The end of high hopes for the traditional VCM
With a contracting market and chronic oversupply the lack of SBTi endorsement is likely the final nail in the coffin for hopes of massive growth of traditional carbon credits.
I believe this week's SBTi reports1 spell the end of the high hopes for the traditional voluntary carbon market (VCM) of emission reduction and avoidance credits. The VCM has always been tiny, $2 billion annual revenue at most, smaller than a midsized multinational company. The whole fuzz has always been about possible future growth. After a contracting market since the 2021 peak and a chronic oversupply, the SBTi announcement is likely the final nail in the coffin for the hope of a large mass of new buyers emerging to meet that projected growth.
Carbon credits can be useful. They have a role to play within the beyond value chain mitigation (BVCM) framework making climate contributions. However, it is just one of several mechanisms to fund climate projects that won't happen by themselves. Grants and concessional loans are two other examples. BVCM is a good framework for companies wanting to take responsibility for their emissions, and it can grow to become a large source of climate finance. But is unlikely to put carbon credits on a massive growth trajectory. See this figure from our Gold Standard / Milkywire guidance on BVCM for how different funding mechanisms and claims function.
So much effort has been poured into "fixing" the VCM restoring trust after media and scientific reports on non-efficiency. Credits can deliver real benefits, but when used to fulfil targets, emission reduction credits only truly work between parties with targets in the same system. When countries with net zero targets trade with each other and make a corresponding adjustment it can be robust. In the same way, companies with SBTi-approved targets could theoretically trade emission reductions with each other, one company overachieving financed by selling reductions to another. (That has not been proposed as far as I know though.)
Domestic markets with trading between companies in the same country is a theoretical possible avenue for the growth of carbon credits with the right government incentives, but it wouldn't be "the VCM" as we know it anymore.
Durable carbon removal credits have a clear use case for corporates though, neutralizing remaining emissions to reach net zero, and will continue to grow. There is a problem incentivizing investments into CDR in the short term, but that would not have been fixed with laxer SBTi rules for the use of carbon credits. Cheap credits would have taken precedence over expensive CDR. Interim carbon removal credit targets is a more fruitful avenue to pursue for CDR.
What happens next? Some companies’ valuations will surely deflate as hope of massive growth dissipates. It’s the end of the VCM as it was perceived, but I would expect the traditional carbon credit sector to remain at around the same size as today (not counting CDR), or grow some if BVCM catches on. New innovations in carbon financing, and compliance instruments may rekindle expectations.
Carbon credit market actors and others have been calling on the Science-based target initiative to incentivize the use of carbon credits, allowing them in target fulfilment. Hope was raised with the SBTi board putting out a statement in April in this direction. A scandal ensued, the CEO of the SBTi resigned, and now they published two reports on Scope 3 target setting, and the use of carbon credits. The reports essentially reaffirm the previous position that credits won't be allowed to be used to meet targets (CDR to neutralize the last 10% is still allowed).