Carbon Credit Market

The global carbon credit market will rise at a significant pace of 30.5% CAGR during the assessment period 2023 - 2030, reaching an estimated market value of US$2 Tn by the end of projection year.

Market Analysis in Brief

A number of reasons, including the implementation of governmental policies and legislation to decrease greenhouse gas emissions, have contributed to the rise in demand for carbon credits in recent years. Companies subject to these regulations may need to purchase carbon credits to offset emissions and comply with the rules. In India, the Energy Conservation Bill 2022 was passed in December, paving the way for establishing carbon credit markets. The increasing demand for carbon credits is driven by companies' growing recognition of sustainability's importance and commitment to reducing their carbon footprint as part of their corporate social responsibility initiatives. This sustained demand for carbon credits results from companies' efforts to offset emissions and contribute to environmental conservation.

Furthermore, the growing concerns about climate change and its potential impacts in the future have also contributed to the increased demand for carbon credits. Despite the rising demand, the market faces challenges, with one of the major issues being the price volatility of carbon credits. Overcoming this challenge is essential to ensure the continued effectiveness and success of carbon credit markets in promoting sustainable practices, thereby combating climate change.

Key Report Findings

• The market for carbon credits (both compliance and voluntary) will demonstrate more massive expansion in revenue through the period of market examination, i.e., between 2023 and 2030.
• The power end-use sector attained the largest market share in the carbon credit market with substantial energy consumption and emission footprint.
• The compliance type secured the largest market share in the carbon credit market due to mandatory regulatory adherence.
• Europe will continue to lead, whereas Asia Pacific's carbon credit market will experience the strongest growth until 2030.

Growth Drivers

Growing Awareness About Climate Change

For several reasons, growing awareness of climate change is a significant driver of the carbon credit market. As people become more informed about the consequences of global warming and the urgent need to reduce greenhouse gas emissions, there is increasing societal and political pressure on businesses and governments to take meaningful action. This heightened awareness has led to the implementation of stricter environmental regulations and policies, which, in turn, have created a demand for carbon credits.

Companies seek ways to offset their carbon emissions and demonstrate their commitment to sustainability to align with public expectations and meet regulatory requirements. Moreover, individuals and businesses are more inclined to make environmentally responsible choices. Consumers increasingly favor eco-friendly products and services, and companies strive to adopt greener practices to appeal to this growing market segment. As part of their corporate social responsibility initiatives, businesses invest in carbon credits to offset their carbon footprints and demonstrate their dedication to combatting climate change. This increasing demand for carbon credits is likely to incentivize more organisations to participate in carbon offset projects, thereby driving the growth of the carbon credit market.

The growing awareness of climate change has also prompted investors and financial institutions to consider sustainability when making investment decisions. There is a rising trend of environmental, social, and governance (ESG) investing, with many investors considering a company's carbon emissions and commitment to sustainability. As companies strive to improve their ESG ratings, they are motivated to invest in carbon credits and other climate solutions to enhance their environmental performance. This growing demand from the financial sector further expands the carbon credit market as more capital flows into carbon offset projects.

In conclusion, the growing awareness of climate change profoundly impacts the carbon credit market. It drives demand from consumers and businesses to make environmentally responsible choices and align with stricter regulations. Additionally, the increasing focus on ESG investing encourages companies to invest in carbon credits to improve their sustainability profiles. As public awareness continues to grow, the demand for carbon credits is expected to rise, making them a vital tool in the global efforts to combat climate change and transition to a more sustainable future.

Stringent Government Regulations and Policies

For several reasons, government regulations and policies play a crucial role in driving the carbon credit market. Many nations have put in place carbon pricing mechanisms such as carbon taxes or cap-and-trade programmes, which put a price on carbon emissions, in order to achieve these objectives. Companies who must abide by these restrictions must either cut back on emissions or buy carbon credits to make up for their carbon impact. Business compliance with the required emission reduction objectives results in a demand for carbon credits, which fuels the market's expansion.

Moreover, governments are setting ambitious emission reduction targets and committing to international agreements like the Paris Agreement. To meet these targets, governments often support and incentivize carbon offset projects, encouraging investments in renewable energy, reforestation, and other sustainable initiatives. Incentives governments provide such as tax breaks or grants for carbon offset projects, further, fuel the demand for carbon credits.

Furthermore, government policies encouraging sustainable practices and environmental stewardship stimulate demand for carbon credits. Businesses are increasingly under pressure from consumers, investors, and stakeholders to demonstrate their commitment to sustainability. By investing in carbon credits and participating in carbon offset projects, companies can showcase their efforts to mitigate their environmental impact and enhance their corporate social responsibility image. Government support for sustainability initiatives and carbon offsetting fosters a favorable environment for businesses to engage in the carbon credit market, promoting environmental protection and economic growth.

Government regulations and policies drive the carbon credit market. Implementing carbon pricing mechanisms, emission reduction targets, and support for carbon offset projects create a demand for carbon credits as companies seek compliance and demonstrate their commitment to sustainability. By providing incentives and fostering a supportive environment for sustainable practices, governments contribute significantly to the growth and effectiveness of the carbon credit market in combatting climate change and promoting a more sustainable future.

