Ten-fold increase in carbon offset costs

The cost of offsetting corporate carbon emissions needs to increase ten-fold to drive meaningful climate action, concludes a report by UCL and Trove Research.

Current prices of carbon offsets are unsustainably low and need to increase significantly to encourage greater investment in new projects that remove carbon from the atmosphere. If prices stay low companies could be accused of greenwashing their emissions, as real emissions reduction and carbon removals are more costly than today’s prices.

Prices of carbon credits are currently low, due to an excess of supply built up over several years, together with issues over whether payments for credits really result in additional reductions in carbon emissions. According to the research, titled Future Demand, Supply and Prices for Voluntary Carbon Credits – Keeping the Balance, without this surplus, prices would be around $15/tCO2e higher, compared to $3-5t/CO2e today.

The research shows, however, that the surplus will not last forever, with demand for carbon credits expected to increase five to ten-fold over the next decade as more companies adopt net-zero climate commitments.

This growth in demand should see carbon credit prices rise to $20-50/tCO2e by 2030, as more investment is required in projects that take carbon out of the atmosphere in the long-term. These prices are needed, for example, to incentivise landowners to forgo income from agriculture and instead preserve forests and plant trees. With a further increase in demand expected by 2040 and 2050, carbon credit prices would rise in excess of $50/tCO2e.

If governments successfully reduce emissions through domestic policies, fewer carbon credits will be available to businesses through the voluntary market. This would increase carbon credit prices further, potentially reaching $100/tCO2e.

The analysis also shows that the contribution of the voluntary market to reducing world emissions needs to be seen in perspective. Even at prices of $100/tCO2e the technologies assessed in this study (reducing deforestation, forest restoration, CCS, BECCs and renewables in least developed countries) could deliver around 2bn tCO2e per year of emission reductions on average between now and 2050. This is about 4 per cent of world greenhouse gas emissions, and 10 per cent of the gap between global “business as usual” emissions in 2030 and pledges in the Paris Agreement by 2030, showing that the market for offsets will be modest compared to economy-wide emissions reductions needed to reach the Paris targets and net-zero by 2050.

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