Carbon Price Outlook 2024

Carbon credits are increasingly recognized as indispensable tools for organizations striving to reach net-zero emissions. With escalating pressures from various stakeholders to address climate change, businesses, particularly those in emissions-heavy industries, are challenged to set and meet substantial decarbonization goals. Carbon credits offer these businesses the means to commit to immediate emissions reductions through offsets while strategizing for future reductions via business model adaptations and asset turnover. In the context of emissions that are costly or difficult to diminish, carbon credits become particularly valuable, providing businesses not only with operational flexibility but also with considerable cost efficiencies. The strategic use of these credits should be tailored to the specific circumstances and goals of each business.

The carbon credit market is poised for a significant shift, with prices anticipated to climb to a central estimate of $80-$150 per tonne by 2035, a stark increase from the current $25 per tonne. This projection is based on various scenarios extending to 2050, taking into account the growing demand, the push for higher quality credits, and the escalating costs of supply as inexpensive sources are depleted. The demand for carbon credits is expected to multiply dramatically, in line with the aims of the Paris Agreement, which will, in turn, propel supply costs upward. Prices at the higher end of the spectrum reflect a more aggressive global mitigation effort and slower technological cost reductions or more substantial market frictions. The trajectory of carbon credit prices is a direct indicator of the global commitment to combating climate change and will likely spur corporations to pursue more costly internal abatement measures more vigorously.

As markets evolve, policy changes and technological cost shifts will affect the baselines for offset projects, leading to a greater emphasis on credits based on carbon removal rather than avoidance. Currently, avoidance-based credits dominate, but the need for atmospheric carbon removal to meet the 1.5C global warming limit calls for new, scalable technologies for carbon capture, the costs and impacts of which are yet to be fully understood. Stricter national emissions regulations, particularly in developed nations, will reduce opportunities for voluntary carbon commitments and focus on the additional benefits of credits as a distinguishing feature among businesses. After 2035, the need for high-integrity carbon credits to meet regulatory requirements will rise, presenting new challenges in registry operations to prevent credit duplication and maintain system integrity.

Finally, business leaders who proactively engage with these shifting dynamics are more likely to navigate a successful transition. The push for efficient markets for high-quality carbon credits is strong, linking numerous registries within a global framework. As businesses confront the increased scarcity and cost of carbon credits, leaders must craft clear decarbonization strategies that leverage the value of credits to maintain viable and dynamic operations in an ever-changing environment. The report suggests that businesses should be proactive and adapt to these changes, considering specific strategies to position themselves advantageously amidst the upcoming disruptive shifts.

1. Introduction

In the contemporary landscape of climate action, carbon pricing emerges as a pivotal mechanism, instrumental in the global endeavor to mitigate climate change. The year 2023 stands as a testament to the dynamic and ever-evolving nature of carbon markets, reflecting a confluence of economic, political, and environmental factors. These markets, integral to driving emissions reduction and fostering sustainable practices, exhibit a complex interplay of forces shaping their trajectory. This article delves into the multifaceted realm of carbon pricing in 2023, aiming to unravel the trends, forecasts, and implications inherent in these critical market mechanisms. As we navigate through various reports and analyses, including the World Bank's comprehensive review and other key sources, we gain insights into the intricacies of carbon pricing and its crucial role in steering global climate strategies.

2. State and Trends of Carbon Pricing in 2023

The World Bank's "State and Trends of Carbon Pricing 2023" stands as a cornerstone report in understanding the current status of global carbon pricing mechanisms. This year, the report reveals a notable milestone: revenues from carbon taxes and Emissions Trading Systems (ETS) have soared to an unprecedented high, approximating $95 billion. This remarkable figure signifies the growing importance and efficacy of carbon pricing as a tool in the global fight against climate change.

A striking revelation of the report is the expanded coverage of carbon pricing instruments, now encompassing nearly a quarter of global greenhouse gas emissions. This wide-ranging impact underscores the increasing adoption and effectiveness of these mechanisms in curbing emissions on a global scale. The report catalogs a diverse array of 73 different instruments employed worldwide, illustrating the varied approaches nations are adopting to integrate carbon pricing into their environmental strategies.

