The Emergence of the Carbon Credit Market

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The Demand Side
Damaging emissions are primarily caused by the use of fossil fuels, which account for three-quarters of global greenhouse gas emissions. The full cost of which has historically not been internalised in the markets for those goods and services. To account for these ignored costs Carbon Pricing has been introduced in both the forms of direct taxes and a marketplace for allowances to emit carbon.
The demand for credits was firstly focused on emission reduction activities to achieve the Paris Agreement goals. We are experiencing a shift of demand as companies tighten their CSR (Corporate Social Responsibilities) policies, including strategies to offset through carbon credits. Individuals are also more enlightened and wish to address their own carbon footprints, and demand as consumers that companies supplying them goods and services do the same.
The markets are divided between Compliance/Regulatory and Voluntary.
The revision of Nationally Determined Contributions (NDCs) every year gives regulatory markets the opportunity to improve their methods of monitoring and accounting for carbon emissions, thereby facilitating the trade of these credits.
The current market for voluntary credits is dwarfed by the compliance carbon markets and prices for voluntary credits remain at a comparatively low level, despite recent growth. Over the past years voluntary crediting mechanisms have gained pace, are growing and there is expectation that the voluntary carbon credits will play an increasingly important role in the transition to carbon neutrality.
Prices of carbon credits are currently low, due to an excess of supply built up over several years, together with issues over whether payments for credits really result in additional reductions in carbon emissions.
Demand for carbon credits is expected to increase exponentially over the next decade as more companies adopt Net Zero climate commitments. Examples of this are CORSIA in the aviation sector and large companies signing up to ‘The Climate Ambition Alliance’s’ “Race to Zero'' campaign. This growth in demand set against a nascent carbon removal supply will drive carbon credit prices upwards in turn financing investment in more projects that take carbon out of the atmosphere in the long-term.
The emissions reduction market is focused on driving the world to Carbon Neutrality. JustCarbon
believes that to achieve safe levels of atmospheric CO2 at c.350ppm in excess of 1000Gt CO2 must be permanently removed. The market for this removal of historic emissions dwarfs the emissions reduction market.
The Supply Side
The supply side is highly decentralized. Developing projects and navigating the crediting process is cumbersome, costly and lacks the fluidity required of a market to respond to substantially increased future demand.
Users of the market need to have confidence that the carbon component is standardised, fungible and divisible along with the prerequisites of any market that allows transactions and settlement at scale combined with ability to store and track, and all at a low cost of use.
Carbon market prices are rising in response to increased legislation and regulation. 2021 saw EU Emission Trading Scheme (ETS) prices exceed €80/mt[19] in response to the EU strengthened targets. The UK ETS opened trading at over £50/mt[20] following ambitious announcements and almost broke the £80/mt barrier in 2021. The International Monetary Fund (IMF) has calculated a carbon price floor of $75 per tonne is needed to meet climate ambitions[21]. Carbon prices sustained at or above this level will provide the base for significant investment into, and introduction of, new technologies particularly those that address CDR at scale.
Technologies that can achieve carbon removal fall broadly into three categories; Nature Based Solutions, Enhanced Natural Processes and Technology solutions.
The popularity of independent crediting mechanisms in the voluntary sector has resulted in a shift towards more nature-based solutions.
Nature Based Solutions include established Afforestation and Reforestation and REDD+ (Reduced Emissions from Deforestation and Degradation). Scale constraints determine that terrestrial based solutions can only be part of the solution.
The ocean’s role in carbon sequestration (Blue Carbon) is gaining increasing attention as a highly efficient and scalable carbon removal and storage solution. This includes conservation of existing, and rewilding marine and coastal ecosystems.
The nature-based Carbon Credit market (predominantly sequestration and storage of carbon in trees) is established and utilised by regulatory and voluntary carbon markets to address the emission reduction requirements.
In the voluntary markets investment in Blue Carbon projects has begun and although nascent is growing exponentially. This growth is supported by Verra announcing in September 2020 the first Blue Carbon conservation methodology approved for any major standards body, which adds Blue Carbon conservation and restoration activities as eligible Verified Carbon Standard (VCS) REDD+ projects, enabling Blue Carbon activities to access additional sources of finance through the sale of carbon credits in voluntary or compliance markets.
Technology solutions include Direct Air Capture (DAC) whereby CO2 is captured via chemical reactions. The captured CO2 can be injected underground for permanent storage in certain geologic formations or used in various products and applications. The advantages are its scalability, siting advantages and that it uses a fraction of the land requirement of Green Carbon solutions. Challenges include the costs, DAC is expensive due to CO2 being very dilute at 415ppm[22], which requires lots of energy to separate out. Presently DAC schemes are costing between $250 and $600/CO2e[23], significantly higher than present market pricing levels.
Evolution of the Market
JustCarbon has anticipated the natural evolution of the carbon market by utilizing modern techniques like blockchain and distributed ledger technologies to the market. Further, due to the success of the digital coin market, the JustCarbon market is built on a platform that not only complies with the newly emerging regulated market but will also respond to changes in the carbon market as it matures.
The potential upsides of this include:
Scalability
Efficiency
Lowered costs
Accessibility to Project Developers (also known as Sellers, or Issuers)
Conversely, accessibility to buyers
Evolving the Carbon Market from a Cottage Industry to an Investment Grade Market
The Design of JustCarbon
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Outline
The Demand Side
The Supply Side
Evolution of the Market