Carbon Credit Market - Industry Dynamics, Market Size, And Opportunity Forecast To 2050

Market Scenario 

Global carbon credit market was valued at US$ 1.0 billion in 2023 and is projected to hit the market valuation of US$ 84.4 billion by 2050 at a CAGR of 18% during the forecast period 2024–2050. 

Carbon credits are a key part of a market system that fights against greenhouse gas emissions. Often, governments and regulatory bodies set caps on pollution levels. Carbon credits offer companies and businesses a way to meet these caps. Companies use the system by selling their surplus carbon credits if they emit less than what is permitted. On the flip side, companies can also buy carbon credits if they exceed their limits. These metrics represent a tonne of carbon dioxide that didn't hit the atmosphere. The prices vary greatly for various reasons, like project expenses, market trends and others. But in simple terms, companies have to make sure they don’t go overboard with emissions or else they’ll be forced to purchase tradable credits on exchanges such as Xpansive CBL in New York or AirCarbon Exchange in Singapore to compensate for it.

Across the global carbon credit market, there are close to 30 trading systems up and running across 38 different countries. In total, these places cover more than three quarters of global carbon credit volume —making them an effective tool in battling climate change. Recently, however, a whopping 90% of all global carbon credit volumes were owned by the EU ETS in 2021; which isn't surprising since the EU has one of —if not— the most extensive cap-and-trade system set up globally. The fight against climate change is getting stronger every year. As of April 1st, 2023, 73 pricing instruments have been put into play worldwide. This means that these instruments alone accounted for almost a quarter (23%) of global greenhouse gas output coverage since its inception! On average it costs $40-80 per metric tonne to offset carbon dioxide but with $87.85 per metric tonne charged through the EU ETS; there's no doubt this trend will continue growing as more companies push for net-zero goals.

Nature-based solutions are appearing more frequently now too: reforestation and other similar projects make up a whopping 60% of the value for the voluntary carbon market in 2022. Experts believe this trend will continue to grow with expectations that this sector alone will be valued at $50 billion by 2050. These nature-based projects accounted for 47% of all voluntary credits issued last year. 

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Market Dynamics 

Regulatory Pressure: A Key Driver for Carbon Market Growth

The carbon credit market is transforming, thanks to a blend of regulatory pressure, a push toward nature-based solutions and the difficulties linked with scaling up supply in order to meet demand. To incentivize emissions reductions, governments all over the globe are starting to implement carbon pricing mechanisms such as cap-and-trade plans. As of 2023, there have been 73 carbon pricing instruments put in place worldwide, covering 23.04% of global greenhouse gas emissions. The European Union's Emissions Trading System for example (EU ETS) accounts for 90% of international carbon credit turnover this year and is the largest carbon market on earth. Similarly, China introduced its national ETS in 2021 which is expected to become the world's largest carbon market for about four billion tonnes of CO2 emissions annually.

The effect that regulatory pressure has had on the carbon credit market can be seen in how widely adopted it has become Worldwide. By 2023, there were already 46 national jurisdictions and 36 subnational jurisdictions that had implemented or were preparing to implement these pricing instruments. Those nations account for around 60% of Global domestic product (GDP). This represents a significant increase from just twenty Jurisdictions back in twenty ten. Additionally, according to estimates from the World Bank, initiatives like this also brought in about $84 billion dollars in revenue last year alone which was a sixty percent increase over the previous year. This revenue could then be used to fund projects aimed at both climate mitigation and adaptation - further driving demand for credits.

Nature-Based Solutions: A Growing Trend in the Carbon Credit Market

Nature-based solutions are taking the carbon credit market by storm. Stuff like reforestation, sustainable land management and wetland restoration projects aren’t just good for the environment and local communities—they’re actually efficient at sequestering carbon. The voluntary carbon market demonstrates this perfectly; in 2022, nature-based solutions made up about 60% of its total value, and forestry and land use projects accounted for 47% of all credits issued. REDD+ (Reducing Emissions from Deforestation and Forest Degradation) is a great example of this shift. This program incentivizes forest conservation and sustainable management, and there are already over 350 REDD+ projects in place across 79 countries. If they all reach their emissions reduction goals by 2030, they’ll have prevented the release of roughly six billion metric tons of CO2 equivalent.

