- Carbon credits have seen prices nosedive as the market has come under increasing scrutiny.
- "The integrity of carbon credits has been a big problem for quite some time," a researcher said.
Amid a slew of net-zero commitments, climate-speak, and environmental activism, companies have been buying and selling carbon credits to reduce their emissions footprint. But the market is breaking down.
In the past two years, demand for credits has plunged, sending prices into freefall. The recent COP28 climate conference was supposed to tackle the problem, but it failed.
"There are less credits that have been issued, but the demand is falling faster than the supply," Yvonne Lam, carbon market researcher at Rystad Energy, told Business Insider.
The price for counterbalancing one metric ton of carbon dioxide, or one credit, is languishing at $0.64 compared to $18 in January 2022, according to one carbon credit tracker.
Another data source, the Platts Nature-Based Avoidance price, shows a plunge to $3.90 per metric ton of carbon dioxide from $11.60 last year, according to S&P Global.
Demand is down because of a lack of standardized rules for governing carbon markets. Recent news reports and studies questioning the system's reliability underscored that lack of rules.
"The integrity of carbon credits has been a big problem for quite some time," Lam said.
How does it work?
Carbon markets basically package the canceling out of carbon emissions into tradeable items. One credit is a token that represents the removal of one metric ton of carbon dioxide from the atmosphere, such as by planting trees.
The idea is that by buying credits from governments or other issuers, companies would realize a cost for their emissions. They would also have an incentive to reduce emissions by selling any unused credits.
There are different types of carbon markets: one is mandatory and another is voluntary. The former is managed by a state or international body, and it includes instruments like carbon taxes to regulate energy-intensive industries like utilities. The latter is where companies and individuals trade credits without being required to. And that's the one facing the heat.
The problem is there's no centralized platform over which these credits can be traded. Voluntary carbon credits can be purchased directly from suppliers in registries — like Verra or Gold Standard — or through exchanges like ACX. That means there's no universal standard under which credits are certified and validated.
"No one is overseeing what is being put up in the market itself," Lam said.
In January, a report from BloombergNEF researchers said the total value of carbon credits issued and sold to help companies meet their de-carbonization goals could approach $1 trillion as soon as 2037 – under right rules.
With tighter oversight, where companies can only purchase carbon credits that are vetted, offset prices could soar above $250 a ton.
"Today's offset market, built mostly on bilateral transactions for cheap credits, is potentially digging its own grave," the report said. "Buyers need transparency, clear definitions around quality and easy access to premium supply, or future years will resemble what we saw in 2022."
Advocates hoped that a solution would come this month.
In the Paris Agreement from 2015, Article 6 lays out some rules on how the carbon trade can work. But at the COP28 climate conference in Dubai, countries failed to adopt those standards.
"The operationalization of Article 6.4 would have provided a new structure for a global carbon market, opening up fresh demand for credits, with the UN deciding the rules on eligibility," researchers wrote in a S&P Global note Wednesday.
"Lack of progress on Article 6 [is] likely to further limit carbon market growth," they added.