Value of Carbon Market Update 2021

In February of 2019, Pianpian Wang wrote an informative article discussing how carbon is priced around the world in both compliance and voluntary carbon markets. We have provided yearly updates on the information from this article, the most recent of which was published in September of 2020.

This post will provide further updates on the market changes and serve as a practical guide on what to expect when looking to purchase carbon offsets.

Sustained Momentum in the Mandatory/Compliance Markets
Mandatory and compliance-based carbon pricing markets are those where carbon emission standards are regulated by governments or public authorities and are managed using carbon taxes by the metric tonne or cap-and-trade systems where participating installations must stay within an emissions maximum or purchase an additional emissions allowance at a premium.

Increases in Participation
According to the World Bank’s Carbon Pricing Dashboard, which provides tracking data on all existing and emerging carbon pricing jurisdictions worldwide, there are currently 64 carbon pricing initiatives. This is a continuation of the increase observed in our previous article of 61 initiatives in 2020 and 50 initiatives in 2019.

This year, the included initiatives would collectively cover 11.65 billion metric tonnes of carbon dioxide equivalent (11.65 Gt CO2e) or about 21.5% of the estimated global greenhouse gas emissions. This is a slight decrease from the 2021 estimates of last year, but with China commencing operation of its new Emissions Trading System (ETS), there is hope that the next few years will see a significant decrease in emissions from the world’s largest emitter of greenhouse gasses.

The Rise in Carbon Prices
The carbon price of the EU ETS, which had never consistently traded for more than €30 has now jumped up to more than €50 in May 2021. This is a huge increase from the €18 price in 2020, and prices are expected to continue to rise as the EU strives to meet its emissions reduction goals and carbon allowances become less available.

Following the drop in carbon prices after the 2008 financial crisis, the EU developed the Market Stability Reserve (MSR) in order to control the supply of carbon units, which led to the sharp rise in carbon prices in 2018. Likewise, carbon prices in other markets are reaching all-time highs. IHS Markit’s Global Carbon Index tracks carbon credit markets globally by consolidating data from the European Union Allowances (EUA), California Carbon Allowances (CCA), and Regional Greenhouse Gas Initiative (RGGI). According to their estimates, the current weighted carbon price is $34.99 (as of June 2021), which is up from around $20 near the end of 2020. Before December of 2020, the IHS Markit Global Carbon Index calculation of carbon credit cost had not risen above $22.15.

As mentioned in Pianpian Wang’s original article on this topic, 2021 marks the beginning of a new phase for the EU ETS focused on establishing larger reduction goals and adjusting the number of allowances available in the Market Stability Reserve. With long-term goals to reach net-zero carbon emissions by 2050, carbon prices will continue to rise and carbon allowances are being seen as an increasingly valuable investment.

Hitting Stride, Voluntary Market Still Faces Price Disparity
In addition to mandatory carbon trading markets, there are also growing markets for companies and organizations who voluntarily seek to offset their carbon emissions. As the possibility of universal carbon pricing and a single, international market become ever more likely, a growing number of independent companies are looking to get ahead of the trend and do their part to reduce carbon emissions by participating in voluntary carbon regulation and credit trading.

Sustained Growth in Voluntary Participation
The Ecosystem Marketplace, a non-profit organization that tracks trends in the voluntary carbon marketplace, found in their report on the state of voluntary carbon markets in 2020 that despite expectations that industries such as airlines would roll back their carbon offset purchases, overall, the corporate demand for carbon offsets is continuing to increase. The final installment of their 2020 carbon market report released in May 2021, which analyzed buyer data, shows that 21% of the world’s largest 2,000 public companies have set net-zero commitments.

Pricing Remains Steady, Varies by Project
In terms of pricing, their data shows that carbon prices continue to vary widely based on project type, project provider, and project location. Because the voluntary carbon market varies only based on voluntary buyers and voluntary market credits cannot be used in compliance markets, prices in the voluntary market tend to be cheaper overall.

Carbon prices in the voluntary market have not changed much in the past year, in part due to the effects of the Covid-19 pandemic, but they are expected to rise in the future, especially as demand increases. Most of the projects posted on the Gold Standard Marketplace are between $10 and $30 per tonne but some can cost as much as $47 per tonne. Overall, these prices have not changed since our previous update toward the end of 2020, but are still higher than prices observed in 2018 and 2019. The cost of specific types of projects has changed, however; since the beginning of January 2021, the price of forestry projects’ carbon offsets has been increasing and is now 2-3% higher.

Project Quality is Key
As was noted in our 2020 update, attention is being paid more to the quality of the projects and considering their qualifying attributes, such as standard, project type, project size, location, community involvement, and other co-benefits. Participating corporate buyers are still very interested in showcasing the high quality and effectiveness of their project investments.

One of the most highly respected entities in evaluating the effectiveness and integrity of carbon offset projects, Gold Standard, notes that the coming year could see some major changes in the voluntary carbon market and potentially a more formal establishment of regulations.

Potential New Frameworks for Voluntary Carbon Markets
This year, participating governments will be bringing their countries’ carbon projects into alignment with the Paris Agreement, and new initiatives led by the United Nations Framework Convention on Climate Change (UNFCCC) are expected to provide a blueprint for carbon trading in the voluntary market. This could lead to new trading mechanics and quality standards, in addition to bringing together a universal voluntary marketplace.

Meeting Goals through Combined Efforts
The sustained growth in mandatory carbon markets is encouraging to see and brings hope that global efforts can curb the environmental effects of greenhouse gases. In order to be effective, however, these efforts need to be paired with increasing participation in voluntary carbon markets as well. This year is sure to bring many new developments in voluntary carbon trading that can push us closer to our net-zero carbon goals.

Carbon Credit Capital continues to monitor the evolution of global carbon marketplaces and supply updates to help our customers make informed decisions that are best for their businesses. Please reach out to us for more information on the many ways you can take climate action and reduce greenhouse gas emissions.