Navigating the Carbon Credit Surge: Strategic Moves for a High-Demand, High-Quality Future

The carbon credit market is experiencing significant shifts, with prices rising sharply over the past few years, though still well below anticipated levels. Between 2021 and 2023, the average price of carbon credits surged by 72.5%, reaching $6.97 in 2023. Projections indicate that buyers could face prices between $25 and $30 per metric ton by 2030, driven by growing demand for higher-quality credits, coupled with supply constraints. This trajectory is expected to continue, as companies face increasing pressure to meet their net-zero targets.

Carbon credit prices are influenced by several factors: supply and demand dynamics, the type of project generating the credits, and the overall quality of the credits. Tech-based solutions tend to command higher prices than nature-based solutions, as they are more complex and expensive to implement. High-quality credits that meet stringent criteria for environmental integrity and offer additional social or environmental co-benefits are also priced at a premium, with some fetching prices 78% higher than credits without such co-benefits.

Market forecasts suggest that prices for carbon credits could rise sixfold by 2031, with demand vastly outstripping supply. As more companies strive to meet their climate commitments, this imbalance could drive prices even higher. By 2050, demand could exceed 8GtCO2e, with a substantial portion coming from nature-based projects such as reforestation and avoided deforestation. However, the tightening focus on credit quality may reduce the supply of credits that meet the highest standards, exacerbating the supply-demand mismatch.

Looking forward, the demand for carbon credits is expected to grow exponentially, with McKinsey estimating a market value of up to $50 billion by 2030. Behavioural demand, where companies purchase offsets to appeal to consumers or differentiate products, is expected to decline. Instead, fundamental demand driven by the need to meet net-zero goals will dominate. Bloomberg forecasts that demand could rise to 1.1GtCO2e by 2030 and 5.4GtCO2e by 2050.

Three possible scenarios for carbon pricing have been outlined by BloombergNEF: a voluntary market scenario, where prices remain low due to oversupply; a removal scenario, where prices rise significantly as companies are forced to buy higher-quality removal offsets; and a bifurcation scenario, where the market splits into two segments—one for high-quality offsets and another for low-quality offsets. In all cases, the market is set to face continued price increases, though the magnitude will depend on how the market evolves and how strictly quality standards are enforced.

For companies, the key takeaway is the importance of acting early. By securing carbon credits now, they can lock in lower prices and avoid the cost increases that are expected in the coming years. Advanced market commitments and offtake agreements could prove to be strategic moves, helping companies hedge against rising prices and ensuring a steady supply of credits to meet their future needs.

Key Takeaways:

• As companies strive for net-zero targets, early investments in high-quality carbon credits will offer long-term cost advantages and help ensure future compliance with climate goals.
• Carbon credit prices have surged by 72.5% between 2021 and 2023 and are expected to rise further, reaching $25 to $30 per metric ton by 2030.
• Higher-quality credits, especially those with co-benefits, are commanding significant price premiums, with demand outpacing supply.
• Companies should act early to secure credits at lower prices, leveraging advanced market commitments or offtake agreements to hedge against future price hikes.
• The carbon credit market may split into two: a more expensive segment for high-quality credits and a larger, cheaper market for lower-quality credits.