VCM 2023 Update: Retirements Stable; Transaction Volume Falls
Exhibit: Carbon Offset Credit Retirements, by Month 2023 (Millions Metric Tons CO2-Equivalent)
Source: MSCI Carbon Markets (formerly Trove Research)
Key Points: Strong YE VCM credit retirements may suggest companies eventually deliberated, but then used, purchased credits to fulfill climate commitments. Retirements were thus flattish yr./yr. in 2023; issuances likely fell more than 10% and transaction volumes perhaps >50%. Demand in 2024 may be bolstered by integrity frameworks and incremental company buyers.
Strong December brings VCM credit retirements in line with prior years. MSCI Carbon Markets (formerly Trove Research) posted its tally of carbon offset credit retirements in the Voluntary Carbon Markets in 2023. Including a record setting month in December, in which 36 million offset credits were retired (see Exhibit), MSCI counted 180MM retired offsets in 2023, down only 3% year-over-year (yr./yr.).
Note: to retire an offset credit is to take it out of circulation; in so doing, the buyer/”retirer” uses the credit to report it as an offset to its internally-generated carbon emissions. One credit is the equivalent of one metric ton of carbon dioxide equivalent.
This outcome surprises; per MSCI, retirements were on pace to fall 12% yr./yr. through the first nine months of 2023 (excluding crypto-based transactions). The pace of retirements had slowed through the course of 2023 through September and it was tempting to tie that slowing pace to greater scrutiny and integrity concerns across the VCM.
We are left to speculate about companies’ thinking. It seems plausible that companies engaged in review of credits they had previously purchased before deciding it was “ok” to use them as offsets. Further, as MSCI had identified earlier in the year, the decline in retirements by a few large buyers of offset credits had slowed their retirement cadence; this had been only partially offset by newer and smaller buyers. Perhaps more (many) of those newer entrants acted in December to fulfill annual commitments.
Issuances were presumably down more than retirements in 2023… Per MSCI, issuances as of the first nine months of 2023 had fallen 8% yr./yr. and 4Q22’s 141MM credits issued was particularly strong (it was double the pace of the first three quarters of 2022). This sets up for full year 2023 issuances to fall more than 10%. Given heightened integrity scrutiny being taken by Verra and other registries and the softer market generally, it is perhaps surprising that issuances didn’t fall more.
…while transaction volume appears likely to have fallen considerably. Ecosystems Marketplace (EM), which has conducted a survey of VCM participants and registries for a number of years, published an update in late November 2023. The report cautions that its 2023 data, which covered through mid-November, is preliminary and likely reflects very incomplete survey results. That said, with survey responses from 2/3 of the actors that responded in 2022, the fact that transaction volumes were down 80% in 2023YTD vs. 2022 certainly points to a dramatic decline — perhaps more than 50% yr./yr. (Our channel checks appear to support that as well.)
This slowdown in transactions likely reflects a pulling back by both buyers/end-users and speculators; it seems entirely plausible that they are waiting for the integration of recommendations/certifications by the integrity standards bodies (and specifically the Integrity Council of the Voluntary Carbon Market or ICVCM) into the registries.
ICVCM assessments and demand from new companies points to some recovery in 2024. Looking forward, transaction volume in 2024 —and demand generally — should depend on a few factors. These include the extent to which: (1) existing/issued credits are deemed to “fit” with ICVCM Core Principles; (2) companies conclude they can or cannot use credits they have already purchased for offsetting purposes; and (3) near term demand for offsets is bolstered by the addition of companies making climate commitments. To this last point, although data still pending, MSCI data through nine months of 2023 would suggest that the number of companies committing to align their emissions with limiting global warming to 1.5°C more than doubled in 2023 to well over 3,000.
January 8, 2024