The corporate craze for net-zero emissions and carbon neutrality has fueled the booming voluntary carbon market (VCM), reaching a market value of $2 billion in 2021. However, two recent reports indicate that the VCM experienced its first contraction in seven years in the first half of 2023, shrinking by 6%-8%. This may be bad news for developing countries seeking to finance climate adaptation through carbon trading.
The carbon trading market saw its first decline in the first half of 2023, with major brands like Nestlé withdrawing investment.
The goal of achieving net-zero carbon emissions has become a global trend. However, business operations inevitably produce carbon dioxide. Purchasing carbon offset credits—buying others' carbon reduction efforts to offset one's own emissions—has become a method for companies to achieve carbon neutrality. Voluntary carbon markets have emerged to facilitate the trading of carbon credits.
Reuters reported that the voluntary carbon trading market is growing rapidly, reaching a market value of $2 billion in 2021. Shell and the Boston Consulting Group predicted earlier this year that the market's value could increase to $10 billion to $40 billion by 2030.
However, the voluntary carbon market has recently faced headwinds. A report by Bloomberg New Energy Finance (BNEF) shows that demand for carbon offsets fell by 6% in the first half of 2023. Documents from consulting firm Ecosystem Marketplace also show an 8% decline over the same period.
The Ecosystem Marketplace initiative of the nonprofit Forest Trends said that several carbon offset programs have been exposed as false carbon reductions, which has tarnished the reputation of companies that purchased the credits and has led some companies to re-examine their carbon neutrality strategies.
Italian fashion house Gucci quietly removed its carbon neutrality statement from its website this year. Food giant Nestle also removed carbon neutrality claims for products like KitKat biscuits, focusing instead on reducing carbon emissions in its supply chain.
Net Zero Investor reported that Gucci has stopped working with Swiss company South Pole due to concerns about the quality of its carbon offsets, but the company has not officially confirmed this. Gucci only stated that it is reviewing its climate strategy and commitments to maximize overall impact.
Carbon offsets are a concern for businesses, potentially impacting developing countries.
As the voluntary carbon trading market shrinks, developing countries may be the first to bear the brunt.
Kenya will launch the world's largest voluntary carbon trading market in June 2023 to secure additional funding for climate change mitigation projects. Last year, Kenya experienced a severe drought that resulted in over $600 million in animal casualties. Kenya's Ministry of Investment, Trade and Industry stated that this event highlights the urgent need for global mitigation solutions to climate change disasters.
Africa held its first African Climate Summit in September, where significant carbon trading commitments were secured. However, Net Zero Investor notes that the circulation of these two reports among delegates casts a shadow over the outlook for the carbon market.
Stephen Donofrio, executive director of Ecosystem Markets, pointed out that the inconsistent quality of carbon offset programs has caused companies to hesitate and wait and see. They are waiting for clearer guidance on how to buy carbon offsets.
As early as the beginning of 2023, Ecosystem Market predicted that the voluntary carbon trading market might shrink in 2023, analyzing various factors. They called for transparent and open rules to ensure the quality of carbon offset credits, in order to restore public confidence in the carbon market.
References:
*Reuters (September 2, 2023), Carbon credit market confidence ebbs as big names retreat
*Ecosystem Marketplace (January 13, 2023), Rough winds do shake the darling buds of carbon markets
*Kenya’s Ministry of Investment, Trade and Industry, Launch of World’s Largest Voluntary Carbon Market and Kenya’s Leadership in Climate Action
*Net Zero Investor (May 9, 2023), ACS 2023: carbon credit retreats cast shadow over investor-focused climate summit
Source: Environmental Information Center
