VCM 2023 Recap and 2024 Outlook

2023 Recap: VCM in the spotlight

In January 2023, concerns about the value of REDD credits emerged when The Guardian published an article labelling them as "worthless", setting a tone for discussions around the credibility and effectiveness of carbon credits within the voluntary carbon market (VCM).

March witnessed a significant development with the launch of the Core Carbon Principles and Program-Level Assessment Framework by the International Carbon Voluntary Carbon Market (ICVCM). This initiative aimed to establish standardized principles and assessment criteria for carbon credit programs, contributing to the market's integrity.

In April, the International Civil Aviation Organization granted approval for ACR and ART for CORSIA Phase 1, along with conditional eligibility for Climate Action Reserve, Global Carbon Council, Gold Standard, and Verra. This move highlighted the growing recognition of independent crediting standards within the international frameworks.

May brought attention to geopolitical dynamics as the Zimbabwean government announced its intention to take control of the nation's carbon credit trade, reflecting a broader trend of host countries imposing restrictions on the VCM.

June saw the unveiling of the "Claims Code of Practice" by the Voluntary Carbon Market Integrity Initiative (VCMI), signaling a shift away from unregulated "climate-neutral" claims. Simultaneously, the U.S. Commodity Futures Trading Commission (CFTC) released an alert, addressing the need to detect fraud and market manipulation within carbon markets.

In July, ICVCM introduced a category-level assessment framework, raising uncertainties around the approval of REDD+ projects.

The tail end of 2023 saw several pivotal events, especially in the run-up to and during COP28. The U.S. CFTC issued proposed guidance to enhance standardization, transparency, and liquidity in the VCM through the listing of voluntary carbon credit derivative contracts. The guidance underscores the importance of clear terms and conditions in these contracts to achieve accurate pricing, reduce manipulation risks, and enhance overall market liquidity and confidence.

Seven EU countries, including the Netherlands, Germany, France, Spain, Finland, Belgium, and Austria, issued a framework addressing corporate claims in voluntary credit purchases. The framework aims to combat greenwashing and includes the differentiation between contribution and offsetting claims, with the latter requiring corresponding adjustment. 

Six major independent crediting standards declared their intention to collaborate on VCM integrity: Verra, Gold Standard, ACR, Climate Action Reserve, Global Carbon Council, and Architecture for REDD+ Transactions will work on common principles for quantifying and accounting for removals and emissions reductions. This collaboration involves implementing a framework to share best practices, support carbon projects, enhance transparency, and create indicators promoting community benefits.

Other notable developments in December included plans by CIX to integrate Article 6 labelled credits on its platform, while CTX planned to conduct the first auctions of Internationally Transferable Mitigation Outcomes (ITMOs). Verra joined Gold Standard in the issuance of Article 6 labelled credits, highlighting a collaborative approach to advancing carbon market standards. 

Parties failed to adopt any text on carbon trading at COP28 (see our takeaway here). This halts progress toward a global credit trading mechanism (Article 6.4) intended to provide a global infrastructure (as well as high standards) for international offset trading and renders the VCM the “only game in town” for many stakeholders in the mitigation space.

The role of greenhouse gas removal activities in particular was contentious at the COP, with some parties opposed to adding these to the list of activities that can generate tradable mitigation units under the mechanism. Such practices are controversial because they involve inherently reversible natural processes such as afforestation (tree planting) or “no till” agricultural soil management practices. With no COP decision on these, project developers pursuing such activities will continue in the voluntary markets where there are no global UN-sanctioned standards. However, some country governments are getting involved: Sweden and Switzerland announced cooperation on the international transfer of carbon removal credits.

Issuance and retirements in 2023

Issuance of carbon credits in the four major registries (ACR, Climate Action Reserve, Gold Standard, and VERRA), decreased collectively in 2023 compared to the previous year (see Figure 1): just under 260 million credits (representing 260 MtCO2e reduced) were issued by these entities in 2023, nearly 10% fewer than in 2022.

Figure 1 – Carbon credit issuances (2018– 2023)

In contrast to issuances, retirements of credits in these four main registries exceeded last year's by 6%, rising from 154 MtCO2e in 2022 to 164 MtCO2e in 2023 (see Figure 2). December 2023 set a record for retirements at 37 million, a 50% increase compared to the same month in the previous year.

