The total value of carbon offset credits produced and sold to help companies and individuals meet their decarbonisation goals could approach $1tn as soon as 2037, according to BNEF’s latest analysis. However, the so-called voluntary carbon market – which allows for the trading of verified emission reduction credits equivalent to 1 tonne of carbon each – is ‘not built for success as currently structured’, the company says, and requires ‘more rigorous definitions of quality and greater emphasis on carbon removal’ in order to ‘solidify market confidence, lift prices and drive demand’.
 

Plagued by media and investor criticism, the offset market failed to grow in 2022, says BNEF in its latest long-term carbon offsets outlook report. It found that companies bought just 155mn offsets, down 4% from 2021, due to fears of reputational risk from purchasing low-quality credits. Supply of such credits grew just 2%, with 255mn offsets created by projects around the world. The supply of ‘avoided deforestation’ credits shrank by a third from 2021 to 2022. Furthermore, some companies were accused of greenwashing after buying such offsets from projects that had questionable environmental impact.
 

Indeed, more recently, last week The Guardian newspaper claimed that rainforest carbon offsets approved by Verra were largely ‘worthless and could make global heating worse’, challenging the legitimacy of the ‘carbon neutral’ labels that some internationally renowned companies are using to help promote their products and services.
 

Kyle Harrison, Head of Sustainability Research at BNEF and the lead author of the BNEF report, is highly critical of current standards, saying: ‘Today’s offset market, built mostly on bilateral transactions for cheap credits, is potentially digging its own grave. Buyers need transparency, clear definitions around quality and easy access to premium supply, or future years will resemble what we saw in 2022. These changes will send demand signals to the projects making the greatest decarbonisation impact and in need of the most investment.’
 

Looking to 2050 in its report, BNEF modelled supply, demand and prices for carbon offsets under three potential scenarios. Under each, demand would grow, but at substantially different rates. Prices would be dramatically different as well.
 

In the first, the voluntary market scenario, companies could purchase any type of carbon offset to achieve their net zero goals and would need 5.4bn offsets annually in 2050. The market would remain consistently oversupplied and 8bn offsets would be created annually in 2050, primarily from avoided deforestation. Prices would rise to just $12/t in 2030 and $35/t in 2050, allowing companies to ‘lean on cheap offsets with dubious environmental value to meet their decarbonisation goals’. The market would be valued at just $15bn annually in 2030 in this scenario – up from estimates of $2bn today.
 

Under the removal scenario, the supply-demand balance would be much tighter as only offsets from projects that actually removed carbon from the atmosphere would be allowed to count. Credits from avoided deforestation or clean energy projects would be eliminated. In this scenario, the market would be briefly undersupplied starting in 2037 because the technology to remove carbon, direct air capture (DAC), remains costly to be built at major scale. Carbon offset prices would soar above $250/t with the annual market reaching nearly $1tn.
 

A removal-only offset market would direct investment into technologies like DAC, helping to reduce costs. Such high prices could also force some companies to invest in other more impactful decarbonisation strategies over offsets. There is a concern, however, that such expensive offsets in later years would price most companies out of the market. It could even cause them to abandon their net zero goals entirely, as they will be too expensive to achieve, warns BNEF.
 

Investors, companies and non-profits increasingly acknowledge that defining the quality of carbon offsets encompasses hard-to-quantify factors like permanence and benefits outside of decarbonisation. A third scenario in BNEF’s outlook, the bifurcation scenario, assumes that this debate effectively splits the market into two pieces. One is a smaller, less liquid market for high-quality offsets, including technology-based removal and nature-based solutions in Africa, North America and Oceania. Demand for high-quality offsets reaches just 433mn in 2030 and 1.3bn in 2050, but buyers are faced with a smaller pool of supply relative to other scenarios in the report at 1.4bn and 3.2bn in the same years. Prices peak at $38/t in 2039 before dropping to $32/t in 2050.

Existing separately in this bifurcation scenario is a larger market for all remaining low-quality offsets, including energy generation and nature-based solutions in Asia and Latin America. Prices are higher earlier due to greater demand at $12/t in 2025, but reach just $22/t in 2050. Companies leveraging this low-quality market could rely more on offsets to achieve their net zero goals, but would have to contend with reputational risk at a far greater scale than what they face today, comments BNEF.

Exchanges, futures products, technology providers and private-led initiatives like the Integrity Council on Voluntary Carbon Markets are working hard trying to standardise and simplify offset buying, creating clear quality tiers. If these efforts prove fruitful, standardisation and quality definitions could drive much more liquidity in the market and help companies and investors differentiate their offsetting strategies. But with so many groups independently tackling this issue, buyers may leave more confused than they started, notes the report.

‘Creating standardisation is the carbon offset market’s space race. Solving these issues could grow the market by several orders of magnitude, but we run the risk of too many of these competing efforts happening at once, similar to what we’ve seen in adjacent areas like ESG [environmental, social and governance] reporting and sustainable finance,’ comments Harrison. ‘If we continue with this siloed approach, we’re back at square one.’