Carbon Pricing Skyrockets: Carbon Is Now A Commodity

February 2022

What do the experts think...

The price of carbon offsets has skyrocketed in recent months and experts are forecasting this trajectory to continue in coming years. Let’s dive into the factors driving these increases, and what this means for anyone with an interest in becoming carbon neutral or climate positive.

The carbon market is booming

The Voluntary Carbon Market (VCM) has experienced exponential growth over the last year, particularly following the November 2021 COP 26 where global leaders committed to stronger net-zero targets and set rules for the use of carbon markets as one mechanism to achieve them. From June 2021 to January 2022, the price of nature-based carbon offsets on the VCM increased more than threefold and in Australia, government-issued credits (Australian Carbon Credit Units, or ACCUs) increased 180% during 2021 alone.

And it’s not stopping anytime soon

Experts predict that the price of offsets on the VCM could increase by 5 to 10-fold in the next decade, and up to 50-fold by 2050! More on this later…

So what’s driving up prices now?

In short, it’s a classic case of supply and demand.

This is currently driven by two, somewhat interconnected events:

  1. Corporate demand

In the wake of COP 26, there’s been increasing pressure from investors and consumers on corporates to take responsibility for their carbon footprints and set net-zero targets. This has led to rising demand from these companies to purchase carbon offsets as an interim solution to meeting these expectations.’

  1. The intervention of Klima DAO

Klima is a cryptocurrency group with a focus on climate activism. The organisation is leveraging the tokenisation of carbon credits to “absorb” offsets from the VCM in large volumes and pull them into their treasury. By ‘betting’ on the fact that there will be even greater demand for carbon offsets in future, they expect the value of the credits they hold to increase over time. The group defines itself as “a collection of environmentalists, developers and entrepreneurs aiming to use blockchain technology to accelerate the appreciation of carbon credits”. For blockchain and cryptocurrency nerds, you can learn more about Klima DAO here.

But this is actually a good thing for the planet

In fact, experts say that significant further price increases are actually necessary for carbon offsets to ensure they drive meaningful climate action.

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Why is this?

1. There is no ‘price cap’ on saving the planet

Putting a price on what’s ‘reasonable’ to protect our environment and way of living for future generations is somewhat crass and certainly unsettling. And of course, it’s near impossible to put a figure on the value of protecting our environment because natural capital provides us with almost infinite value and without it, the value of all other modern assets is essentially nullified. In fact, many estimates project that the economic costs of not taking action to avert climate change would greatly exceed investments in mitigation opportunities. 

If there is a price for “fixing the planet” it’s fairly safe to say that until we reach (and ideally beat) our goal of limiting global warming to 1.5 degrees, we haven't yet paid that price. With this in mind, many argue that prices are merely getting closer to accurately reflecting the impact of our emissions on the environment, as well as the true socio-economic value of the projects that carbon credits fund (beyond just carbon reductions).

2. Increased prices = increased incentives for reduction

If you link the cost of one tonne of carbon, to the profits a company makes in the process of creating those emissions, it immediately re-frames the cost of purchasing offsets as a cost of doing business. The good news is that this cost is variable, as it can be reduced with operational and behavioural changes. 

Currently, it is relatively “cheap” for any company to produce a tonne of emissions, creating a limited financial incentive to reduce, particularly if in the process of emitting that tonne the company is making large profits. However, as the cost of carbon offsets increases, the cost of emitting carbon, and therefore doing ‘business-as-usual’ will also increase, making offsets relatively “expensive” in comparison to profits. While carbon offsets are a vital tool in responding to climate change, nothing beats stopping emissions before they are created and the increased price of offsets will incentivise a greater focus on reduction activities.

3. We need to spend more to safeguard the planet

Increased carbon credit prices will facilitate greater investment in new projects, particularly to support more nascent technologies requiring significant upfront capital to develop. (More on this later…).

With all of this in mind, it’s easy to see how using the words “expensive” or “cheap” to describe the price of carbon offsets can be unproductive because defining whether a carbon credit is expensive depends so much on the context in which it’s being purchased, and the inherent value associated with it.

How high could prices get? 

How much prices will increase and over what time period will depend on a variety of factors.

First, is the timing and scale of investment in technologies that reduce or remove CO2 from the atmosphere, particularly emerging technologies that will require further development to reach their full potential. 

