INTERVIEW: Price-sensitive carbon credit supply waiting in wings: Ecosystem Marketplace

A dramatic surge in carbon credit sales and widening price spreads seen in 2021 are likely to continue in 2022 as the buy-side grows and becomes increasingly diverse, according to Stephen Donofrio, director of Ecosystem Marketplace – an information provider for environmental markets.

And to meet this increase in interest, there is plenty of price-sensitive supply of credits on deck to be brought to market, he said in an interview Feb. 9.

The outlook follows a very strong year for carbon credits in 2021 which saw the price of some types of credit increase by multiples of almost 10.

CORSIA-eligible carbon (CEC) credit prices, for example, increased by 900% in 2021, according to S&P Global Platts daily assessments. CEC prices were assessed at $7.70/mt CO2e Feb. 8.

Meanwhile, nature-based carbon credit prices, which gained 199% in 2021, were assessed at $15.15/mt CO2e Feb. 8, according to Platts assessments.

"For years now there have been projects that wouldn't go through registration and issuance [of credits] until prices reach a certain level. So with demand and prices trending up, we should expect to continue to see supply come through from new project types that may not have been financially feasible previously," said Donofrio.

"So if we look at the registries of carbon credit standards, there appears to be ample supply. But the question that Ecosystem Marketplace aims to answer by tracking sales is how much of what's been issued but not yet retired is still available to purchase versus what has already been contracted and spoken for?" he said.

Increased investment

Carbon credits can come from projects ranging from reforestation programs, peatland restoration, renewable energy facilities and clean cookstove programs.

Some voluntary carbon market analysts have pointed to a risk of a looming supply crunch for credits as an increasing number of companies set ambitious net-zero emissions targets, raising demand for the credits worldwide.

But Donofrio's view of the market suggests supply will be able to meet that demand growth.

"If we were building it all today [the VCM] – the infrastructure, the guidelines -- then absolutely there would be a supply crunch," said Donofrio.

"But we are not building it all from scratch today. We have the infrastructure in place, and we have more investment in supply coming through from corporate buyers, banks and investors," he said.

Ecosystem Marketplace publishes regular analysis reports estimating the value of the global voluntary carbon market, which it pegged at over $1 billion in 2021.

"We know that record-breaking number that the market exceeded last year is definitely much higher now as our respondents are currently reporting their trued-up and full year 2021 carbon credit trades," said Donofrio.

Ecosystem Marketplace – an initiative of not-for-profit group Forest Trends – aims to increase transparency in environmental markets. The group is also part of the Integrity Council for the Voluntary Carbon Markets, which seeks to ensure that the VCM can help meet the goals of the Paris Agreement on climate change.

Ecosystem Marketplace is part way through a push to beef up its data analysis to support its services on the voluntary carbon market, Donofrio said.

"We're trying to ground folks in the reality of the market as stakeholders develop frameworks, rules and guidance for what the market could be in the most ideal sense," he said.

"We are enhancing our research on the demand side, looking at net-zero commitments but also analyzing pathways to achieving those goals, including the use of carbon credits," he said.

As the market develops, there is a need for empirical data to support decisions on quality and integrity affecting schemes like CORSIA – the United Nations Carbon Offsetting and Reduction Scheme for International Aviation, Donofrio said.

Ecosystem Marketplace plans to publish a major briefing on the "State of the VCM" in March on the progress of the market and a public webinar to explain the findings.

The report is expected to provide an update on the group's November 2021 special report for the COP26 UN climate talks, which valued the VCM at $1.006 billion in the year to Nov. 9, 2021.