The importance of voluntary carbon offsets is growing as companies make commitments to achieve net zero carbon emissions by 2050. Carbon offsets resulting from negative emissions are a particular class of carbon offset credit that is especially important for achieving net zero and keeping global warming to less than 1.5 degrees Celsius. Virtually every emissions reduction pathway has some negative emissions, some pathways have a lot. As a result, offset credits from negative emissions technologies need to scale up massively. The volume of carbon dioxide that needs to be removed from the atmosphere is between 5-10 GT or CO2e per year. Right now, there are only about 0.15 GT of CO2e per year of removal projects that are currently in the pipeline. In other words, we are significantly lagging where we need to be on the negative emissions deployment curve.
McKinsey has estimated that annual global demand for carbon credits could reach up to 1.5-2 GT of CO2e per year by 2030 and up to 7-13 GT of CO2e per year by 2050 with total market value being as high as $50 billion in 2050. This demand influx could cause prices to surge to as high as $223 per tCO2e by 2030. By 2050, technologies used to capture carbon dioxide directly from the atmosphere become more economic as adoption increases and prices reach a more modest price level of $120 per tCO2e. This price is significantly higher than the roughly $8.00 per tCO2e price that is currently observed in the market – a price that does not reflect higher quality atmospheric removal credits.
As we look out to what we can expect for the carbon offsets market for 2023 and beyond we know that big changes are on the horizon. Drawing on analysis from Climate Tech VC, we make four big bold predictions for the offset market. Companies that begin to position their sustainability strategies today for the inevitable boom in voluntary carbon markets will be able to build more resilient and cost-effective strategies than those who wait.
In order to keep global warming to less than 1.5 degrees Celsius, we need to stop emissions of all greenhouse gases (GHGs) and remove 10-20% of the global annual emissions by 2050. The amount of carbon removals will continue to increase beyond 2050, hitting about 20 GT of CO2e per year by 2070. As we have wrote in previous blog posts, not all carbon offsets are created equal. When we talk about the level of removals that are needed on a global scale, we are not talking about carbon offsets that “avoid” emissions. In a net zero world, there is no credit awarded for avoidance since these activities must already be happening in a world striving to reach net-zero. Remember, we need to stop emitting all GHGs and remove carbon. If we are giving out offset credits for avoidance activities, that allows emissions somewhere else in the economy, and we can’t have emissions somewhere else in the economy. The economy must be zero emissions.
As a result of the inherent difference between removal and avoidance credits, we expect that the market of removal credits will decouple from avoidance credits. Avoidance credits will still be needed in the near-term as a form of carbon finance to enable carbon mitigation, but in the long-term, removal credits are likely to be the only valid type of offset. It is even possible that international standard setting organizations will not recognize avoidance claims as an offset credit. If you are looking to place future bets in the offset market, you would be wise to look towards removal credits as the category that will see the greatest price appreciation over the next decade.
We reference above that international standard setting organizations may not recognize avoidance-based offset credits in the future. We expect that in the coming years, guidance for what constitutes a valid emission reduction credit and corporate claim will be made more clear. Let start with corporate claims. The Voluntary Carbon Markets Integrity Initiative (VCMI) is a body that is looking to define how corporate climate pledges should be evaluated. The VCMI is planning to make a clear distinction between ‘carbon-neutral’, ‘net-zero’, ‘carbon-positive, and ‘carbon-negative when discussing pledges, commitments, and claims. The VCMI will draw a distinction between commitment claims (what the company says) and achievement claims (what the company does). The VCMI is also looking to align with the Science Based Targets Initiative (SBTi) which sets out that companies should only use removal-based offset credits for residual emissions.
Moving from guidance on corporate claims, to guidance on the offset credits themselves, the Integrity Council for the Voluntary Carbon Market (IC-VCM) is a new governance body that was spun out of the Taskforce on Scaling Voluntary Carbon Markets (TSVCM). The IC-VCM is made up of independent members with diverse skills, experience, and expertise that is looking to scale high-integrity voluntary carbon offsets. The IC-VCM will look to Develop Core Carbon Principles (CCPs) with a taxonomy of attributes to ensure credits are high integrity. The CCPs are being developed to help market participants understand the minimum threshold for what constitutes a high-integrity credit. There is also a component of the CCPs definition to ensure robust governance and oversight with regard to the CCPs designation process.
While the IC-VCM is leading the way on setting new offset standards to establish trust in the voluntary carbon market, they are not focused exclusively on negative emissions technologies. The CCPs are a much broader standard that will still permit lower-quality avoidance-based credits to be recognized and used towards a company's voluntary greenhouse gas commitments. To address this shortcoming, a separate initiative known as the Coalition for Negative Emissions was launched. The coalition has outlined actions that would help establish a healthy market for negative emissions including defining high-quality negative emissions and shaping a robust, liquid, and transparent market for trading negative-emission credits and generating supply-side financing.
