Carbon Markets set to continue growth as countries double down on climate ambition – IETA Survey

GENEVA, 21 June – Carbon markets around the world are set to continue growing rapidly as countries double down on climate ambition, and as corporates continue to pursue net-zero goals, finds IETA’s latest annual Market Sentiment Survey.

The growth is expected to extend to the Voluntary Carbon Market, where efforts are underway to scale up supply of offsets to meet growing global demand, according to the survey, carried out by PwC UK’s Sustainability and Climate Change team.

The full report is available at the IETA website.

Prices in the EU Emissions Trading System (ETS) have more than doubled since the beginning of March 2021, when Europe was beginning to emerge from the shadow of coronavirus. Prices in other carbon markets have also risen, though by smaller increments.

“Europe’s market has shown that carbon markets can be resilient to energy price shocks,” says IETA’s CEO and President Dirk Forrister. “The continued strength of the EU ETS throughout the Ukraine crisis demonstrates that climate ambition can be advanced in a way that reinforces energy security.”

“This year’s survey reveals bullish sentiment for carbon pricing globally, as price expectations hit record highs across all emission trading schemes surveyed,” says Ian Milborrow, PwC Partner.

“Carbon pricing initiatives – which already cover over one-fifth of global GHG emissions – represent a critical lever to deliver the emissions reductions required to keep warming to below 1.5°C.”

The conflict in Ukraine and the resulting concerns over energy security are likely to lead Europe to adopt more ambitious climate targets. Around half those surveyed this year said they expect Europe to strengthen its “Fit for 55” climate package and this, along with measures to cut Russian imports of fossil fuels and speed up the deployment of renewables, is expected to drive EU carbon prices to an average price of almost €100 in the period 2026-30.

Most respondents to the survey believe that the agreement reached at the climate talks in Glasgow last year is insufficient to achieve the global goal of net zero emissions by the middle of the century. 52% of survey respondents also say there has not been enough progress in translating commitments into action since COP26.

“At COP26, consensus was reached to finalise the Paris Rulebook. However, as the survey shows, stronger, more ambitious national commitments will be required to achieve the goals of the Paris Agreement,” Milborrow adds.

On voluntary markets, nearly three-quarters of respondents – up from two-thirds in 2021 – expect the market to partition between credits for carbon avoidance or reduction on one side, and carbon removals on the other by 2030. Most of those polled plan to use nature-based offsets in their market growth strategy.

“The voluntary carbon market has a critical role to play in directing private finance towards climate mitigation and nature-based projects. Improving the integrity and transparency of the market will be critical to guarantee its credibility and enable action at scale from the private sector,” says PwC UK’s Ian Milborrow.

More than 60% of respondents said the voluntary carbon market will be able to accommodate the growth in demand needed to meet net zero commitments.

“When the UNFCCC launched the Clean Development Mechanism in 1997, there was some doubt that demand would scale up to support the new system,” Forrister says. “That experience taught us that if we do build an ambitious mitigation framework, investment will come, and it will come to the VCM as well.”

The survey covers recent progress and expectations for compliance and voluntary markets across several geographies, as well as ahead of COP27.

Key findings from this year’s survey:

1. Increased optimism on carbon price expectations as climate ambitions ramp up. Expected prices for 2022-25 and 2026-30 have increased for every market surveyed, in comparison to last year’s survey.
2. Just 8% of respondents said the agreement reached in Glasgow at COP26 will be sufficient to achieve the goals of the Paris Agreement.
3. The largest share of respondents expect the Article 6.4 mechanism to become operational between 2024 and 2025, with another 31% predicting it will start operating between 2026 and 2028.
4. The US is still unlikely to implement a federal carbon price, despite the expectation that other jurisdictions will launch Carbon Border Adjustment Mechanisms.
5. Respondents were cautiously optimistic that the recent initiatives to streamline the voluntary carbon markets and enhance quality – such as the IC-VCM and VCMI – will bring greater transparency and standardisation.