits exist in every category. There is little correlation between price and quality in the current markets and that needs to change for the market to scale and for VCM to deliver its intended climate-positive outcomes.
Moreover, increasing the nationally determined contributions (NDC) net-zero target is also expected to further contribute to the demand for carbon credit.
For instance, EU member states agreed on a 2030 domestic emissions target of at least 55% net reduction below 1990 levels and achieving the goal of emissions neutrality by 2050. On the other hand, South Korea pledged to reduce 2030 emissions by 40% below 2018 levels and achieve carbon neutrality by 2050.
Impact of COVID-19, and the way forward
The economic impact of the COVID-19 pandemic had the potential to shock carbon markets around the world. However, markets demonstrated remarkable resilience, first reacting rationally to lower demand through price decreases, and then returning to near-normal functioning. Compared to after the global financial crisis, ETSs have weathered the shock without major effects.
The global voluntary carbon market has experienced positive growth during the pandemic. In 2020, airlines rolled back their purchases to match lower emissions, whereas broader corporate demand for voluntary carbon offsets was increasing. Then, as the year progressed, so did the number of carbon-neutral pledges from individual companies like Amazon and Microsoft. In the post-COVID era, factors such as government support to reduce greenhouse gas emissions are anticipated to drive market growth, according to the report.