VCMs have existed in various forms for many years, but started growing significantly in popularity, at least from a corporate perspective, from 2019. The peak was set in 2021 at around 360 million credits generated from different projects, but the markets have since flattened out. As there is a growing number of companies setting net emission-reduction targets that include the use of carbon offsets, this trend may appear counterintuitive.

To add to these diverging observations, the carbon dioxide removal market, and particularly the (current) niche of high-cost technologies such as bioenergy with carbon capture and storage (BECCS) and direct air capture (DAC), is growing rapidly. Overall purchase agreements have gone from virtually zero in 2021 to now indicate spending levels in the same ballpark as the ‘classic’ VCM offset market. This is despite a cost level of between $500 and $1,000 per tonne of CO2, which is around 50 to 100 times higher than the cost of a forestry offset from a typical registry. As the face value of the carbon credit is the same – 1 tonne of CO2e – the question is: what motivates companies to spend more on offsets than they need to?

At least partially, the driving factor behind these diverging observations can be summed up in what will inevitably make or break VCMs: the quality of the credit. Towards the end of 2022 and the beginning of last year, a series of research papers from numerous sources – many of which cited by UK news outlet The Guardian - argued that a significant number of credits, especially related to forestry, had limited to no benefit for the climate, were drastically overstated and could even include eviction of the local population. Verra, the verifier behind many of these projects, has since seen its market share fall around 40%. Other papers have shown issues with other types of credits as well, and often the companies purchasing them are put in the spotlight for not allegedly conducting proper due diligence. This illustrates a key issue: if the companies cannot trust that they are actually making positive contributions by purchasing offsets, and rather end up with a reputational risk, the appetite naturally wanes.

Many within industry, government and society were hoping discussions during the COP28 summit in Dubai late last year around Article 6 of the Paris Agreement – which in essence aimed to create more agreements on transparency and requirements for quality in the carbon credit space – could provide the guidance needed. However, little progress was made, meaning the pressure is now back on industry to build credibility in carbon offset markets.

And industry is responding. The aviation industry has a specific credibility program, CORSIA, as devised by the United Nations (UN), and verifiers themselves are also agreeing to more unified and stringent project evaluation undertaken by, for instance, the Integrity Council for Voluntary Carbon Markets (ICVCM). An increasing convergence is also seen between compliance and VCMs, where there is a strong call on credits from the compliance side – all coming with different requirements to credit characteristics. An ecosystem of carbon credit rating agencies and integrity initiatives is emerging and growing – something that is sorely needed.

Around half of companies tracked by Rystad Energy, across different sectors, have either used or are actively planning to use offsets as a strategy to reach emission-reduction targets – and successfully meeting these entails relying on available carbon credits. In a world where integrity concerns are cleared up, a situation may arise where the world suddenly goes from an oversupplied situation – which has been the case for many years – to an undersupplied situation with limited quality assured credits, resulting in a sharp price increase. Alternatively, if the initiatives fail to gain trust in the market, the result could be postponement or failure to reach targets from companies. All observations points towards 2024 as being a potentially transformative year for VCMs in establishing the foundation of trust in the integrity of carbon credits – and the demand certainly exists.

Rystad Energy is proud to launch coverage of VCMs, as one part of our services aimed at guiding companies through the energy transition with high-quality data and insights. We offer coverage across all major registries (including tech-based removals), policy updates, buyer benchmarking and analysis across sectors, granular project overviews and more, and aim to be a trusted knowledge partner in these opaque and fast-moving markets.

To read more on the topic, download our latest report on the outlook for the voluntary carbon market.