4 Insights into Voluntary Carbon Market Trends
We all know that the voluntary carbon market is ready for this explodes, or is already exploding, depending on who you ask. The value of all those carbon credits hit $1 billion for the first time in 2021, and 2022 shows no signs of slowing down. Increased corporate commitments to reduce emissions and net-zero commitments have fueled rising demand.
A new report from BloombergNEF, Voluntary Carbon Offset Demand Demystified, dives deep into publicly available 2021 carbon registry data from the Verra carbon registry to examine the trends underlying demand for offsets. (Verra accounts for 80 percent of the voluntary carbon offset supply in the market, about 129.7 million offsets.) The BNEF report looks at 80.1 million retired offsets, or 50 percent of the 2021 market that had buyers. It analyzes who bought how much, which region, the type and age of the loans – and makes predictions for the future of the market. Much of the report supports previous findings from other research of the market, but here are four new notable findings.
1. We don’t know the buyers
According to the BNEF report, over 28,000 offset purchases were recorded in 2021. Only 6,200 of those transactions (representing the 80.1 million offsets examined in the report) indicated who the specific buyer was. That’s less than a quarter of the activity, and even less considering that many of the buyers listed were only identified by code names.
Interestingly, according to the BNEF analysis, transactions in which buyer information was not disclosed were not, on average, of significantly lower quality than transactions in which buyer identities were listed.
For example, the identity of the buyer has been disclosed for about 42 percent of projects that provide co-benefits such as biodiversity improvements, economic benefits for local communities, etc. That was about the same percentage as for co-benefit projects where the buyer was not specifically identified. Transactions with older offsets, which are usually considered to be of lower quality when considering criteria such as durability or additionality, had a 50/50 chance of uncovering a buyer.
Buyers need to start shifting their focus from avoided credits to distance compensations.
What is the reason for the secrecy? Disclosing sustainability goals and progress sometimes seems like a lose-lose situation for companies – when they talk about what they’re doing, they get hammered for not doing more, and when they don’t talk about what they’re doing, they become she hammered for appearances doing nothing. Because offsets have been criticized form of environmental measures, this could be one reason why some companies prefer to remain silent.
2. Consumer pressure drives the market
The BNEF report finds that two-thirds of disclosed buyers as of 2021 were business-to-consumer (B2C) companies and most of the top offset buyers were consumer-facing brands with well-known names – Delta Airlines, Shell, Volkswagen and Audi , all crack the best 10.
An estimated 64 percent of the offsets decommissioned in 2021 came from B2C companies, with the rest going to B2B companies. For example, many airlines allow consumers to purchase carbon offsets directly with their ticket to offset the carbon emissions of their journey. The BNEF report concludes that because most disclosed purchases over the past year were from consumer-facing brands, much of the pressure to buy offsets stems from a desire to satisfy consumer preference, as opposed to operational Pressure to meet a climate commitment.
Further evidence for this argument is that cryptocurrency companies, heavily criticized last year due to their carbon intensive processes were the biggest buyers for offsets in 2021.
Some crypto companies use offsets as part of their business model. For example, according to the BNEF report, Toucan Protocol was by far the top buyer with 16.6 million offsets in 2021. Toucan Protocol buys inferior offsets to turn into tokens be traded via its blockchain ledger “Carbon Bridge”. In May, announced Verra it will not allow carbon offset purchases from its registry to be tokenized by the crypto sector to avoid double counting. But it is Opened a public consultation period to better evaluate how it can partner with third-party crypto companies focused on anti-fraud measures.
3. Businesses rely on vintage offsets
Vintage offsets, or credits from projects that happened years ago, are popular with businesses, according to BNEF analysis. The report found that more than half of all compensations retired in 2021 were manufactured before 2015, and the most common were from 2014. Many companies, including Delta, have met their carbon neutrality claims by purchasing these types of offsets. But Delta was also the only company among the top 10 buyers to buy offsets produced in 2021. Overall, less than half a percent of the offsets phased out in 2021 were produced in the same year.
Vintage credits are usually cheaper. They’re also typically of lower quality, meaning they don’t come with any additional benefits and the emission reduction claims don’t carry as much weight. Some represent emission reductions that have already happened but simply have not been financially rewarded – contradicting the promise that loans will fund new projects to fight climate change.
The BNEF report also suspects that vintage offsets are loans that have struggled to find a buyer due to their deteriorating quality. Carbon register and efforts like that Voluntary Initiative on Carbon Market Integrity call for better disclosures and regulations around the sale of vintage offsets.
4. Businesses are behind on relocation compensation
According to the BNEF report, two types of offsets accounted for the bulk of the market in 2021 — avoided deforestation (47.6 percent of exits) and energy production (43 percent of exits). Both credit categories fall under the “avoidance of emissions” bucket, meaning that these projects did not remove carbon from the atmosphere but instead prevented the possibility of new carbon being released.
Deforestation credits were avoided criticized for protecting forests that have never really been threatened with logging. The BNEF report also finds that power generation loans fail the additionality test, partly because technology costs have fallen and the projects no longer require financial support from the loan market. Although geothermal, solar and hydro should be generation credits largely discontinued by Verra as of January 2020 they still account for a large portion of the credits deducted each year, which needs to change.
According to the BNEF report, to make a real impact on the climate crisis, buyers need to start shifting their focus from avoided credits to distance offsets associated with projects like direct air capture and reforestation. But these types of offsets are much more expensive.