Read more in the November 1 edition of Invert Insights.
A new report titled The Voluntary Carbon Market Outlook 2024 released by the EY Net Zero Centre outlines the crucial role carbon credits play in supporting global decarbonization aligned with the Paris Agreement and net-zero ambitions.
The report emphasizes that while carbon credits are essential to offset hard-to-abate emissions and support emission reduction commitments, the market faces challenges related to transparency, standardization, and credibility.
Key findings from the report include:
Carbon credits play a material role in decarbonization and make a meaningful impact on the planet. Carbon credits are vital in bringing forward emissions reductions, especially for companies in sectors with limited abatement options. They support equitable climate action by transferring financial resources from high- to low-income countries, facilitating emissions reductions across borders.
Standardization bodies play a large role in building trust and in the evolution of carbon markets. The report highlights the need for enhanced integrity within the carbon market due to scrutiny over the quality of some credits. Initiatives like the Voluntary Carbon Markets Integrity Initiative (VCMI) and the Integrity Council for the Voluntary Carbon Market (ICVCM) aim to improve the quality and consistency of credits. However, current regulations vary by country, leading to a fragmented market that poses barriers to scaling.
As the quality of carbon credits improves, the price will increase. As demand for high-quality credits grows, coupled with rising quality standards and the shift toward removal-based credits, carbon credits are expected to become more expensive. By 2035, prices may reach between $75–125 per tonne, with up to 50% of credits exceeding $50 per tonne, depending on market conditions. Costs are also likely to rise for credits that offer additional non-carbon benefits, which appeal to companies with high ESG standards.
Businesses who buy carbon credits have an advantage in their decarbonization plans. Businesses that engage early in voluntary carbon markets will be better positioned to manage future costs and navigate emerging regulations. Companies that incorporate carbon credits typically set more ambitious emissions reduction goals compared to those that don’t. These businesses often have more rigorous targets for reducing their own emissions (Scope 1 and 2) before using credits to offset what cannot be directly reduced.
Carbon credits help global communities in a meaningful way. The report highlights opportunities in low- and middle-income countries, which are poised to play a more significant role in carbon credit supply. Carbon credit projects in emerging markets are seen as vehicles for local development, providing financial flows that can support economic growth, job creation, and social benefits. These projects often include co-benefits such as improved infrastructure, community engagement, and biodiversity preservation.
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💡 A lack of consistent global standards for carbon credits and market rules creates a fragmented and complex environment. Regulatory differences across jurisdictions result in varying definitions, requirements, and allowable uses of carbon credits, complicating market participation and discouraging large-scale investment. This fragmentation also makes it difficult to ensure credit integrity and prevent double-counting of emissions reductions.
💡 The report highlights that the market will undergo a “race to integrity,” driven by increased scrutiny of credit quality and verification. Now more than ever, the role of oversight of the carbon markets by initiatives like the Voluntary Carbon Markets Integrity Initiative (VCMI) and the Integrity Council for the Voluntary Carbon Market (ICVCM) is crucial. Activities like the standardization of quality benchmarks is expected to build market trust as fragmented regulations and inconsistent standards across jurisdictions slow progress.
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