Voluntary Carbon Markets: The Storm Before the Calm
Tuesday, July 2, 2024
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July 2024
Voluntary Carbon Markets: The Storm Before the Calm
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It's been a tumultuous few years in the voluntary carbon markets. In this new series, our nature investments team shares their insights into why and what’s next. 

by Amelia Sadler (senior associate nature investing) and David Sternlicht (head of nature investing)

In late 2021, the voluntary carbon market (VCM) was picking up speed. The market had roughly doubled over the previous two years, bringing the volume of credit issuances to an all-time high, according to a report by Ecosystem Marketplace. The market eclipsed $2 billion by the end of the year. A surge in corporate net-zero commitments — particularly across the technology, consumer goods, and financial sectors — as well as increasing participation from institutional investors drove an ever greater demand for offsets, trading platforms, and evolved market infrastructure.

However, as is often the case after a period of frothy exuberance, the years that followed presented a rapidly diverging narrative, and many buyers spent part of 2022 and all of 2023 losing confidence in the VCM. Several factors contributed to this market turbulence:

  • SBTi silence on offsets: The Science-Based Targets initiative (SBTi), a key authority on corporate climate action, had been mum on the role of offsets in corporate decarbonization, creating uncertainty for both buyers and sellers. More than 4,000 companies rely on the SBTi to validate their carbon reduction targets.
  • Negative, and sometimes misleading, media attention: Major media scrutiny around a few large carbon offset projects heightened reputational risks in the industry. High-profile reports named some of the market’s largest offset buyers — its biggest developer, South Pole, and the largest certification body, Verra. Many were introduced to the VCM through this negative mainstream news coverage.
  • Evolving views on “quality”: Market participants began to coalesce around a set of characteristics that distinguish high quality projects, and buyers widely perceived a dearth of such projects in the VCM while retroactively judging past projects on these evolved quality standards. Such characteristics include additionality, conservative accounting and estimations, durability, biodiversity, preference for emission removal over avoidance, and community benefit, among others.
  • Awaiting methodology updates: Buyers were waiting for the refresh of certain crediting standards that were catching up with the latest quality standards. The impending arrival of “new and improved vintages,” many of which would also meet compliance market thresholds (e.g., CORSIA), decreased demand in the interim. The phenomenon was similar to how sales drop when consumers anticipate a new product release (e.g., iPhone 15 sales dropping ahead of the iPhone 16 launch).

As a result, the VCM experienced a significant decline in 2023 compared to the previous year. According to the aforementioned Ecosystem Marketplace report, market volume declined 56%, along with an 11% drop in pricing versus 2022 levels. Such headline figures seemingly backed the arguments of those who doubted the market's viability and made for schadenfreude-fueled news coverage, but some critical nuance tells another story: one of resilience and market maturation. Despite the overall downturn, the data reveal some important distinctions for 2023:

  • REDD+ Decline: The 2022-to-2023 decline in price and volume was primarily driven by Reduced Emissions from Deforestation and Forest Degradation projects (REDD+), which experienced the largest volume decrease amongst all categories and a 62% drop in pricing. Much of the negative media attention centered on REDD+ projects and amplified concerns about additionality and questionable accounting.
  • Average Price Per Ton: Despite a year-over-year decline, the average price per ton in 2023 was still up 60% from 2021, with early 2024 prices rebounding further.
  • ARR and IFM Projects: Pricing for Afforestation, Reforestation, and Revegetation (ARR) and Improved Forest Management (IFM) projects increased by 31% and 11%, respectively. Buyers often consider these projects higher quality as a result of better additionality, easier measurement, and co-benefits; however, combined they accounted for only ~10% of the market in both 2022 and 2023.
  • Projects with Verified Co-Benefits: Projects with verified co-benefits — additional benefits to communities and biodiversity (e.g., job creation, improved agricultural productivity due to healthier soil, habitat preservation, etc.) — maintained a price premium over those without, and buyers continued to express a strong preference for co-benefits as a project feature and quality indicator.

All of these factors indicate a larger flight to quality — and reputational safety — amidst last year’s choppy market. Reflected in both transaction volume and price was market participants’ unwillingness to bear risks, particularly around additionality, durability, and lack of co-benefits. Buyers expressed a strong desire for high quality projects with these attributes rather than a wholesale rejection of the market. These are all signs of a market finding its footing.

