Putting Carbon in Neutral
The carbon offset market is set to grow exponentially as companies and regulators continue to establish emissions limits.
The global carbon offsets market was assessed at $600 million in 2019 and is projected to grow as high as $200 billion by 2050.
As companies continue to increase carbon reduction pledges, the demand for offsets will inflate prices.
Companies are moving funding into emergent carbon sequestration technology to remove carbon directly from the atmosphere, which could increase offset supply.
What do Amazon, Delta Airlines, Elton John, Justin Trudeau, and Norway have in common? They have all made commitments to limit their contributions to climate change by using one common tactic: buying carbon offsets. Carbon offsets are the purchase of carbon reduction efforts from third parties to help individuals, companies, and countries reduce their carbon footprint either voluntarily or in response to regulation.
There are two types of carbon offsets: compliance and voluntary. Compliance purchasers buy offsets to meet mandated emission limits set by regulatory agencies, while voluntary purchasers buy offsets to meet individual emissions goals. These buyers tend to purchase offsets to demonstrate climate leadership, achieve personal greenhouse gas targets, or pursue a climate-driven mission.
Voluntary purchasers usually take one of two approaches to buying offsets: the avoidance approach — purchasing offsets to maintain internal practices and meet emissions goals — and the bridge approach — purchasing offsets while investing in internal initiatives to reduce emissions.
Trends in Demand:
Carbon Offset prices are historically determined by the cost of implementing projects; however, the offset industry might shift to a value-based or market model derived on the negative value (social costs) incurred by carbon emissions not offset.
Demand for voluntary and compliance offsets has exploded over the past decade as companies and countries adopt more ambitious emission reduction goals. Annual voluntary purchases increased from 0.3 million to 95 million metric tons of carbon dioxide emissions from 2008 to 2020 driven by for-profit corporations who just in 2015 made up 87% of voluntary offset purchases.
Companies will continue to increase their emissions reduction pledges and purchase offsets for emissions that are too expensive or difficult to eliminate altogether. For example, in 2019 Google pledged carbon-neutral shipping to consumers by 2020. To do so, Google supplemented emission-reduction efforts by purchasing offsets equal to total emissions. Subsequently, it was in September of 2020 that Google announced that it was completely carbon-neutral. Although voluntary offset purchases have grown, they have made up less than a quarter of one percent of global carbon emissions. Even with such a wide gap to bridge, the carbon offset market is expected to grow significantly from its $600 million market size in 2019, with some suggesting it could grow as high as $200 billion by 2050.
Trends in Supply:
Between 2008 and 2019, the supply of voluntary offsets has increased from 9 million to 104 million metric tons of carbon dioxide. Currently, because the relative prices of offsets are low, the supply of voluntary offsets exceeds demand. This excess supply won’t last long, however, as demand for carbon offsets is set to increase five to ten times over the next decade, driving up prices as more companies adopt net-zero carbon emissions.
Moreover, growth in supply is not going to be driven purely by market factors. Regulators have the power to determine the nature of offsets that count toward compliance requirements, which means they have a significant influence over compliance offset supply. Regulators can adjust the supply of compliance offsets by changing the certification standards for offsets and whether offsets from a certain date can be used to meet reduction requirements. This means, if regulators allow older offsets with a number of standards to count toward required emissions reductions supply could grow exponentially, thus keeping prices low even as demand rises.
The Future of Carbon Offsets:
One emergent technology, carbon sequestration (the process of capturing and storing atmospheric carbon dioxide) could shift the nature of offsets from preventing carbon emissions to actually removing them altogether. An expansion in carbon sequestration technology would increase offset supply and improve the overall impact that offsets have. In January of 2020, Microsoft announced it would invest $1 billion into carbon sequestration technology over the next four years. Although these investments do not count as offsets, Microsoft believes that carbon sequestration technology will be vital to remove a majority — if not all — of the company’s carbon dioxide emissions by 2050. Carbon sequestration could mitigate rising prices for carbon offsets by increasing the overall supply available as companies continue to invest in the technology. If you are interested in learning more, check out our last article discussing carbon sequestration and its expected market growth.
Carbon offsets will continue to be a vital tool in reaching the short-term carbon reduction goals set by regulators and individuals as the work continues to transition the world to a true zero-carbon energy system. As expected though, this will be no easy feat to achieve. As the scrutiny of corporate emissions and adoption of standardized ESG practices expands, it will increasingly become the standard for companies to participate in the carbon offset market — a major step towards a new green-economy.