The report also sheds light on the geographical spread and evolution of these instruments. While emerging economies are progressively embracing ETS and carbon taxes, high-income countries continue to lead in their implementation. This global distribution reflects the varying economic and environmental priorities across different regions. Notably, the report highlights significant new implementations in Austria, Indonesia, and parts of the United States and Mexico, each tailored to the specific environmental and economic contexts of these regions.

Furthermore, the report points to a significant development in Australia, which is scheduled to recommence carbon pricing with a rate-based ETS starting in July 2023. This move marks a renewed commitment to carbon pricing strategies in the pursuit of emissions reduction goals.

In summary, the World Bank's report paints a comprehensive picture of the state and trends of carbon pricing in 2023. It not only reflects the growing global consensus on the necessity of carbon pricing in climate action but also indicates the evolving nature of these mechanisms in response to global economic and environmental challenges.

3. Differentiating Voluntary and Compliance Carbon Markets

The carbon market is bifurcated into two primary segments: voluntary and compliance markets, each with distinct characteristics and roles. Voluntary carbon markets are where entities voluntarily purchase carbon credits to offset their emissions. These markets are driven by corporate social responsibility initiatives and are not regulated by mandatory climate policies. In contrast, the compliance carbon markets are part of regulatory systems where governments or international bodies mandate emission reductions. Entities in these markets must obtain sufficient credits to comply with legal caps on their emissions.

The voluntary market in 2023 has seen a slight dip in average credit prices, now at $6.97 per ton, with nature-based solutions driving much of the market's value. Despite this decrease, the overall value of the Voluntary Carbon Market (VCM) has remained steady, close to $2 billion in 2022. These trends reflect a growing awareness and adoption of environmental responsibility practices in the corporate sector.

4. Carbon Market Price Forecasts

In the realm of compliance carbon markets, a 2023 survey by IETA and PwC reveals nuanced expectations. Participants forecast a short-term decline in carbon prices, followed by a robust recovery in the latter half of the decade. European markets, for instance, are predicted to see EU Allowance prices averaging €84.40 between 2023 and 2025. This projection represents a modest decrease from the current rates, signaling a period of adjustment in response to evolving regulatory and market conditions. Similarly, the California carbon allowance and RGGI permits in the northeastern U.S. are anticipated to experience price shifts. The underlying sentiment, despite these short-term fluctuations, is one of optimism, with reforms expected to invigorate compliance market prices and catalyze growth in the voluntary carbon market【26†source】【27†source】【28†source】.

The provided graph projects the outlook for carbon credit prices from 2020 to 2050, illustrating a trend of increasing scarcity and cost driven by heightened demand, expectations for higher quality, and rising supply costs. Here is a more detailed narrative based on the graph and the associated reports:

• Current Baseline: As of now, the price of carbon credits stands at approximately US$25 per tonne of CO2 equivalent (t-CO2e).
• Projected Price Range by 2035: It is estimated that prices could rise to a central estimate of US$80-150 per t-CO2e by 2035, in real 2020 dollars. This central estimate factors in different scenarios, including the potential for faster technological cost reductions or varying levels of global abatement ambition.
• Expected Growth in Credit Volume: The global volume of required carbon credits is anticipated to increase by at least 20 times by 2035, with a 30 to 40-fold increase from current levels in scenarios aligned with the Paris Agreement. Post-2035, this growth rate is expected to moderate.
• Scenarios for 2050:
• Nature-enabled Net Zero: Suggests carbon credit prices might lie between US$150-200 per t-CO2e.
• Tech-enabled Net Zero Below 2°C: Indicates a similar price trajectory to the Nature-enabled scenario but is contingent on technological advancements keeping global warming below 2°C.
• Announced Plans: Represents a trajectory based on current commitments, which may result in temperatures rising well above 2°C, potentially influencing credit prices differently.
• Price Implications: Higher carbon credit prices reflect society’s willingness to engage in climate action. They are likely to incentivize companies to pursue more costly internal abatement measures, thereby accelerating the pace of emission reductions.

