Are carbon credits too cheap to be effective?
The voluntary carbon market has grown significantly in recent years as more individuals, companies, and governments seek to reduce their carbon footprint and mitigate the impacts of climate change.
However, the market has been facing several challenges, including an oversupply of credits, which has put pressure on prices.
Currently, an oversupply of credits is leading to a price crisis in the voluntary markets where carbon prices have crashed to below US$2 per tonne – far less than is needed to keep forests standing.
One of the main drivers of the oversupply of carbon credits and thus the price crash, is the slowdown in economic activity during the COVID-19 pandemic. The pandemic led to a reduction in emissions as businesses closed and people stayed at home, resulting in a surplus of carbon credits.
This low price has made it challenging for carbon reduction projects to secure funding, and it could discourage future investment in these projects.
The price of carbon credits can vary widely because of a number of other factors too, including the quality of the projects that generate credits, and the regulatory environment in which the credits are traded.
And it is here that the challenges we are facing to mobilize the entire potential supply and bring it to market come to the fore.
Most of the potential supply of avoided nature loss and of nature-based sequestration is concentrated in a small number of countries, limiting the global impact.
The annual global demand for carbon credits could reach up to 1.5 to 2.0 gigatons of carbon dioxide (GtCO2) by 2030 and up to 7 to 13 GtCO2 by 2050, according to a Taskforce on Scaling Voluntary Carbon Markets (TSVCM) estimate, worth between $5 billion and $30 billion at the low end and more than $50 billion at the high end by 2030.
While the increase in demand for carbon credits is significant, analysis by McKinsey indicates that demand in 2030 could be matched by the potential annual supply of carbon credits: 8 to 12 GtCO2 per year.
But at present, with prices so low, carbon credits may be priced too low to provide a sufficient incentive for companies to reduce their emissions.
But overall, the oversupply of carbon credits is a complex issue, and its impact on global climate change efforts will depend on a range of factors, including the response of policymakers, the behaviour of market participants, and the evolution of the global economy and energy system.
Not just price.
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