Between the VCMI, SBTi, IC-VCM, and the Coalition for Negative Emissions, we expect that clarity will come to companies that are procuring carbon offset credits for use against their corporate emissions reduction goals. The underlying problems that these bodies will look to address are not new. They include additionality (which assesses if the carbon offset would be generated anyway in the absence of a credit), leakage (which assesses what activities the carbon offsetting activity might displace resulting in a shifting of emissions and no real reduction), verification (which is the process for determining if the activity is accurate and robust), and permanence (which assesses the risk of stored carbon being released back into the atmosphere). With a clear demand from external stakeholders that clarity on additionality, leakage, verification, and permanence are needed, and a shift towards carbon removals, now is the time for carbon offset stakeholders to finally gain clarity on some of these important issues.
Some corporations approach their carbon offset procurement with a financial imperative. These corporations will seek to lock-in supply at the lowest possible costs with offset quality being a secondary factor. However, some corporations approach carbon offsetting with a marketing imperative and instead look to purchase the highest quality credits possible. Often, they will seek credits that are aligned with other environmental priorities they may have such as biodiversity, forest conservation, or economic development. Typically, companies that operate under the marketing imperative have lower carbon footprints and are therefore able to absorb the greater per unit cost of high-quality credits.
As buyers look to avoid the pitfalls associated with offset credit additionality, leakage, verification, and permanence (described above), more and more buyers are demanding higher quality. Two companies that are leading the way in the procurement of high-quality carbon offsets are Microsoft and Stripe. These companies are making commitments to remove atmospheric carbon from existing projects like forest and soil carbon removal. But they are going one giant leap further. They are also purchasing future credits from carbon removal technology providers. In other words, they are purchasing credits from projects that don’t even exist yet. By entering into these forward commitments, they are helping to accelerate the scale up of carbon removal pilots that have the potential for giga-scale removals.
The per tonne abatement costs of these investments are high. Stripe has said their willingness to pay for these credits is greater than $1000/ tCO2. But the offset cost is not really the point. The driver behind these investments is to kick-start a nascent carbon removal market and accelerate these technologies down the cost curve so that they can be more widely accessible. Like Stripe, Microsoft has also looked to pay a premium for high quality carbon removal projects as it sets out to make good on its promise to be carbon negative by 2030.
While Stripe has started the trend, others have followed. Thousands of Stripe’s customers are now contributing to purchase carbon removal through Stripe Climate. This highlights how the action of one corporation can lay the groundwork for others to follow. Microsoft has also made a positive contribution to raising the bar for voluntary offsetting by publishing their criteria for sourcing high quality credits. These criteria can serve as a form of de facto standard for corporations seeking high quality credits while the work of the IC-VCM continues. Many more companies including Shopify and Swiss Re, are prioritizing quality over quantity and seeking out removal-based carbon offsets. We expect that the companies that are new to the carbon offsetting space will look to these offset procurement strategies as the new bar to meet. A bias towards quality over quantity is becoming the new standard.
Companies that are using carbon offsets have a lot to gain beyond the obvious goal of reducing their corporate GHG footprint. Carbon removals can help firms attract and retain talent as many employees want to work at a place that aligns with their values. For sectors that are constrained more by human resources than by capital, budgeting for high quality carbon offsets and telling a compelling narrative to climate-concerned employees is an excellent return on capital. Companies that are early movers to the carbon removal scene also have the ability the help define net zero and what it means for corporate actors. This can ensure that net zero definitions are not overly prescriptive and continue to allow for flexibility in how emissions reduction targets are met.
Companies that start now will have a competitive advantage. Business leaders that begin to position their sustainability strategies today for the inevitable boom in voluntary carbon markets will be able to build more resilient and cost-effective strategies. We also expect carbon-related verification and accounting services will be in short supply in the coming years, so once again, early movers will have an advantage by developing long-term business arrangements today.
We are helping our clients to source high integrity offset credits that allow for removal and permanent sequestration technologies to be scaled up commercially. We are also working with carbon offset purchasers to understand the carbon footprint of their operations and supply chains and direct those purchases toward permanent negative emissions - the only true form of carbon offset. Those that prepare for the future, will be best positioned for success. If you need help sourcing high-quality carbon removal credits to neutralize your “hard-to-abate" emissions, Frostbyte’s team of experts is here to help you on your journey. We can also help companies that are just starting out to understand their carbon footprint and identifying carbon abatement options.
Frostbyte's sustainability services are cost effective and the broadest in the industry. We’ve worked with countless businesses around the world, including those in the energy, mining, chemical, and construction sectors. Our philosophy is that environmental management is the day-to-day work, while sustainability management is the message behind the work. Ultimately, our goal is to ensure that your organization meets the latest standards in Environmental, Social & Governance ratings while also balancing the needs of people, the planet and your profits.
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