Carbon market remains optimistic on pricing and political outlook, annual survey finds

BILBAO, 24 May – Carbon market participants are optimistic that ambitious reforms will continue to drive compliance market prices higher in the coming years, while voluntary carbon stakeholders are confident that the market will grow to meet increasing demand for carbon reductions, according to IETA and PwC’s 18th annual GHG Market Sentiment Survey.

Despite the political turmoil of the last year and the macroeconomic uncertainty, respondents in the annual survey remain optimistic that prices for carbon permits will continue to rise steadily in the long term, though the poll revealed a slight moderation in the pace of the increase compared to last year’s expectations.

Nearly three-quarters of those who expressed an opinion said the voluntary market is well-placed to meet rapidly rising demand from companies seeking to drive emissions down, as the market strives to enhance quality and oversight of projects.

The annual survey among IETA members has been undertaken by PwC and IETA every year since 2005. This year’s poll was carried out in April and received responses from 187 members.

Allowance prices

European respondents expect EU Allowance (EUA) prices to average €84.40 between 2023 and 2025, compared to a current price of €85.50. This represents a 1.2% decrease in the predicted price to 2025 from last year’s survey.

California carbon allowance (CCA) prices are predicted to average €39.23 between 2023 and 2025, a drop of 10.3% from last year’s result, while values for RGA permits in the northeastern RGGI market are forecast to average €32.20, a decline of 18% from the 2022 survey’s forecast.

Prices in the UK ETS are expected to average €79.22 over the next two years, compared to €85.65 in last year’s poll. New Zealand participants predicted NZU prices will average €45.00, down from €51.43 a year ago.

Despite drops in short-term price expectations, the survey reflected expectations that prices will be higher in the period from 2026 to 2030, with EUAs forecast to average €100, CCAs at €51.54 and RGAs at €45.83.

“The results of the survey underline the resilience of the carbon markets, in particular compliance markets, to the economic and geopolitical shocks that it has experienced over the last 20 years,” said Dirk Forrister, CEO and President of IETA.

“The findings demonstrate how market sentiment responds to political will, and that our members remain confident that carbon pricing mechanisms will grow in importance and spread to more parts of the world,” Forrister added.

“This year’s survey highlights the optimistic outlook for global carbon markets, with a consensus that prices will continue to rise across all emissions trading schemes surveyed,” said Ian Milborrow, sustainability partner at PwC UK.

“While there is some caution regarding the extent of expected price increases in the short to medium term, carbon pricing initiatives will play a critical role in mitigating climate change and keeping global warming below 1.5 degrees Celsius,” he added.

For the first time this year, IETA and PwC sought price forecasts for Australian Carbon Credit Units (ACCUs), and the survey predicted prices will average €43.08 in the next two years, and €55.83 between 2026 and 2030.

Respondents felt that regulators are likely to continue ramping up the ambition of their carbon pricing systems, with the EU expected to lead the way when co-legislators begin the task of setting the bloc’s 2040 emissions goals later this year. Nearly half of respondents anticipate that the EU will set a reduction target of 75% or more.

Similarly, more than two-thirds of respondents expected lawmakers in California to extend the state’s carbon market beyond 2030, while there remains some uncertainty over what target RGGI states will adopt for the market’s next phase.

New markets have emerged in the past year in Washington state, while New York’s governor recently announced the creation of a state-wide cap-and-invest system. Nearly half the survey respondents expect the New York market to begin by 2025.

Voluntary market

There has also been a decline in carbon offset price expectations compared to last year’s survey. Respondents this year said they expect prices for standardised N-GEO contracts to average €20.00 between 2023 and 2025, compared to a forecast of €33.36 in last year’s survey.

The survey found that 71% of respondents are confident that the market will be able to scale up supply sufficiently to meet growing demand, compared to 66% in last year’s poll.

Most of those questioned said they plan to use nature-based removal credits in their offsetting strategy, especially afforestation, soil carbon and sequestration and biochar.

Almost three-quarters (72%) of those polled said they expect the carbon offset credit to bifurcate into two classes for reduction/avoidance credits and carbon removal credits. The share of respondents predicting this shift has risen steadily in the last three years.

The work of the Integrity Council for the Voluntary Carbon Market (IC-VCM) was welcomed by many of those surveyed. A third said that the IC-VCM’s launch of the Core Carbon Principles (CCPs) will improve the integrity of voluntary carbon offsets.

“The voluntary carbon market has experienced a challenging period, but the work of organisations like the IC-VCM is only just beginning,” said Andrea Abrahams, managing director of voluntary markets at IETA.

“Stakeholders are fully committed to improving the integrity and reliability of carbon offsets so that the global community can confidently undertake decarbonisation plans knowing that they will be acquiring permanent, verified emission reductions,” Abrahams added.

“Ongoing reforms are likely to significantly alter the shape of the sector, this year’s survey has shown that the voluntary market is well-placed to adapt and continue playing a crucial role in channelling finance towards climate action,” said PwC’s Milborrow.

“As demand for carbon credits continues to grow, improving the integrity of the market will be critical to ensuring its long-term credibility and enable continued support from the private sector.”

The advent of the UNFCCC’s Article 6 markets remains a source of some uncertainty, the survey found, particularly when it comes to aligning the voluntary market with the new UN system. 21% of respondents said integrity and credibility issues around carbon offsets would present challenges, while 20% also highlighted the potential for political risk and a lack of government support.

The survey’s findings can be found on the IETA website.