A marginal abatement cost curve (MACC) provides a helpful theoretical model for demonstrating the potential benefit of various opportunities, against their projected financial cost per tonne of CO2e. You can see an example below (Figure 1).

Figure 1: Global greenhouse gas abatement cost curve. Credit: Our World in Data

The price of carbon offsets becomes relevant when we consider the price the market is willing to pay in order to make these investments (See Figure 2 below). The ideal scenario is that the market for offsets is able to meet the investment demands of the numerous technologies that will need to be implemented for us to achieve ‘global net zero’.

Figure 2: Greenhouse gas emissions MACC and carbon credit pricing. Image: McMaster University

Another factor at play is changing regulatory standards. As in any industry or marketplace, as the VCM evolves, there is both an increased capacity (with more knowledge and expertise available) and a necessity to improve its standards of operation. Platforms such as the Voluntary Carbon Markets Integrity Initiative (VCMII), alongside global and political leaders are increasingly focused on how to ensure the market operates to its full potential and benefit. According to BloombergNEF, the price of offsets could reach highs of up to $120 per tonne/CO2e if efforts to improve the quality of carbon credits are implemented to full effect before 2030. An additional nuance to this forecast is that prices could temporarily get as high as $224 per tonne/CO2e by 2029, due to “growing pains” in the wake of new regulation and the resulting impacts on the supply of credits that meet new quality standards.

The final and somewhat ironic factor is the increased risk of projects being affected by extreme weather events as the short term effects of climate change become more apparent across the world.

What does this mean for companies?

While the market may seem complex and somewhat unpredictable, there are a couple of things we can almost certainly count on.

1. The price of offsets, and therefore the impact on a company’s bottom line will increase in future if they are using offsetting as part of their net-zero strategy. 

This means companies are more likely to look for cheaper ways to reduce their emissions through internal behavioural change or investing in lower-emission technologies.

2. The price of offsets won't necessarily be a reliable indicator of quality moving forward. Currently, prices of credits vary widely, and this is often influenced by their perceived quality. But as we are now witnessing, many other factors are coming into play so price alone is no longer a reliable proxy for quality. 

This means it’s important that businesses work with partners like trace who are procuring the highest quality of credits currently available and continue to increase their selection standards even before any new regulation demands it. (You can read more about how we choose the best quality carbon offsets here).

Regardless of how many offsets a business will need to buy in the coming years to reach their interim net-zero goals, they should plan for prices to increase substantially and see this as an opportunity to make informed trade-offs between investing in long-term reduction initiatives and buying credits. 

In other words, this steep and continuing rise should give companies pause to consider whether to offset or reduce as a first-order priority. 

Cat & Jo, the co-founders of trace

At trace, we always recommend offsetting as a component of a broader net-zero strategy. trace‘s Sustainability & Impact Director, Brett Giddings says, there are two very good reasons to measure and offset today:

1. We need to take measurable and meaningful action on climate change before it’s too late (which is now!) and offsetting carbon emissions has an immediate impact. The traditional approach of measure, reduce and then offset operates on a timeline that simply doesn’t work for the emissions reductions we need to achieve now.

2. Once you have committed to offsetting, you’ve essentially set your own internal price on carbon emissions. As the cost of carbon continues to rise, the incentive to find innovative net-zero solutions increases, making taking climate action not just the right thing to do for the planet, but also for your business's bottom line.

If a business does not have a picture of its carbon footprint now, it will be impossible to make these decisions, so it’s important that every company measures their carbon footprint now, and starts mapping out a plan for reduction now, alongside business growth targets. If implemented correctly, as the price of offsets increases the business’ emissions will decrease and so will their reliance on offsets.

How innovative companies are planning for future price increases

What does this mean for individuals?

If you’re an individual wanting to offset your personal carbon emissions (like hundreds of people already do with trace!), the principles of implementing long-term reduction strategies are the same as with businesses.

You can measure your current carbon footprint with our free calculator here, check out our carbon footprint tips to learn ways to reduce your emissions here, and use tools like this one from our friends at My Net Zero to plan how you will reduce your reliance on offsets over time.

We’ve also announced some changes to our trace individual subscription plans to reflect the changing market. You can find out about the changes here.

Helpful & Interesting Resources

To understand more about how carbon credits are priced, read this Gold Standard article

A live tracker of the mandatory and voluntary carbon market prices

An explained from ClimateWorks Australia on how to read a marginal abatement cost curve

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