While the future of the VCM may have felt less certain in the wake of its recent tumult, there are increasing signals of the market’s evolution and improvement. A slew of recent developments are restoring confidence in the VCM in both the public and private spheres:

  • Widespread Endorsement: The White House, Conservation International, The Nature Conservancy, the Environmental Defense Fund, and SBTi have all come out in favor of high-integrity VCMs, underscoring their importance in decarbonization pathways. Conservation International CEO M. Sanjayan said it best: “High-quality carbon credits are not an environmental indulgence purchased to avoid climate responsibilities — they are a proven, immediate and scalable tool that should be part of any comprehensive, science-based strategy.”
  • New Guidance: New guidance from groups including the Integrity Council for the Voluntary Carbon Market (ICVCM), Voluntary Carbon Markets Integrity Initiative (VCMI), and the Financial Accounting Standards Board (FASB) has provided much-needed clarity. These groups are pushing for more rigorous standards for carbon offsets, ensuring clear reporting and accounting, and preventing greenwashing, helping increase confidence and participation among market stakeholders.​ Clear standards from these internationally recognized organizations, which govern the VCM and corporate accounting, enhance the credibility, transparency, and integrity of the VCM. 
  • Buyer Commitments: Major corporations, like Google, Meta, and Microsoft, have shown field-building interest through the recent establishment of the Symbiosis Coalition, a 20-million-ton advance market commitment to invest in the next generation of nature-based carbon removal projects by 2030. 
  • Investor Interest: In a new report, Morgan Stanley advised on the importance of discussing how to buy carbon offsets, not whether to do so. TPG has made a significant VCM play with its $300 million investment in Rubicon Carbon, a carbon solutions provider that has been extremely active in recent years.
  • Expanding Market:  The voluntary carbon market has seen an increase in the number of verification bodies and standards, resulting in improved quality via greater competition. While Verra has historically been the dominant carbon offset verifier (alongside ACR, CAR, and the Gold Standard), the emergence of new crediting standards, such as ERS, and verification bodies, such as PlanVivo, help enhance competitive dynamics among verifiers and improve overall offset quality. Among the four big players, Verra has experienced a decline in market share of annual credit issuance from nearly 70% in 2018 to 30% in 2023, according to data from UC Berkeley’s Voluntary Registry Offsets Database.

This and other developments provide ample evidence that the flight to quality is more than a temporary market correction; rather, the shift in buyer attitudes towards aligning carbon markets with biodiversity and economic development objectives marks an evolution in the VCM. We ask those whose main understanding of the VCM is derived from sensational media takes on poor verification schemes or ineffective projects to imagine that you had purchased Enron’s stock just prior to its infamous accounting scandal and subsequent collapse (of both Enron and its accounting firm Arthur Anderson). Would you divest from public equities (and subsequently miss the ~500% ROI of the S&P 500 since 2001)? Or would you approach future investments cautiously, perform diligent research, and push for quality and oversight improvements? The VCM’s reckoning in the past two years was just that: a shoring up of faith in carbon credits as a means to combat climate change and the tightening of market standards and oversight.

Now, with increasing investor and buyer discernment, calls for a robust VCM from leading governments and NGOs, and ever-strengthening verification regimes, is a key inflection point in the trajectory of high-quality carbon credits. With a renewed emphasis on integrity and quality, the VCM is poised for a significant comeback. And make no mistake: This is an excellent development for everyone who cares about the protection of biodiversity and funding those who steward it. As we move forward, the market's evolution promises not only to restore confidence but also to align carbon offsetting more closely with global sustainability goals. 

For more background information on the history of voluntary carbon markets and their role in global decarbonization goals, see here and here

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Ethic Inc. is a Registered Investment Adviser located in New York, NY. Registration of an investment adviser does not imply any level of skill or training. Information pertaining to Ethic Inc’s registration or to obtain a copy of Ethic Inc.’s current written disclosure statement discussing Ethic Inc.’s business operations, services and fees is available on the SEC’s Investment Adviser Public Information website – www.adviserinfo.sec.gov or from Ethic Inc. upon written request at support@ethicinvesting.com. Information provided herein is for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Any subsequent, direct communication by Ethic Inc. with a prospective client shall be conducted by a representative of Ethic Inc. that is either registered or qualifies for an exemption or exclusion from registration in the state where a prospective client resides. Information contained herein may be carefully compiled from third-party sources that Ethic Inc. believes to be reliable, but Ethic Inc. cannot guarantee the accuracy of any third-party information.

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David Sternlicht's entire career has been dedicated to addressing social and environmental challenges with investment capital. He has published research reports, launched and managed private investment funds, and advised startups and fund managers in the impact space. He has assembled a team of industry leaders in finance, science, technology, and storytelling to build out nature as an asset class for Ethic.

Amelia Sadler, CFA, is a Senior Associate on our Nature Investing team. She comes to Ethic after six years as an institutional investor with PGIM Private Alternatives, where she deployed over $1 billion in private capital across private credit, real assets, venture capital, and direct equity investments. Having always been an interdisciplinary student (with degrees in Economics, Business Administration, and Spanish Language and Literature), she is passionate about emerging markets, the health of our planet, and establishing nature as an asset class.

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