No one can ignore the cost-effectiveness or valuable co-benefits that come with nature-based solutions either in the carbon credit market. A World Economic Forum study conducted last year found that these solutions could address up to 37% of the emissions reductions required to meet Paris Agreement targets by 2030—and it would cost less than $10 per metric ton of CO2 equivalent to do so. Plus, when you invest in these types of initiatives, you’re also investing directly in local communities. They help people make ends meet, expand biodiversity and prepare for climate change’s worst effects. Take Kenya’s Kasigau Corridor REDD+ Project as an example: It protects over 200,000 hectares (almost 500,000 acres) of dryland forest while simultaneously creating jobs for locals, improving education systems and supporting healthcare initiatives.

Scaling Up Supply: A Critical Challenge for the Carbon Credit Market

Expanding the supply of high-quality carbon credits is a big problem. In order to motivate suppliers to invest in offset projects and secure the necessary financing, the market needs transparent signals of demand. According to a 2022 survey by the Taskforce on Scaling Voluntary Carbon Markets (TSVCM), 80% of project developers identified lack of demand as a significant barrier to expanding supply. Additionally, it takes 3-5 years on average just to develop and register a carbon offset project — not great for encouraging investment. The Voluntary Carbon Market Integrity Initiative (VCMI), among other initiatives, aims to solve this issue by establishing clear and consistent standards for high-quality carbon credits that could boost investor confidence and drive more capital into the carbon credit market. Moreover, mechanisms like the World Bank's Climate Warehouse are trying to get rid of excess transaction costs that have made entry difficult.

Another obstacle standing in our way towards scaling up supply is the requirement for strong monitoring systems, reporting systems, and verification (MRV) systems all built into one. These ensure that carbon credits have integrity. In 2021 UC Berkeley discovered that nearly 85% of voluntary market offsets may not represent genuine emissions reductions due to issues such as double-counting, overestimation of baselines, and non-permanence. While these findings are troubling, there are initiatives being taken such as SBTi and CCQI which aim to build trust in this space with rigorous methodologies for assessing the quality and additionality of carbon credits along with benchmarks for credit quality transparency in MRV processes

Segmental Analysis 

By Type:

The carbon credit market is bifurcated into 2 sub-segments: Compliance Markets and Voluntary Markets. As of 2023, compliance markets account for 99.6% of the market share with voluntary markets bringing up the rear. Although Voluntary markets are expected to grow with a projected CAGR of 21.2%, it still remains in second place. The dominance that Compliance Markets has over its competitor is mainly due to the fact that they’re mandatory in nature. They’re driven by government regulations such as the Kyoto Protocol and Paris Agreement as well as other international agreements. For example, The European Union Emissions Trading System (EU ETS), which is regarded as the world’s largest compliance market, covered nearly 1.6 billion tons of CO2 equivalent last year alone; this makes up about 90% of the total global carbon market value.

Despite being second best right now, it’s projected that Voluntary segment in the global carbon credit market will experience massive growth within the forecast period at a rate of 21.2%. This growth is driven by corporate sustainability commitments per consumer pressure and companies’ desires to offset their unavoidable emissions. In an effort to hit zero emissions targets, UK ETS operated for its first full year covering roughly around 155 million tons of CO2 equivalent in 2023 while China’s national ETS saw trading increase by 30%; this calculated up to be nearly 8 billion tons of CO2 equivalent last year as well. Moving back towards Voluntary Markets however; As companies adopt more net-zero targets there will be a further need to reduce emissions and so far, over 3000 companies have committed to science-based targets already

By Source:

The carbon credit market can be split up into segments based on emission reduction sources. The biggest segment, Technology Based, which includes improvements in renewable energy, energy efficiency, and industrial processes, accounted for 46.9% of the market in 2023. The availability of large-scale emissions cuts from established technologies drives down prices in this segment more than others. For instance, over two-fifths of all voluntary carbon credits issued last year came from renewables projects. But Nature Based is gaining steam as societies and companies realize that it isn’t enough to just offset the CO2 they produce—projects like reforestation actually suck existing greenhouse gases out of the air. In a sign of this growing interest, nature-based solutions made up nearly three-fifths of the value of voluntary credits last year; forestry and land-use alone accounted for almost half.

In 2023, both segments in the global carbon credit market continued to grow but by smaller amounts than they did between 2021 and 2022 (see chart). Technology Based still led with a market share of 46.9% thanks to rapid deployment of renewable energy and energy efficiency projects. In March total renewable capacity reached 3,870 GW—nearly seven times what was installed ten years ago—according to IRENA. Nature Based increased its share to 41.5%, up from 39.7% in the previous year but at a slower pace than before as investors worried about their returns.

