Voluntary Carbon Market –Trends and Outlook

Organisations worldwide are taking strides to reduce or eliminate carbon emissions from their businesses. The majority of them are experiencing technical difficulties in becoming emission-free immediately, or the economic cost of doing so is excessively high. So they have voluntarily committed to becoming carbon-neutral through medium- and long-term plans, directing their investments in climate-friendly projects such as afforestation, land use, renewable energy and energy efficiency. As a result, there has been a surge in transaction volumes of voluntary carbon credits in the last few years.

The year 2020 witnessed strong willpower in reducing carbon emissions. Several global initiatives were launched in 2020, such as ‘Race-to Zero’ by the Climate Ambition Alliance to encourage governments, public and private entities, organisations etc. to pledge carbon neutrality by the end of 2021. In Sep 2020 a ‘Global task force’ was formed by the former governor of the bank of England to scale voluntary carbon market, and also the Science-Based Targets Initiative released its guidelines aimed to reduce carbon emissions and use carbon offsets as part of the energy transition journey.

Voluntary carbon markets comprise seven major project categories – forestry and land use, renewable energy, household devices, waste disposal, chemical processing/industrial manufacturing, transportation and energy efficiency/fuel switching.

The volume of offsets transacted from the renewable energy domain rose 78% to 42.3 MtCO2e in 2019 from 23.8 MtCO2e in 2018. The price per ton of emission, however, decreased 16% y/y. The transacted volume of offsets generated through nature-based solutions (forestry and land) declined 30% to 36.7 MtCO2e in 2019 from 50.7 MtCO2e in 2018.

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Source: Voluntary Carbon and the Post-Pandemic Recovery, Ecosystem Marketplace, September 2020

Nature-based projects, such as REDD+ (reducing emissions from deforestation and forest), which covers extensive forest management activities in developing countries, have been the most preferred option by companies over other project categories for the voluntary market. REDD+ projects not only help counterbalance ecological degradation because of industries but also provide superior additional benefits – community development, as well as the creation and distribution of jobs and activities under sustainable development goals.

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Source: Voluntary Carbon and the Post-Pandemic Recovery, Ecosystem Marketplace, September 2020

The voluntary carbon market is expected to witness a huge transaction in volume in the future, as 32bn metric tons of greenhouse gas reduction is required to meet the 1.5°C reductions in temperature by 2030 set under the Paris Agreement. As per a CDM analysis, the demand for voluntary carbon offsets would reach over 6,000 MtCO2e and the overall value of the voluntary market would touch $270bn per year by 2050. Organisations, therefore, must not only continue their efforts to cut greenhouse gas emissions but also actively support and invest in activities that remove carbon from the atmosphere.

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Source: CDM

Recognising the importance of decarbonisation, a large number of companies are participating in this market. CDP, a non-profit organisation, has developed a global disclosure system for key stakeholders such as investors, companies, cities, states and regions etc. for the management of their environmental footprint in the last 20 years. CDP’s ranking is based on three key themes: climate, forests and water. So far, 313 companies (45% higher than 2019) have found a place on CDP’s ‘A’ list in 2020 for demonstrating their commitment to environmental transparency and action. Some prominent companies from CDP’s list are highlighted below.

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As per CDP’s assessment parameters, the number of organisations ranked ‘AAA’ across climate, forests and water domains grew to 10 in 2020 from 6 in 2019. The share of Asia-based ‘A’ ranked companies increased to 32% in 2020. Europe led in terms of ‘A’-ranked companies, followed by Asia and North America. A record 9,600 companies disclosed information on environmental action in the CDP survey.

Through their environmental action and transparency, the organisations have proved that the transformation towards a sustainable net-zero economy is feasible and can be achieved sooner than expected. Increasing environmental and climate action awareness among businesses is also evident in increasing transactions in the voluntary carbon market. Standardisation and further development of market infrastructure can increase transparency and liquidity in voluntary carbon markets to achieve carbon neutrality shortly.

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