The Voluntary Carbon Market
In 2021, voluntary carbon markets became widely discussed and recognised in the energy industry. Large corporations, oil & gas firms, banks and other interested parties began exploring the market. These entities have looked at the market as an investment proposition or to reduce their carbon emissions.
Political bodies, such as the UK and EU have compliant markets in place, which cover industrial sectors, to limit carbon emissions. This has prompted other sectors to voluntarily purchase carbon offsets, to show they want to reduce their greenhouse gas emissions.
Voluntary carbon credits are not restricted to specific regions, industries or countries, whereas the compliant market is. This creates a more easily accessible carbon credit for all, allowing any business or individual to offset their emissions.
Participants
The market is made up of five key participants:
Project developers - start projects and receive credits for them to trade.
Brokers - buy from developers or other organisations to sell with a commission.
Retail traders - purchase large quantities to sell to end users in smaller volumes at a profit.
Standards - certify projects meets requirements to qualify as credits.
End user - Purchase carbon credits to offset their residual carbon emissions.
Pricing
The prices for carbon credits vary widely due to the complex nature of factors which influence the underlying value of the credit.
As mentioned here, carbon credits fall into either the carbon avoidance or carbon removal categories. Carbon avoidance projects prevent emissions from entering the atmosphere, that otherwise would have occurred if it were not for the new project. This type of project includes renewable energy, farming, deforestation prevention and forest restoration, cookstove and fuel efficiency projects.
Removal projects directly remove carbon dioxide from the atmosphere and store it. They can be nature based, such as planting trees, or technology based, such as direct air capture (DAC) or carbon capture and storage (CCS).
Removal credits are usually more expensive than avoidance credits due to the demand for this type and higher capital and development costs. They are considered the better option for fighting climate change as they physically reduce the amount of carbon in the atmosphere. Other factors, such as social and community impacts, also influence the price of carbon credits.
The current market sees prices for wholesale carbon credits as low as £1/tCO2, while some sell for up to £40/tCO2 in the retail market. Some technology based removal projects are trading north of £100/tCO2. These higher prices were unheard of prior to last year.
Are carbon credits a good investment?
Due to the nature of the market, it is difficult to predict exactly what is likely to happen. There has been an unprecedented increase in demand over the last year, as mentioned above, due to all the new entrants in the market. Large financials and oil & gas heavyweights are purchasing large volumes, either to offset in the future or as an investment position. Several new companies have entered the market, bringing more projects and credits into the market, making them more accessible for organisations and individuals who wish to offset.
Looking ahead, the market may continue to grow, with some analysts predicting it to be a multi-billion pound industry as the world looks at all options for decarbonising. With the net zero targets of 2050 and the Paris Agreement, it could be that carbon credits and offsets have a role to play in the fight against climate change.