Figure 2 – Retirements of VCM credits (2018-2023)

All about Verra

As the biggest player in the VCM when it comes to carbon credit volume, actions in Verra’s registry had the most influence on the overall trend. Accounting for nearly 60% of total issuances in 2023, the fall in overall issuance for 2023 was due to Verra issuances declining about 50 MtCO2e compared to 2022 (-26%) while Gold Standard and ACR issuances actually increased.

The picture is similar for retirements, with Verra accounting for 70% of the credits retired in 2023. This is about the same amount (110 MtCO2e) as in 2022, whereas the amount of credits retired in the Gold Standard, ACR, and Climate Action Reserve (CAR) grew by 5, 7, and 5 percent respectively.

To the extent that a fall in issuance rates or lack of growth in retirements reflects “public sentiment” about voluntary carbon markets, the volume data illustrates that Verra took the brunt of 2023’s abundant criticism of offsetting. The standard’s accounting, monitoring and verification methods - especially for projects that reduce emissions from deforestation and forest degradation (REDD) – were the subject of particularly intense bad press over the year, prompting some project developers to shift their pipeline of projects to other registries like Gold Standard. 

Another factor that impacts issuance is the updating of project methodologies: changing the way emission reductions are counted alters the issuance process because the amount of credits a project generates has to be recalculated and recertified, etc. Several project methodologies were updated in 2023, again with the most significant being the REDD+ update by Verra. Given that this update occurred as late as November, however, it is unlikely to have had a large impact on issuance in terms of volume. For further details, read our analysis of these updates here.

On the retirement front, firms set to offset their emissions in 2023 (for which retirement of credits in their registry is the official act) may have held off on those in Verra’s registry to avoid being associated with the negative press coverage – this may account for at least part of the reason retirements grew in every registry except Verra. 

Project types

Year-on-year, the project types contributing most to total issuance were renewable energy, and forestry and land use. However, renewable energy projects’ share of total issuances fell from just under 40 percent to just over 30 (110 MtCO2eto 80 MtCO2e), and the amount of credits issued to forestry and land use projects decreased as well by roughly 20 million tonnes – see Figure 3. Conversely, other project types, such as “household and community” ones (including clean cookstoves), saw an increase in total issuance of over 30 MtCO2e driven by projects registered under the Gold Standard.

Figure 3 - Issuance by project type in 2022 and 2023

Forestry projects led in credit retirements in 2023 – comprising nearly 40% of the retired credits, up from 30% last year (see Figure 4). Specific forest preservation projects whose credits were retired in high quantities include Katingan Peatland (VCS1477), Cordillera Azul (VCS985), and Rimba Raya (VCS674). Despite the critics, we observe companies consistently retiring credits from forestry projects. Typically, these companies actively seek projects with numerous co-benefits, such as social and biodiversity enhancements. We expect this trend to persist, given that companies conduct thorough internal due diligence to ensure projects align with their specific criteria and preferences.

Credits from projects in the chemical/industrial sectors were retired at greater rates than in 2022, as were those from projects in the household and community category. Credits from projects involving renewable energy, which accounted for half the credits retired in 2022, accounted for only 38% of retirements in 2023.

Figure 4 – Retirements by project type in 2022 and 2023

Notably, firms chose to retire credits that had been generated quite recently: most retirements involved credits that the reduction or capture occurred in 2020 and 2021 (vintage year 2020 and 2021) even though registries contain plenty of offset units crediting reductions that took place much earlier, like 2016-2020 (see Figure 5).

Figure 5 - Credits retired in 2023 by vintage

In 2023, the individual company that retired the most credits was fossil fuel and petrochemical giant Shell, with 13 MtCO2e through Verra alone as well as additional retirements in Gold Standard and ACR (see Figure 6). Other firms that offset large volumes of emissions include Volkswagen Group, parcel delivery company Yamato Transport, pharmaceutical firm Takeda, and commercial real estate developer Highland Fairview.

Figure 6 – Largest retirements in 2023 by companies

In addition to the “big four” registries, the registry of carbon removal platform Puro.earth (crediting engineered carbon removal activities such as geologically stored carbon and biochar) saw 81,000 tCO2e retired, mostly from biochar. This represents a 10% drop from last year, likely because removal credits simply are not available in larger quantities.

Prices in 2023

The price trend for offsets in 2023 witnessed a staggering collapse, with almost every exchange-traded carbon credit contract sinking in value over the course of the year. The price of the NGO Dec-23, a nature-based offset futures contract on the CBL exchange, previously considered a "premium" contract and therefore fetching higher prices, plummeted over 95% from USD 6.32/t (09 Jan) to a mere USD 0.20/t by the year's end (29 Dec) - see Figure 7.

