Tailwinds and Crosswinds: Forecasting Demand in the Voluntary Carbon Markets

Tailwinds and Crosswinds: Forecasting Demand in the Voluntary Carbon Markets

By Dana Gibber, CEO, Flowcarbon
December 7, 2023

The carbon markets can play a critical role in the global fight against climate change by facilitating the massive private flows of capital needed to be part of a holistic strategy to tackle the climate crisis. Yet, these markets are at a pivotal juncture. 

Despite their significance for both businesses and the environment, carbon markets in recent years have been harangued by a combination of legitimate concerns about certain legacy credit types, uncertainty about the proper use of carbon credits in corporate environmental claims, and deep misconceptions propagated by certain media outlets and NGOs.

Nevertheless, there are compelling reasons to be highly optimistic about the future of carbon markets: Sophisticated market infrastructure is rolling out, standards to offer necessary clarity to market participants are being implemented, corporations are continuing to make substantial carbon credit purchases, and investor interest is through the roof. 

To build upon this momentum, and move beyond this period of transition, a few things need to happen. Here are the exciting tailwinds — and one crosswind — impacting the carbon markets today, and where efforts must be focused to enable the carbon markets to deliver desperately needed private finance into climate mitigation.

Tailwind: Corporate Spending in the Carbon Markets is Growing

Large corporations continue to make investments across the carbon markets — typically as part of a commitment to compensate for their residual emissions with carbon offsets serving as a vital component of holistic corporate decarbonization plans. According to a recent report by AlliedOffsets, a data company that tracks carbon offsetting, a remarkable influx of 1,200 new buyers entered the voluntary (verified) carbon market this year. 

Additionally, existing marquis buyers are continuing to buy. In early September, Microsoft struck a historic $200 million carbon dioxide removal deal with Heirloom Carbon, one of the largest ever purchases of carbon removal credits. This came on the heels of another Microsoft purchase in May from a Danish energy company that is expected to capture 2.76 million metric tons of carbon dioxide from a wood-burning power station. Meanwhile, consumer megalith Amazon recently signed a deal with one of the world’s leading Direct Air Capture (DAC) companies to purchase 250,000 tons of CO2 removal.

While these purchases demonstrate the growth of corporate appetite for engineered removals credits, the market for nature-based credits also continues to persevere through a period of intensive scrutiny and even backlash. Brazilian state-owned oil giant Petrobras recently committed to a $120 million carbon credit purchase, which will support rainforest conservation in Brazil.

Nature-based carbon credits are capturing the attention of other corporate giants as well. In 2020, the World Economic Forum established 1t.org, a platform for corporations to pledge their financial support to conserve and grow 1 trillion trees by 2030. Since its launch, 91 companies have committed to safeguarding forests and promoting forest growth, often via carbon markets, by more than 7 billion trees across 65 countries.

In particular, the emergence of an elite category of high-quality removal projects is a key driver of growth for the nature-based market. Blue carbon projects, which involve the protection and restoration of mangrove ecosystems and tidal marshes, can sequester four times as much carbon as tropical rainforests. While blue carbon projects currently only represent a small portion of the nature-based credits available, financiers are watching. One recent study placed the current corporate demand for blue carbon credits at greater than $10 billion.

At Flowcarbon, we believe nature-based projects are by far the most scalable and cost-effective carbon sinks available today and that carbon markets are the best mechanism for financing them. Although historically there have been instances of inaccurate measurement and monitoring, the standards and infrastructure development happening in the market is actively addressing this. Continuous enhancement of methodologies by carbon crediting programs, the implementation of remote sensing and other digital monitoring and verification tools, and increasing alignment on international best practices continues to significantly improve the integrity of these markets.

Tailwind: Investor Interest in Financing Carbon Projects

Investors are increasingly eager to finance new carbon projects. A recent report by MSCI estimates that more than $18 billion in capital has been raised to invest in carbon credit projects in the last two and a half years alone, with more than 80% of this funding targeted to nature-based projects such as afforestation/reforestation, improved forest management, and reducing emissions from deforestation and forest degradation. Notably, more than $3 billion in future investment has already been committed as well.

Finance and tech communities, meanwhile, are focusing more on developing new, innovative tools and platforms, attracted by the future of climate technology and signaling a growing appetite for environmentally conscious investments. These trends open enormous possibilities for the future of the carbon markets.

To enable institutional investor capital to continue flowing in, clear standards are essential. As more projects come online, the Integrity Council for the Voluntary Carbon Market (ICVCM) is working to approve carbon standard bodies and methodologies as well as introduce a Core Carbon Principle assurance label to shore up investor confidence in the market. It’s imperative that regulatory agencies and stakeholders work diligently to provide the necessary clarity and framework for this market to thrive and fulfill its promise in addressing climate change challenges. Achieving transparency and consistency in regulations and standards is paramount to attract further investment and foster growth in the carbon markets.

Crosswind: Corporate Frameworks for Carbon Offsetting

While the supply side must continue to improve integrity, the demand side also faces challenges, with substantial corporate interest in the carbon market still remaining on the sidelines as many sustainability leaders await a feasible framework for including carbon credits in net-zero targets and pathways. 

Demand for carbon credits — and resultant climate action — would immediately skyrocket with the arrival of commonly aligned guidance on how carbon credits can be used as part of a net zero pathway. With incredibly promising signals coming out of COP28, it appears that 2024 will be the year this holy grail is reached.

Here’s why:

  • The VCMI released a revised Claims Code that includes a “Scope 3 Flexibility” claim with the potential to unlock massive demand, should it be finalized. 
  • The VCMI and ICVCM has partnered with four organizations — including critically, the Science Based Targets initiative — to establish an “End-to-End Integrity Framework” that provides consistent guidance on decarbonization and explicitly includes the use of carbon credits for residual emissions. 

However, we still have road to travel before reaching our final destination:

  • The details of the “End-to-End Integrity Framework partnership” are not yet entirely clear, nor is it clear whether the SBTi has formally agreed in concept to the Scope 3 Flexibility Claim (although it would appear strange for the SBTi to join this partnership if they strongly disagreed with this approach).
  • We still need the market to adopt wholeheartedly the VCMI framework, indicating a clear willingness to spend capital to achieve its “Carbon Integrity” label as a significant value-add on top of the SBTi-only claim made by many corporates.

At Flowcarbon, we strongly believe that companies should take responsibility for their residual emissions on the path to net zero, and be clearly incented with a compelling claim and a “shield” against ill-informed greenwashing accusations. 

All the pieces are coming into alignment. In 2024, we need the SBTi to formally agree, or indicate a lack of objection, to the VCMI’s Scope 3 Flexibility Claim. And leading corporations need to start making VCMI-approved claims. 

Conclusion

The commitment and capital needed to scale carbon markets is actively watching the market, waiting to be unleashed. With clear guidance for corporations on how to utilize carbon credits in their decarbonization plan, coupled with growing investor activity funding new carbon projects, the carbon markets can realize the phenomenal growth trajectory they have been on in recent years. 

Which is why we believe the future of the carbon markets is bright — and there is every reason to be optimistic.

Learn more about how we’re working with investors and corporations to maximize their engagement with the voluntary carbon market here.

About Flowcarbon

Flowcarbon is a pioneering carbon finance and technology company working to scale the voluntary carbon market through innovative investment and carbon finance structures and sales.

Dana Gibber is CEO of Flowcarbon, which she co-founded in 2021. 

Read More on Knowcarbon