VCM requires stricter definitions to counter oversupply

The global voluntary carbon market (VCM) remains more than four times oversupplied, but demand is likely to increase sharply when stricter definitions on credit attributes materialise, delegates heard at a series of panels at the UN Cop 26 climate conference.

Around 130mn t of CO2 equivalent (CO2e) of credits have been retired in the global VCM so far this year, 380mn t CO2e have been issued, and — including legacy credits issued prior to 2021 — there is around a 580mn t CO2e market surplus, according to a panel discussion at Cop 26 today.

While interest has risen sharply over the past year, demand remains hampered by a lack of strict definitions for voluntary carbon credits, in particular which credits are considered "high integrity" based on their environmental attributes. Corporate customers remain unclear on what claims they are able to make for each credit, as well as which credits will be eligible for offset schemes in the future, and this is deterring long-term trade in the VCM. More clarity is expected to emerge on the definition of high integrity credits in the next 6-12 months, a panel at Cop 26 suggested today.

Global carbon trade is also expected to get a boost if a formulation of Article 6 of the 2015 Paris climate agreement is adopted internationally. Physical carbon trade — including compliance and voluntary markets — is expected to grow from 2.9bn t CO2e in 2025 to 3.85bn t in 2040 but then fall off to 3.65bn t in 2045, according to a presentation at Cop 26 by Sha Yu, senior scientist at the Pacific Northwest National Laboratory. But financial carbon trade is expected to continue to grow for a further five years, from $160bn in 2025 to $1.1 trillion in 2045, before dropping to $1.05 trillion in 2050.

These projections assume adoption of Article 6 in some format. Article 6 paragraphs are being revised as discussions progress at Cop 26, with emissions trading association Ieta considering its adoption crucial to achieve international net zero targets.

By Justin Colley