The global carbon credit market traded value was US$978.56 billion in 2022. The market is expected to reach US$2.68 trillion by 2028. at a CAGR of 18.23% during the forecast period of 2023-2028.
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.
Market Dynamics
Growth Drivers:
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, establishment of CORSIA, etc.
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:
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.
Trends:
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.
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.
According to a report by the Energy & Climate Intelligence Unit and Oxford Net Zero (Taking Stock: A global assessment of net zero targets), 21% of world's largest public companies have committed to a net zero target. Increase in adoption of net zero targets are also contributing to the market growth.
Impact Analysis of COVID-19 and 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.
Competitive Landscape
The key initiatives/ Emission Trading Systems (ETS) of the global carbon credit market are:
EU ETS
California Cap-and-Trade Program
Regional Greenhouse Gas Initiative (RGGI)
Korea Emissions Trading System
UK ETS
China National ETS
The European Union Emissions Trading System (EU ETS) represents the central pillar of the EU's policy to combat climate change and a key tool for reducing, on a cost-effective basis, GHG emissions from the regulated sectors. The system covered 36% of the total emissions of the European Economic Area (EEA) in 2020-21, encompassing activities from the power sector, manufacturing industry, and aviation (including flights from the EEA to the United Kingdom).
The Regional Greenhouse Gas Initiative (RGGI) is the first mandatory GHG ETS in the US and covers emissions from the power sector. The system started operating in 2009 with 10 states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont).
The UK Emissions Trading Scheme (UK ETS) started in January 2021. Many design elements of the new system mirror those in phase 4 of the EU ETS, in which the UK had participated since 2005. The UK ETS covers energy-intensive industries, the power sector, and aviation within the UK and European Economic Area (EEA), together making up about one-third of the UK's GHG emissions.
Key Attributes:
Report Attribute
Details
No. of Pages
204
Forecast Period
2023 - 2028
Estimated Market Value (USD) in 2023
$1.16 Trillion
Forecasted Market Value (USD) by 2028
$2.68 Trillion
Compound Annual Growth Rate
18.2%
Regions Covered
Global
Key Topics Covered:
1. Executive Summary
2. Introduction
3. Global Market Analysis 3.1 Global Carbon Credit Market: Traded Value Analysis 3.2 Global Carbon Credit Market: Traded Volume Analysis 3.3 Global Compliance Carbon Market: An Analysis 3.4 Global Compliance Carbon Market: Segment Analysis 3.5 Global Voluntary Carbon Market: An Analysis 3.6 Global Voluntary Carbon Market: Project Category Analysis
4. Regional Market Analysis
5. Impact of COVID-19 5.1 Impact of COVID-19 on Carbon Credit Market 5.2 Impact of COVID-19 on Carbon Prices 5.3 Investments in Green Recovery Plans
6. Market Dynamics 6.1 Growth Driver 6.1.1 Rising Carbon Emission 6.1.2 Growing Coverage of Carbon Pricing Initiatives 6.1.3 Increase in Carbon Pricing 6.1.4 Increase in Adoption of Net Zero Targets 6.1.5 Establishment of CORSIA 6.1.6 Increasing Demand for Natural Climate Solutions 6.2 Challenges 6.2.1 Insufficient Governance 6.2.2 No Standard Measurement of Quality 6.2.3 Difficulty in Mobilizing Potential Supply 6.2.4 Problems of Homogeneity, Justice, Gaming, and Knowledge 6.3 Market Trends 6.3.1 Increasing Number of Voluntary Carbon Market (VCM) Platforms 6.3.2 Booming Venture Capital (VC) Deals in NBS/Carbon Removal 6.3.3 Increasing Corporates Efforts in Carbon Offsetting 6.3.4 Key Nationally Determined Contributions (NDC) Net-Zero Targets 6.3.5 Key Initiatives Framing the Future 6.3.6 Article 6 Agreement Redefining Global Carbon Offset Markets 6.3.7 Carbon as a New Investment Asset Class 6.3.8 Emergence of Carbon Credit Rating Agencies
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