Understanding carbon credit prices

Key takeaways

1. The average price per carbon credit has increased by 72.5 % from 2021-2023.
2. In 2023, the average price of carbon credits was $6.97. —Ecosystem Marketplace
3. Buyers expect to pay $25 to $30 per metric ton by 2030. The expected increases in prices and budget are likely driven by increased demand for higher-quality credits and potential scarcity. —BCG Report
4. Increasing demand, expectations of quality, and unit supply costs will make carbon credits scarce and expensive.— EY report

As we showed in the previous module, the Voluntary Carbon Market is expected to grow more than 10-20 times its current size. Other predictions are that with this growth, demand will grow exponentially as companies face growing pressure to meet their jurisdiction's net zero goals. Supply is expected to lag behind the growth of demand, causing even further price increases than that caused by the rising demand.The average price per carbon credit has increased by 72.5 % from 2021-2023. - Ecosystem Marketplace. Even though this increase has been drastic, prices are still not where the market desires it to be to point towards robust quality, and in turn, this means that companies who purchase carbon credits now, still receive early mover benefits.In this chapter, we will look at the current state of the market as well as the predictions on where it is heading.

Pricing of Carbon Credits

Carbon credit prices are primarily influenced by the following characteristics:

• Supply and demand
• Project Category
• Carbon credits from Tech-based solutions price much higher than credits from Nature-based solutions, due to complex systems that are costly to engineer.
• Quality Verified Credits from projects with high scores in terms of additionality, permanence and leakage, high environmental integrity, and robust MRV standards, often command higher prices.
• Co-benefits “Credits that certified additional robust environmental and social co-benefits “beyond carbon” had a significant price premium. Credits from projects with at least one co-benefit certification had a 78% price premium compared to projects without any co-benefit certification.” — EM Report
• Vintage “The premium for carbon credits with a more recent vintage, representing more recent emissions reductions activities, was 57% above older credits, compared with a 38% recency premium in 2021, using a historical five-year rolling cutoff date from the year of the transaction.”— EM Report

What is the status of the Carbon Market, and where is it heading?

Price

Status quo: The average price per carbon credit skyrocketed since 2021, rising by 82% from $4.04 per ton in 2021 to $7.37 in 2022, and taking a slight dip in 2023 to $6.97— Ecosystem Marketplace

Limited pricing data make it challenging for buyers to know whether they are paying a fair price. It is important therefore that buyers make informed decisions and get help from players close the market who are more in tune with current pricing levels for nature-based and tech-based solutions. This will greatly assist buyers in getting a feeling for the realistic nature of their proposed budget for carbon credits.

Carbon Credit Pricing forecast

Prices are projected to rise 6x by 2031 and have climbed 60% in the past year alone. EY Net Zero Centre report

Supply

Status quo

‍Offset supply rose slightly in 2022: Projects in 77 countries issued 255 million carbon offsets, up just 2% from 251 million in 2021.

Supply forecast

‍Carbon offset supply will likely grow significantly. In a market that allows all offsets like those seen today, regardless of their sector and geography, supply will exceed 8GtCO2e by 2050. Over three-quarters of this supply will come from nature-based avoided deforestation, reforestation, and agriculture.On the other hand, the market is continuously tightening its grip on carbon credit quality. This is expected to have a decreasing effect on the growth of quality credit supply and could see demand outstripping supply even further.

Demand

Status Quo

Demand for carbon credits is measured in terms of retirements(the use of carbon credits) by companies. Since 2017, the market has seen more than a 4 fold increase in demand for carbon credits from the private sector.As of 2020, the demand for carbon credits in the voluntary market was approximately 95Mt (Mega tons) of carbon dioxide equivalent (MtCO2e).

Today’s fluctuating demand is mostly classified as behavioural, meaning companies buy offsets to differentiate products or satisfy customers. It’s more responsive to prices and criticism, and Bloomberg NEF expects behavioural demand to drop from 181MtCO2e in 2023 to zero in 2050. It will be replaced by fundamental demand as companies work toward net-zero goals, increasing to 1.1GtCO2e in 2030 and 5.4GtCO2e in 2050. This demand is less price elastic and takes over the long term. — BloombergNEF Report

Demand Forecast

• “Demand for carbon credits could increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050. Overall, the market for carbon credits could be worth upward of $50 billion in 2030.” —Mckinsey Report
• This demand translates into a ~$10 billion–$40 billion market opportunity in 2030, with an ample runway to reach ~$20 billion–$135 billion in 2040.” — BCG Report
• The demand for quality, nature-based credits is outpacing supply. —EY Net Zero Centre report

Bloomberg Study: 3 Scenarios For Carbon Credit Prices

A recent pricing report by BloombergNEF describes the 3 scenarios of carbon offset prices under three scenarios:

The voluntary market scenario assumes nothing fundamentally changes about the offset market, with companies buying all types of offsets. The removal scenario assumes companies can only buy removal offsets to achieve net-zero goals. The bifurcation scenario has the market split in two, with a smaller market for expensive high-quality credits and a larger market for everything else.

Scenario 1: Prices would be criminally low in the voluntary market scenario: Supply would be almost four times greater than demand in 2030. Offsets will cost just $13/ton at that point, valuing the market at a mere $15 billion. Prices rise to $35/ton in 2050, which is less than our previous outlook of $47/ton. This would be a disastrous outcome for the market – companies would continue to invest in cheap, low-quality offsets while sectors like DAC would fail to get needed investment.

Scenario 2: A removal scenario would send offset prices to new highs, but the rise is gradual and gives buyers time to brace: Prices would rise to a manageable $42/ton in 2030, before shooting up to $105/ton in 2032 and $254/ton in 2037.

Scenario 3: A bifurcation scenario lives and dies by the definition of quality: Once stakeholders create such a definition, the market likely diverges into a less liquid, more expensive market for high-quality offsets and a larger, cheaper market for everything else. BNEF estimates that such a market denoted by quality peaks at $38/ton in 2038, but would still be too cheap to incentivise investment into technology-based removal like DAC. A low-quality market would exacerbate many of the issues already seen in today’s market and prices would peak at just $22/ton in 2050. Just how fundamentally different these markets would be is based on how inclusive the definition of ‘high-quality’ is.

Conclusions

According to the forecasts, both prices and demand are expected to rise. While supply is anticipated to increase, it will likely fall short of meeting the growing demand.

After recognising this opportunity to receive early mover advantages, companies can:

• Calculate and forecast hard-to-abate and unavoidable emissions as soon as possible, in order to get an understanding of how many carbon credits should be purchased to save costs.
• Compensate hard-to-abate emissions,  and neutralise unavoidable emissions, using high-quality carbon credits.