Climate Trust’s Offset Outlook
The carbon offset market, like every market, has been volatile since March 2020. Although there have been periods of uncertainty around carbon offsets in the past – suspension of the Clean Power Plan in 2016 and the (then) uncertainty of the extension of California’s compliance market in 2017 – this one is different. The volatility is not a function of jurisprudence or politics, but of uncertainty around projected demand for offsets during what could be a long-term economic downturn. But the news is not all bad. As the compliance market has experienced depressed prices due to depressed demand from both regulatory and financial buyers, the voluntary market looks poised for an onslaught of demand from corporate buyers.
Voluntary markets are just that – voluntary. The commitment to purchase offsets is a business decision. It seems like every week there is another press release announcing carbon reductions or carbon neutrality goals: Unilever, Verizon, Southern Company, Amazon…These are heavy hitters with strong balance sheets and the budgetary chops to implement carbon reduction and offset programs. It’s all the more impressive that some of these announcements have come since the economic downturn. Adding up all those commitments points to a huge potential for voluntary offset credit demand. Will all of that demand be in the US? Certainly not. Voluntary offset prices range from $.50 to $25.00 and many of the cheapest offsets are generated outside the US. However, Climate Trust’s experience working with voluntary buyers shows that price is not necessarily the primary driver. Decisions are often based on the location, type and quality of the offset project. Prices matter, but not as much as one might assume.
We believe the WCI compliance market will be neutral in the medium term as the economy slowly recovers, and bullish long term. The WCI market’s decreasing annual targets and the cost effectiveness of offsets drive our thinking. Voluntary offset markets, particularly those that are land-based like grasslands and forestry, will see a dramatic increase in demand over the next ten years.