By Project Type:

Based on project type, carbon credit market is categorized into two sub-segments: Carbon removal projects and Carbon avoidance projects. In 2023, the carbon removal projects segment held the highest share of 75.3%. These types of endeavors actively remove CO2 from the atmosphere, using afforestation, reforestation, and carbon capture and storage (CCS). The high share is due to growing recognition that negative emissions technologies are necessary to meet climate goals. More recently, a 2021 report by the Intergovernmental Panel on Climate Change (IPCC) found that removing 100-1000 billion tons of CO2 from the atmosphere will be required by 2050 to reach net-zero emissions. Consequently, it’s projected to continue on its path of dominance with a CAGR of 18.2% during the forecast period.

By the end of 2024, it’s expected to grow even more when it increases its market share to 76.1% in the carbon credit market. This can be attributed to CCS projects gaining traction and moving forward at an increasing pace. In 2023 alone Global CCS Institute reported that global CCS capacity had reached 111 million tonnes per annum (Mtpa), which was a massive increase from previous years' numbers at +33%. The remaining segment known as Carbon avoidance projects accounted for only 22.9% in 2023. Although smaller than others this section plays a crucial role in decarbonizing energy-intensive industries with renewable energy and energy efficiency projects that reduce or prevent emissions from occurring. For distance, in 2023 International Energy Agency (IEA) estimated that over 40% of needed emissions reductions could be achieved through energy efficiency improvements within two decades time frame.

By Selling Platform:

The global carbon credit market can be categorized by the selling platform used to trade credits. The Climate Exchange Platform segment is the largest, boasting 64.9% in 2023. Platforms such as the European Climate Exchange (ECX) and the Chicago Climate Exchange (CCX) help with the trading of standardized carbon credit contracts. This provides liquidity and price transparency which drives up demand in this type of platform. ECX alone accounted for over 80% of the global carbon market turnover in 2020 with a trading volume of 8.1 billion tons of CO2 equivalent. The Over-the-Counter (OTC) segment, which involves trades between buyers and sellers, makes up for the remaining market share.

The Climate Exchange Platform in the carbon credit market is expected to grow at a CAGR of 18.2% during this period. In 2023, they had already launched new exchanges and expanded existing ones further dominating the market share. For example, Singapore Exchange (SGX) has just introduced its own carbon credit exchange - SGX Carbon Market - to facilitate trading of high-quality carbon credits from Southeast Asia while Intercontinental Exchange (ICE)'s trading volume grew by 15% last year to reach 9.3 billion tons of CO2 equivalent. OTC's market share fell to 32.7% in 2023 when fewer sellers opted for it instead going with more standardized contracts available on climate exchanges where prices are transparently shown

By Industry:

The carbon credit market can also be analyzed based on the end-use industries that purchase and retire carbon credits. The Power Generation segment has the highest share of 22.1% in 2023. In 2020, the power sector emitted about 36% of global CO2, with coal-fired plants being the largest single source of emissions. In response to regulatory pressure and rising investor scrutiny, many utilities are looking to buy carbon credits to offset their emissions. For example, in 2021, Italian utility Enel said it would buy up to 1.5 million tons of CO2 equivalent per year in carbon credits to offset emissions from its gas-fired plants (see ENEL: Utilities use more than half of voluntary offsets – report). Other industries with large shares in the carbon credit market are Oil and Gas, Manufacturing, and Transportation.

Power Generation’s market share is projected to increase in the years to come as more utilities sought to offset their emissions and meet increasingly stringent carbon pricing regulations. Spanish utility Iberdrola plans to invest €75bn ($89bn) in renewable energy and carbon reduction projects by 2025; it will purchase carbon credits for any remaining emissions (see IBERDROLA: Spanish firm announces new five-year plan). Oil and Gas’ market share increased to 18.3% last year as companies focused more on managing their carbon footprints and began adopting internal or external carbon pricing mechanisms (see OGCI: Oil majors’ club says it is net-zero – but still buying offsets). The Manufacturing and Transportation segments accounted for 16.1% and 14.7% of the market respectively last year as both sectors came under increasing pressure to decarbonize supply chains.

