21 October 2024
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The carbon market might have been created directly as a result of decarbonisation efforts where reduced or avoided carbon emissions are measured by carbon credits. There are two type of carbon credits, those that are used in the mandatory carbon market and those that are used in the voluntary carbon market (VCM). The term Carbon Offset is often used interchangeably with Carbon Credit in the VCM.
Carbon and decarbonisation easily link us to carbon dioxide (CO2), which is the largest component of greenhouse gas (GHG) and contributes the most to the global warming potential. For the entire 2022, CO2 accounted for 71.65% of GHG. Other GHG include Methane (CH4), Nitrous Oxide (N2O) and F-gases: they can be measured by CO2 equivalent in terms of global warming potential.
A seminal definition is that one carbon credit equals to one tonne of CO2 equivalent emissions. When carbon credits are traded in different currencies, they are given monetary value: their prices being determined by the economic fundamentals of supply and demand.
From the above, it is fair to say that carbon credits or carbon offsets bond the decarbonisation efforts and the financial markets, the combination of which makes the carbon market today.
Globally, the carbon market is in its infancy compared to the equity and bond markets, for the simple fact that there are questions about whether carbon trading should sit with the commodity or other financial instrument trading desk.
The VCM grew at CAGR 21% from 2018 to 2023, measured by carbon credits issued annually. Nonetheless, it only accounted for approximately 0.62% of the global GHG emissions in 2023 by our calculations, compared to 24% (12.8 bn tCO2e) covered by the compliance mechanisms over a similar period. Using the voluntary carbon market size as a reflection of decarbonisation efforts, there is much work to roll up your sleeves for, and we see that as an exciting opportunity for growth from a business perspective too.
In the Base Case scenario, we are projecting US$ 7.65 bn annual VCM for 2025 and US$ 32.70 bn for 2030. In the Base Plus scenario, these will be more significant, and I cannot cross out the even higher potential in this emerging carbon market, where decarbonisation meets finance.
On the road forward, it would be nice to see more clear guidelines for the VCM from an industry practice and policy perspective. Noticing that critical carbon technologies such as Carbon Capture, Utilisation and Storage (CCUS), Carbon Capture and Utilisation (CCS) are more developed in Europe including the UK, there should be business cooperation opportunities geographically.
Finally, like the mandatory carbon market, the VCM needs transactions and liquidity to establish the fungibility between carbon credits and prices for trading.
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Writing ahead of COP29
Partner and Founder of BTT Consulting Limited
Oct. 2024
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