To encapsulate this information into a table format, we can delineate the expected price ranges for carbon credits under different scenarios and years:

These ranges provide a strategic forecast that can inform decision-making and future planning for companies like Changeblock, which may be engaging in the carbon credit market or considering the financial implications of carbon offsetting as part of their climate action initiatives.

5. Global Energy Outlook and Carbon Pricing

The 2023 "World Energy Outlook" report by the International Energy Agency (IEA) provides pivotal insights into the intersection of global energy trends and carbon pricing. The report suggests that the aftermath of the global energy crisis might be accelerating the end of the fossil fuel era. This transition is underpinned by a surge in investments in clean energy technologies, notably in solar PV and electric vehicles. Such shifts are vital for global efforts to limit warming to 1.5 °C. The IEA's analysis underscores the significant role of evolving energy dynamics in shaping the carbon pricing landscape, particularly as traditional energy sources reach their peak before 2030. This evolving energy scenario is expected to have profound implications on both voluntary and compliance carbon markets, as they adapt to these global changes.

6. Long-Term Carbon Offsets Outlook

The "Long-Term Carbon Offsets Outlook 2023" report by Bloomberg via Yahoo Finance projects a significant expansion of the carbon offset market, potentially reaching a valuation of half a trillion dollars annually by 2050. This growth is anticipated as demand for carbon dioxide equivalent offsets is expected to rise into the billions of tons over the next decade. The report outlines three distinct scenarios for the future of carbon offset prices: a voluntary market scenario, a removal scenario focusing exclusively on carbon removal offsets, and a bifurcation scenario leading to two separate markets with varying price trajectories. In the voluntary market scenario, a wide variety of offset types could lead to lower prices, whereas the removal scenario predicts higher prices due to a focus on carbon removal offsets. The bifurcation scenario suggests a split in the market, resulting in different pricing structures for high-quality offsets versus others. These forecasts highlight the evolving complexity of the carbon offset market and its potential impact on global climate action strategies.

8. Advanced Forecasting in Carbon Pricing: Insights from a Recent Study

The study "Carbon Prices Forecasting Using Group Information" published in Energy RESEARCH LETTERS marks a significant advancement in the field of carbon price forecasting. This research adopts a high-dimensional model approach, utilizing 44 macroeconomic variables encompassing energy commodities, financial markets, and economic activities. The methodology involves sophisticated statistical models such as ARMAX, GARCHX, LASSO, Adaptive LASSO, Group SCAD, and Group LASSO, offering a comprehensive and nuanced analysis of EU carbon futures price returns.

A key finding of this study is the superior performance of high-dimensional models, particularly those incorporating group structure variables, over traditional time-series models. This enhanced accuracy is evident in both six-month and twelve-month carbon price forecasts, suggesting a notable improvement in predictive capabilities【14†source】【15†source】. These insights have profound implications for policymakers and investors. They underscore the importance of integrating a diverse array of macroeconomic factors into carbon price prediction strategies, which is essential for formulating effective intervention policies and diversifying investment portfolios.

In essence, the study signifies a pivotal shift towards greater precision in carbon price forecasting. By leveraging complex statistical models and a broad spectrum of economic indicators, it provides invaluable guidance for decision-making processes in the environmental finance sector, offering a more reliable foundation for strategic planning and policy development in the context of climate action.

7. Conclusion

In conclusion, the carbon market in 2023 represents a dynamic and transitional phase, characterized by both challenges and opportunities. The insights from various reputable sources, including the World Bank, IETA, PwC, IEA, and Bloomberg, provide a comprehensive view of the current state and future expectations of carbon pricing. These analyses reveal an intricate interplay of economic, political, and environmental factors globally, forecasting a strong growth trajectory for carbon markets, especially from 2026 onwards. For strategic planning and decision-making in the realm of climate action and environmental finance, understanding these trends and forecasts is crucial. The current landscape suggests that carbon markets will continue to evolve, reflecting the global commitment to reducing emissions and mitigating climate change.