The GEO Dec-23 contract gained popularity mid-year, emerging as a benchmark for quality after the VCMI announced its acceptance of CORSIA-eligible credits while awaiting CCP-labelled credits. The contract’s price went up in July, but still declined to close the year at USD 0.6/t (29 Dec).

The C-GEO Dec 23 contract was designed in alignment with the initial recommendations for the Core Carbon Principles of the Taskforce on Scaling Voluntary Carbon Market and therefore fetched a price premium. However, it was perceived as irrelevant after the ICVCM updated its Core Carbon Principles and thus lost justification for a premium. Opening at USD 1.11/t on January 3rd, the C-GEO Dec-23 contract’s value dropped over 40% to close at a mere USD 0.23/t on December 29th. 

Figure 7 – CBL’s Futures Dec-23 Average Monthly Prices

The overall price decline was more evident among the above and other standardized contracts (typically transacted on exchanges) than among the more prevalent over-the-counter (OTC) transactions. Standardized contracts inherently lack individualized attributes about, e.g., projects they come from, adhering only to the designated "contract specifications." While precise figures may vary, it is evident that prices for OTC credits have not experienced such a substantial decrease. This observation suggests that, during periods of uncertainty surrounding the reliability of offsetting and individual projects, standardized contracts (which are inherently less transparent) bear the brunt of significant price depreciation. Conversely, companies engaging in bespoke agreements for credits from specific projects express greater confidence in the impact of those projects, leading them to be more willing to pay premium prices for such credits.

Factors influencing the price of carbon credit contracts include project country and project type, with many buyers aiming to support projects in certain regions or involving certain activities and, therefore, paying more for the credits they generate. A clear preference for newer vintages was particularly evident in 2023, with buyers willing to pay significantly more for credits from projects in which mitigation took place more recently. This is connected to the effort toward higher carbon market integrity, as reductions that took place far in the past are perceived as less traceable/verifiable. Data from CIX’s Nature X contracts shows a growing price distinction between credits for mitigation that occurred before 2019. In June, newer vintages (v19-22) were valued almost three times higher than older vintages (v16-19). By the end of the year, the younger vintages were nearly four times higher than the older ones.

Figure 8 – CIX Nature X contracts

The type of credit fetching the highest prices are those for engineered removals described above as tracked by a Removal Certificate Index published by Nasdaq. This shows credits for e.g. biochar credits selling for between EUR 110/t and EUR 180/t in 2023. 

Outlook for 2024

We see two significant factors influencing carbon credit prices this year: the distinction between authorized vs. non-authorized credits and the distinction between CCP and non-CCP labelled credits, anticipated to be issued in the next couple of months.

Authorized units are from projects in countries willing to forego “credit” for the amount of mitigation the project achieves toward its national climate target under the Paris Agreement, allowing the buyer to claim it has truly “offset” its emissions. Those authorized credits will be more expensive than non-authorized, given what the host/seller country has to sacrifice. Now that the International Civil Aviation Organisation’s carbon offsetting scheme CORSIA is in its first compliance phase, air carriers will be looking for carbon credits to offset their emissions growth – and only authorized offsets are allowed under CORSIA. We anticipate a premium price for CORSIA-eligible credits, driven by demand from airlines and companies seeking to utilize them as quality benchmarks in support of their net-zero claims.

Carbon credits that adhere to the ICVCM’s core carbon principles will fetch a premium over those that do not in 2024, in our view, as we expect CCPs to serve as a benchmark of high-integrity and quality credits in the voluntary market. As the VCMI explicitly states its acceptance only of CCP-aligned and CORSIA-eligible credits to make a VCMI claim, we expect to see limited to no demand for credits without CCP labels or for those ineligible for CORSIA. 

We base this expectation on the extreme downward price trend for exchange-traded credits not perceived to adhere to the CCP over 2024. It indicates that buyers seek to align their purchases with the voluntary market’s self-set integrity standards to the extent possible going forward. This means credits issued for reductions that took place in years before those standards were set, or for which the degree of meeting those standards is not traceable (as with most exchange-traded contracts), will likely continue to see prices close to zero, and thus remain unpurchased and not retired.

Ongoing developments in national government compliance activities, such as Singapore’s eligibility criteria for its International Carbon Credits, will further contribute to pricing dynamics, as such government endorsement signals high-integrity and quality credits.