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Regional Analysis

The carbon credit market has seen robust growth in recent years, with Europe taking the lead and North America trailing behind. Europe accounts for 51.1% of the market’s revenue, while North America lags behind. The region’s ambitious climate targets and established European Union Emissions Trading System (EU ETS), which covers about 40% of the EU’s greenhouse gas emissions, have contributed to its dominance. Last year, the EU ETS carbon price hit a record high of €98 ($115) per ton of CO2 equivalent. That drove up demand for carbon credits in the bloc, which is also home to the European Green Deal aimed at making Europe climate-neutral by 2050. The plan includes a raised target for reducing emissions by 55% by 2030 compared with 1990 levels.

In July 2023, the European Commission proposed a new target to cut net greenhouse gases by at least 55% from 1990 levels by 2030. It also adopted a proposal for an EU-wide reforestation plan that could see up to three billion trees planted across Europe every year. The initiatives in the Europe carbon credit market are driving demand for carbon credits: in June this year, it was revealed that the EU and its Member States pumped €23.39bn into environmentally friendly projects in developing countries last year – a rise of more than 7% on the previous two years.

North America appears to be dragging its feet on implementing comprehensive climate policies continent wide. Relying heavily on state-level initiatives like California's Cap-and-Trade Program and Regional Greenhouse Gas Initiative (RGGI), which covers ten US states including New York and Maryland as well as Washington DC., has done little to capture investors’ attention. That said, there have been some advancements in green policy and carbon pricing mechanisms at state level in North America. In April 2023, President Joe Biden committed to a 50-52% reduction in US greenhouse gas emissions by 2030 relative to 2005 levels. And he has proposed a $2tn infrastructure plan that includes investments in clean energy and climate resilience. In his first week as president he also signed an executive order bringing the US back into the Paris Agreement after Donald Trump's decision to withdraw from it in the carbon credit market.

When lines were drawn between East Asia Pacific, South Asia and Africa over their portfolios’ exposure to North America's big emitters during an investor collective Climate Action 100+ meeting in July this year, one investor said: “There is no point in looking at the east Asian region, because they are all front-runners on renewables. The red areas [are the laggards]”.

Top Players in Carbon Credit Market 

• 3Degrees
• Atmosfair
• Climate Impact Partners
• ClimeCo LLC
• EKI Energy Services Ltd.
• Finite Carbon
• Moss.earth
• NativeEnergy
• NATUREOFFICE
• Pachama, Inc.
• South Pole Group
• Tasman Environmental Markets
• Terrapass
• Verra Carbon
• Xpansiv
• Other Prominent Players

Recent Development

• In April 2024, Manx Willdlife Trust launched a carbon credit project, which is expected to sequester over 3,000 tonnes of carbon in the next 50 years as well as establishing and sustainably developing native woodland, ensuring biodiversity and creating a public nature site.

Market Segmentation Overview:

By Type

• Voluntary Markets
• Compliance Markets

 By Source

• Technology Based
• Biomass
• Forest Based
• Sewage Treatment Plants
• Wastewater Treatment Plants

By Project Type

• Carbon Avoidance Projects
• Carbon Removal projects
  • Nature Based
  • Technology Based

By Selling Platform

• Direct Contact
• Climate Exchange Platforms

By Business Size

• Small and Micro Enterprises
• Medium and Large Businesses

By Industry

• Power Generation
  • Biomass
  • Geothermal
  • Hydrogen
  • Solar
  • Others
• Waste Treatment Plant
  • Sewage Treatment
  • Commercial Waste Treatment
  • Industrial Waste Treatment
  • Municipal Solid Waste
  • Others Waster Treatment
• Cement
• Oil & Gas
• Iron & Steel
• Chemical & Petrochemical
• Other Industries

By Region

• North America
  • The U.S.
  • Canada
  • Mexico
• Europe
  • Western Europe
    • The UK
    • Germany
    • France
    • Italy
    • Spain
    • Rest of Western Europe
  • Eastern Europe
    • Poland
    • Russia
    • Rest of Eastern Europe
• Asia Pacific
  • China
  • India
  • Japan
  • Australia & New Zealand
  • South Korea
  • ASEAN
  • Rest of Asia Pacific
• Middle East & Africa (MEA)
  • Saudi Arabia
  • South Africa
  • UAE
  • Rest of MEA
• South America
  • Argentina
  • Brazil
  • Rest of South America