Enabling the "Net" in Net Zero
Demand for carbon offset credits will grow significantly in the coming years. A third of the world's 2,000 largest companies have made a net-zero or equivalent commitment, and 56% have an execution strategy; of those, nearly half plan to use offsets to help them meet climate goals. As global government policies continue to lag corporate commitments on climate actions, the demand for "high quality" carbon credits will inevitably grow. By most industry estimates, offset demand could reach 1 billion tonnes by 2030, >5x the 2021 level, driven by aviation, financial services and the energy sector.
The voluntary carbon market (VCM) is the "Wild West" of carbon markets. Unlike compliance carbon markets (such as the EU ETS), which governments regulate, VCM is currently self-regulated, with poor transparency across the entire value chain. This opacity brings credibility concerns, both in the quality of credits on the supply side and the use of credits on the demand side. Based on our research and conversations with VCM participants, this is changing, with an unprecedented push to improve the market's integrity and rising investments across public and private entities.
ESG engagement can play a crucial role in corporates' use of offsets. Because demand is voluntary, corporates need to be accountable for how many and what type of credits they buy and how they "take credit" for those purchases. The most significant current debate is carbon avoidance vs. removal credits for "carbon neutrality" claims. While both solutions are needed, carbon removals are required in the long run for corporates to reach "net-zero." Ultimately, the focus should be on price as the goal is to raise companies' internal cost of carbon to provide incentives to reduce their emissions.
Where are the opportunities? Many market observers see a lack of correlation between price and credit quality, creating compelling opportunities for alternative asset managers, traders, and tech start-ups. Enablers of high-durability carbon removal technologies (e.g., direct air capture, BECCS) and nature-based solutions (e.g., forest management, sustainable agriculture) should benefit along with the emerging "carbon streaming" space.