VCM Trends and the Rise of Carbon Removals

As the world struggles to make sufficient progress on the decarbonization needed to avoid the worst effects of climate change, the role of carbon markets has become inevitable.

Net zero commitments made in the early 2020s remain, and the private sector is moving further away from achieving these commitments. Regulators are taking notice and the pressure to deliver on these pledges will only ratchet up as we approach the end of the decade. As companies face increasing challenges in reducing emissions and navigating the complexity of their climate commitments, they either retreat – a position that we see as unlikely on mass – or they turn to market-based solutions to provide relief. Within this framework, carbon credits have become indispensable for industries striving to meet their decarbonization targets.

As carbon markets continue to evolve, there is a noticeable shift in focus, from a methodological perspective as well as demand, from emission avoidance to carbon removal efforts. This trend is partly driven by the need to prioritize removals that align with science-based targets, as outlined in the Oxford Principles for Net Zero Aligned Carbon Offsetting. Corporate preferences are following suit, favoring carbon removals over avoidance projects, at least from a vocal minority of market makers such as Microsoft, Meta, Stripe, Shopify, Google, and Apple. While these large corporates may skew the results, they are undeniably shaping the market narrative and setting future standards for a broader range of participants.

Currently, however, voluntary participation from large emitters in hard-to-abate sectors such as aviation, shipping, mining, power, and industry has remained limited. This is felt nowhere more than on the avoidance side of the market. As a result, prices for many emissions avoidance credits have reached all-time lows, as evident from industry benchmarks such as CBL’s GEO, N-GEO, and C-GEO contracts across both spot and CME futures markets, culminating in the recent announcement of the delisting of CBL’s Core Global Emissions Offset (C-GEO) futures contract on CME. We believe that this reflects a changing market dynamic where removal projects are becoming increasingly valued​. We term this the carbon zeitgeist.

In the first half of 2024, 85.2 million offsets were retired within the voluntary carbon market (VCM), marking an 8% year-over-year increase from the same period in 2023 and setting a new six-month record for retirements. While avoidance credits continue to make up the majority of these retirements due to widespread availability, their retirements saw a 14% year-over-year decline at the start of Q3 2024. In contrast, the retirement of removal credits is on the rise, driven by growing demand for carbon removal solutions. In 2023, 19 million removal credits were retired, a record high that has continued into 2024. In Q2 2024 alone, 2.1 million removal credits were retired, a 90% year-over-year increase and another record. Afforestation, Reforestation, and Revegetation (ARR) projects are the leading contributors to removal credits, with Microsoft emerging as the largest user during the quarter. Despite these gains, removal projects still represent only a small fraction of the overall market.

As demand for these credits continues to rise, their availability is expected to become increasingly constrained, driven by several key factors. Regulatory shifts are making it more challenging to generate carbon credits. For instance, the 2019 revision of the Verified Carbon Standard excluded new renewable energy projects from earning credits in all but the least developed countries, tightening the market supply. Additionally, as certain technologies mature, some projects may no longer qualify for carbon credits, further restricting supply. Moreover, nature-based solutions such as ARR, while increasing in demand and commanding price premiums, require significant time and resources to scale up and deliver measurable outcomes. These projects demand substantial investment, community involvement, and years of monitoring, all of which contribute to supply constraints. Compounding these challenges, the supply of high-quality carbon removal and storage solutions remains insufficient to meet both current and future demand. Developers may also withhold credit issuances due to lower market prices, especially for removal methods considered low risk, such as afforestation or certain types of carbon sequestration, which are less likely to be reversed (i.e., the carbon stored is less likely to be released back into the atmosphere). These low-risk methods are in high demand because they offer more stable and reliable long-term carbon storage, but when market prices are low, developers might choose to hold back issuing credits to avoid selling them at undervalued rates, further exacerbating the supply-demand imbalance.

The market now stands at an inflection point as buyer preferences shift away from the lowest hanging fruit – emissions avoidance – and move toward higher-value carbon removals. This transition will be compounded by tightening supply, regulatory changes, and compliance market convergence, further increasing inflationary pressures. Looking ahead, our forecast for the 2030s is clear: carbon prices are set for substantial growth. We anticipate that demand in the VCM could outstrip supply as early as 2028, pushing prices significantly higher, particularly for removal credits. For companies and investors, this presents both an opportunity and a challenge. Those who adapt to the changing dynamics of the carbon market stand to benefit from cost savings by taking early action, securing carbon credits at lower prices than they might face in the future. Conversely, those who delay may encounter rising costs and diminishing access to the carbon credits necessary for compliance and sustainability goals.