Growing Pains of a Burgeoning Market

Calvin Tran

Ecosystem Marketplace recently released their report, “State of the Voluntary Carbon Market 2024: On the Path to Maturity,” which details the latest trends within the market. The report detailed a significant downturn in the market last year, but details an increasingly complex landscape, with some market segments showing growth as others fell. In this Commentary, American’ Forest Foundation (AFF)’s Manager of Environmental Markets, Calvin Tran, breaks down the news and what it means for the future of the market. This article was originally posted on the AFF blog.

As it goes with any emerging market, trends continue to shift and evolve within the voluntary carbon market (VCM). This emergence takes time, and the VCM is showing the right signs that it is on its upwards “flight to quality.” In my view, the VCM is between growth phases; volatility and larger contractions are part of this growth. Reminiscent of the dotcom bubble before the advent and growth of the internet, it makes sense that buyers in the VCM is “derisking” from – that is, not participating in – the market as they wait for volatility to settle.

The problem is this: being so close to midnight on the climate catastrophe clock, there’s no time to waste.

A key takeaway from this report is that retirements of credits have remained steady. This is the most fundamental metric to assess the health of demand for voluntary carbon credits. The rate of credit retirement shows that end users are indeed consistently using carbon credits generated. Most of the drop in sales seem to be attributable to a drop in speculative purchases. This is not entirely surprising. In short, people have stopped believing in the upside of the current iteration of the voluntary market and are demanding higher quality, integrity, and durability. The call for high integrity, along with general demand hesitancy, indicates a need to build an updated version of the market that incentivizes investment and expands access to participation in high-quality projects.

REDD+ Receipts

The REDD+ controversy was an unfortunate but necessary bump in the road. The reality is if we want the VCM to be successful, we need stronger, more certain guardrails around the quality of supply. Now, we are seeing new narratives emerge around higher scientific integrity principles to increase the quality of supply, with everything from the End-to-End Framework to dynamic baselines in carbon accounting methodologies. This highlights the strength and unity in the market, showcasing its responsiveness along with its ability to adjust course.

However, the optics around REDD+ unfairly spread across the entire market, especially to other REDD+ projects in developing nations.  This is quite an injustice, as there are good projects out there that have simply gotten associated and dropped with the general negative perceptions.

The good news is that now a new generation of supply is beginning to enter the market. The EM report found that some project types – notably, improved forest management (IFM) and afforestation, reforestation, and revegetation (ARR) – experienced increases in price.  This is good for anyone working on these project types, but it also shows promise for the market overall. The carbon price increase reflects a “flight to quality” that will eventually occur across all project types.  In short, buyers are willing to pay much more for “safe” projects.

If this market is to play out, it will become a structural supply constraint challenge that curtails growth instead of the simple lack of demand we’re seeing today. In this regard, the market knows where it needs to go and is already building up and making progress; we just need the finance to get it done. In the meantime, volumes and valuations of existing credits will drop, as the report duly shows.

Up Next: A Demand Reckoning

In my view, the same reckoning that the VCM experienced across supply will eventually be faced on the demand side. We need stronger incentives for climate risk reporting and corporate transparency so that the public knows if and how companies are falling short on their decarbonization objectives. With clearer and stronger mandates will come clearer and stronger demand incentives for the proper use of carbon credits.

Governments have a major role to play here. Those who have focused more efforts into sorting their domestic policies on carbon markets indeed have stronger carbon markets in their regions as a result. The U.S. Government’s announcement this week of their “Principles for the Responsible Participation in VCMs” is an indication that this is still happening now at varying paces.

Buyers and suppliers are only just beginning to understand the nuances of building a global interconnected market from the ground up. We’re now seeing a sophistication across different regions – not just in type of credits but the type of credit demand. Businesses across different regions and industries are just beginning to understand how to parse through the intricacies of this. A company based in Singapore will have different demand drivers compared to a company based in the EU, the US, and so on and so forth. The same is true for companies from different sectors – some industries will have geographic or credit type preferences. Others have distinct mandates (e.g., CORSIA). It’s almost like a balkanization of the VCM, and it is the job of the supply side to remain as interoperable as possible across these similar-but-distinct markets. It is also the job of policymakers to make sure demand is sufficiently consistent across domains.

Future Market Loading…

While this report might seem like a damnation of a volatile market, it holds critical learnings for market players that are invaluable in building a voluntary carbon market that works for people and the planet. 2023 was a year of reckoning for those working to transform the quality, integrity, and viability of carbon projects. In 2024, we need companies and governments to step up to the plate and invest to bring this promising market to scale. Governments and standards bodies can continue to provide clearer guidance for participation, and companies can invest in high-quality projects to scale climate solutions to maximize their impact on our atmosphere. This is an inflection point, one that will determine the path we take to either shrink away from a work in progress or to strengthen a critical element of our fight against climate change.

Calvin Tran is Manager of Environmental Markets at American Forest Foundation.

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