Current prices and possible trajectories
Carbon offsets are currently traded at a wide range of prices. We distinguish between carbon avoidances which are close to 99% of the overall market and the much more expensive carbon removals that are being generated by negative emissions technologies such as direct air capture, a technology which is still in its infancy.
The majority of carbon offsets from emissions avoidances is still selling in the single digits per ton of CO2 equivalent (tCO2e), the cheapest being leftover offsets from the Clean Development Mechanism (CDM), which have arguably little actual impact and are selling in the low single digits per tCO2e. Many other registries such as the ADR, the CAR and the VCM are currently also selling below USD 10 per tCO2e on the wholesale market.
Recent research confirms that the higher perceived quality of the offset, the higher the price. Quality is closely linked with the registry the carbon offset is certified under. The registries have more or less stringent criteria for durability, credibility and measurability of the offset and also offer a wide range of co-benefits, such as poverty alleviation, biodiversity conservation, supporting local communities and others.
At the “high-end” range of the spectrum are quality registries such as the Gold Standard, one of the bigger registries that was established by the WWF and other NGOs and Planet Vivo, a UK based registry that is dedicated to supporting smallholder communities delivering clear environmental benefits. Gold Standard and Plan Vivo credits are selling for well over USD 10 per tCO2e on the wholesale market. Other upcoming standards such as the UK Peatland Code and the Woodland Carbon Code are paying private landholders for re-planting trees and conserving peatland have sold for over USD 30 per tCO2e in 2020/2021 auctions.
Carbon removals on the other hand are much more expensive. Climeworks, the company that is extracting CO2 out of the atmosphere in Iceland and mineralizes the carbon for long term storage is selling tCO2e on their website for close to USD 1000 per ton of CO2e.
Hence, as a thought experiment, a public or private entity that needs to offset their emissions residual of say 36000t of CO2 per year (which is the projected residual of the Council of the City of Edinburgh by 2030) would have to budget either around USD 180,000 p.a. if they go with low-cost, low-quality offsets or USD 30,000,000 p.a. if they would want to buy actual carbon removals.
Apart from intrinsic factors impacting the price of voluntary carbon offsets the overall direction of the market is set by supply and demand. While at present overall supply in carbon offsets of the emissions avoidance type is still outstripping demand, which explains the relatively low prices observed today, interest from the private sector is growing tremendously. Recent research into the net-zero strategies of the world’s largest corporations suggests that companies with over USD 16 trillion in combined annual revenues plan the purchase of voluntary carbon offsets as core part of their emissions neutralization efforts[1].
This implies a possible demand shock in the coming years. To make things worse, there is uncertainty on the supply, since forestry and land use related carbon offsets, the largest source of credits at present, may not be available for the voluntary offset market anymore once National Determined Contributions (NDCs) are fully expanded to comply with the Paris Agreement’s Article 6. Academic research concludes that the voluntary carbon offset market has not yet found a way to credibly position itself within the Paris Agreement’s legal architecture. It is expected that COP26 will provide further guidance, but we can be certain that NDCs will have to grow rapidly to comply with the Paris Agreement, leaving little room for voluntary offset generation[2].
[1] Kreibich, N. and Hermwille, L. (2021) Caught in between: credibility and feasibility of the voluntary carbon market post-2020. Climate Policy
[2] Lang, S., Blum, M. and Leipold, S. (2019) What future for the voluntary carbon offset market after Paris? An explorative study based on the Discursive Agency Approach. Climate Policy. Vol.19 (4), pp.414–426.
Carbon Offsets - everything you ever wanted to know 