What influences carbon offset pricing?

carbon credit price

The voluntary carbon market is extremely varied, both in terms of types of projects and in terms of carbon offset pricing. In this article, we dive into the drivers of these price variations.

If you’re reading this article, you’re probably quite far in your journey towards net zero: you’ve calculated your company’s CO2 emissions, taken measures to reduce your carbon footprint and are now looking to offset your remaining emissions.

You’ve learned how to purchase carbon offsets and are now comparing your options, and you’ve quickly realized there is a very wide range of prices for carbon credits. What’s the reason for this? Does a higher price signify higher quality? Is it risky to go for the cheapest credits? Don’t worry, we explain how everything works below.

Carbon credit supply and demand

The World Bank’s latest State and Trends of Carbon Pricing report reveals that carbon prices have risen sharply in the past year, and this is mostly due to increased demand as decarbonization efforts accelerate.

“For the first time, the total value of the voluntary carbon market exceeded more than US$1 billion in November 2021,” the report says. “This rapid increase in value reflects both rising prices and rising demand from corporate buyers leading to higher transacted volumes.”

According to the authors, global average carbon credit prices on the voluntary market moved from US$2.49/tCO2e in 2020 to US$3.82/tCO2e in 2021, and the volume of credits transacted in the voluntary market exceeded 362 million credits last year, 92% more than in 2020.

This growth in demand and upward price trend is attracting investors, who are starting to see carbon credits as an investment product that is set to bring high returns in the coming years.  

discover and buy carbon credits of different prices in a marketplace

Carbon mitigation project costs

The location and type of a carbon mitigation project influence the funding available to it, as well as its development costs. For instance, the Fairtrade minimum pricing model, developed in collaboration with Gold Standard, calculates a minimum price that ensures the average costs of the projects are covered, and these costs include:

  • investment in equipment and machinery
  • project costs like transport, monitoring, training, etc.
  • carbon verification and certification costs
  • a margin for the project to make a small benefit

The model also deducts any revenues (for instance from the sale of clean electricity) from the price. According to this, the Fairtrade minimum pricing for carbon mitigation projects is 8.20€ for energy efficiency projects, 8.10€ for renewable energy projects and 13€ for forest management projects.

Renewable energy v. nature-based carbon offsets

In our article What are ‘good’ or ‘bad’ carbon credits, we explained that one of the principles that determines the quality of a carbon offset is its additionality: whether the project would happen without the financing provided by carbon offsetting.

This principle is now leading many companies to move away from carbon credits generated by renewable energy projects, even though these are often the cheapest type of offset available. Private investment in solar or wind energy is now abundant, and the industry doesn’t need carbon finance to survive.

“A highlight this year is the increased interest in forest and land use-based credits. Carbon credit issuances from forestry and land-use projects increased 159% over the past year, accounting for more than a third of total credit issuances in 2021,” notes the World Bank report.

Carbon credit price transparency

While the variety of different prices in the voluntary carbon market can be overwhelming, the main thing to look for is transparency and traceability. In early May 2022, the Financial Times published an article denouncing the opacity of the carbon market. In its analysis, it discovered that the price offered by brokers could be double the actual price of carbon offsets when sold directly by the project.

This is why ClimateTrade offers a marketplace where project developers can set the price of their carbon credits and sell them directly to companies around the world. We base all our transactions on blockchain infrastructure, which means that data cannot be duplicated or manipulated. This guarantees the integrity of data and the traceability of carbon offsetting transactions.

How to buy carbon credits

Now that you know what drivers influence the price of carbon credits, read our guide on how to buy carbon credits to offset your footprint.

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