Voluntary Carbon Markets Softened in 2022
Exhibit: Carbon Offset Credit Issuance by Project Type, 2021 and ~10 Months 2022
Source: Berkeley Voluntary Registry Offset Database (VROD)
Key Points: With data through early November, VCM offset issuances (supply), retirements (demand) and pricing are poised to have weakened in 2022 vs 2021. The reasons vary but include processing logjams and correlation with equity markets. A more than doubling of corporates making decarbonization commitments in 2022 supports an outlook for strong multi-year growth.
2022 YTD credit issuances down 19% vs. the same period in 2021. Voluntary Carbon Market (VCM) issuances of 217 million tons of CO2-equivalent (CO2e) offset credits year-to-date (YTD) in 2022 are down for two reasons (for details on the database see the last paragraph). First, there is a logjam in processing project approvals. Per Trove Research, a consultancy, the pipeline of projects pending approval from the VCS and Gold Standard registries had risen 118% year-over-year (yoy) by the end of 3Q22 to 421 million tons. Second, there have been moratoria put in place by certain countries in issuing Forestry & Land Use credits as these countries assess the impact of issuing voluntary credits on their ability to meet their future decarbonization (Nationally Determined Contribution or NDC) commitments.
For context, although the comparisons are imperfect because we compare all of 2021 with YTD 2022 (through November 9th), the reduction in total credits issued in 2022 is led by Renewable Energy (down 35% yoy) and Forestry & Land Use (down 33%) (see Exhibit).
With respect to the project logjam, Verra has cited labor scarcity as a factor, as is the rapid increase in number of project requests. Verra’s efforts to ‘break through” the logjam include training new hires, establishing a new verification oversight team and implementing new automation to streamline the project review process for faster as well as proper substantiation. Verra is the parent of VCS, which is the largest project registry (with approximately 2/3 of issuances this year in the database).
2022 YTD retirements down 24% vs. all of 2021 at 122 million. The decline in retirement demand can likely be attributed to lack of company confidence generally — Trove, for example, has calculated a strong correlation between retirement demand and equity market (S&P500) performance over the last two years — as well as to possible concern regarding quality of the credits given the very public conversation about raising overall project integrity in the market.
Pricing also looks to have fallen. From an average of $9.50/ton of CO2e in Dec-2021, average offset credit prices fell more-or-less steadily (barring spikes related to project mix) to $6.40/ton by late October 2022. This decline occurred despite a consistent trend of “younger”, i.e., more recent, vintages being purchased through the course of 2022, which, all else equal, command higher prices as they are perceived to be of relatively higher quality than older vintages.
Increase in corporate commitments to decarbonize suggests medium term demand growth. The total number of companies This suggests significant growth in demand for carbon offsets through the current decade as most, if not all, of these companies will take action to neutralize residual emissions beyond their value chains by purchasing high-quality credits for removal.
Background on the VCM data. The Berkeley Carbon Trading Project recently released the latest version of its Voluntary Registry Offsets Database (VROD), with data through November 9th, 2022. The VROD contains all carbon offset projects, credit issuances, and credit retirements listed globally by the four largest voluntary offset project registries: American Carbon Registry (ACR), Climate Action Reserve (CAR), Gold Standard, and Verified Carbon Standard (VCS).
December 19, 2022.