Growth Challenges

Varying Prices of Carbon Credits

The varying prices of carbon credits pose significant challenges to the market. The market operates on the principle of supply and demand, and as the demand for carbon credits fluctuates, so do their prices. The volatility in carbon credit prices can make it challenging for companies to plan and budget for their emissions reduction strategies effectively. Sharp price fluctuations may lead to business uncertainty and hinder long-term investment decisions in carbon offset projects.

Moreover, unpredictable carbon credit prices can affect the financial incentive for companies to invest in emissions reduction initiatives. If the price of carbon credits is too low, it may not motivate companies to adopt sustainable practices or invest in carbon offset projects. Conversely, if the price of carbon credits is too high, it could increase costs for businesses, potentially impacting their competitiveness in the market.

This price uncertainty can deter companies from actively participating in the carbon credit market, limiting the overall effectiveness of carbon offsetting efforts. Furthermore, varying prices of carbon credits can create challenges for carbon credit project developers.

Price fluctuations may impact the financial viability, and profitability of carbon offset projects, making it difficult for developers to secure funding or attract investors. This, in turn, can hinder the growth of the carbon credit market as fewer projects are initiated or completed. The market must establish stability and predictability in carbon credit prices to ensure the continued growth and success of carbon offset projects and encourage greater participation from buyers and sellers. Addressing these challenges requires stabilising carbon credit prices and creating a more predictable market environment.

Governments and regulatory authorities can play a pivotal role in establishing price management mechanisms such as introducing price floors or ceilings to limit extreme price fluctuations. Additionally, creating market incentives and long-term agreements can provide stability and encourage greater participation in the carbon credit market. By fostering a more predictable pricing environment, the carbon credit market can become a more effective tool in driving emissions reductions and combatting climate change.

Overview of Key Segments

Compliance Type Segment Captures the Largest Market Share

The compliance type segment captured the largest market share in the carbon credit market in 2022, for several compelling reasons. One of the key factors is the increasing number of government-led regulatory frameworks and emission reduction targets worldwide. Many countries have implemented cap-and-trade systems or carbon pricing mechanisms that require companies to comply with emission limits or purchase carbon credits to offset their excess emissions. This has created a significant demand for compliance-type carbon credits as companies seek to meet regulatory obligations and avoid penalties.

Moreover, compliance-type carbon credits offer a more secure and reliable market than voluntary carbon credits. Compliance markets are often backed by government policies and regulations, providing a stable and predictable demand for carbon credits. This predictability makes compliance-type credits a preferred choice for companies seeking a long-term and legally recognised solution for meeting their emission reduction targets. Compliance credits typically have higher market liquidity and are more widely accepted internationally, further driving their market share.

Furthermore, the growing global focus on climate change and sustainability has increased the importance of environmental responsibility for businesses. Many companies voluntarily commit to carbon neutrality or net-zero emission targets as part of their corporate sustainability strategies. Compliance-type carbon credits provide a credible and transparent means for companies to demonstrate their commitment to carbon footprint management and meeting their environmental goals. As the emphasis on sustainability continues to rise, the demand for compliance-type carbon credits is expected to remain strong, solidifying their position as the largest segment in the carbon credit market.

To conclude, the compliance type segment has captured the largest market share in the carbon credit market due to the prevalence of government-led regulatory frameworks and emission reduction targets. The secure and reliable nature of compliance-type credits and their wider acceptance and credibility in the international market make them a preferred choice for companies seeking to meet their emission reduction obligations. As businesses increasingly prioritise environmental responsibility and sustainability, the demand for compliance-type carbon credits will continue growing, reinforcing their dominant position in the carbon credit market.

Power Industry Remains the Top End-use Category

The power segment captured the largest market share in the carbon credit market for several compelling reasons. One of the primary factors is the significant contribution of the power sector to global greenhouse gas emissions. Power generation from fossil fuels is a major source of carbon dioxide emissions, and governments worldwide have implemented stringent regulations and targets to reduce emissions from the power industry. As a result, power companies must either reduce their emissions or purchase carbon credits to offset their carbon footprint, driving a substantial demand for carbon credits in the power segment.

Moreover, the power sector is significantly transforming towards cleaner and more sustainable energy sources. Many power companies invest in renewable energy projects such as wind, solar, and hydropower to reduce their reliance on fossil fuels and lower carbon emissions.

However, during this transition period, some power companies may still have significant carbon emissions from their existing fossil fuel-based power plants. Purchasing carbon credits allows these companies to achieve their emission reduction targets while continuing to operate their conventional power plants, facilitating a smoother transition to cleaner energy sources.

Furthermore, the power sector's large-scale operations and centralised nature make it more accessible and practical for power companies to participate in the carbon credit market. Power companies typically understand carbon offset projects better, and many have the resources to invest in sustainable initiatives or renewable energy projects that generate carbon credits. The power segment's active involvement in the carbon credit market has resulted in a higher demand for carbon credits, further strengthening its position as the largest segment in the carbon credit market.

As a result of its considerable contribution to global greenhouse gas emissions, and the severe rules placed on the power industry to minimise carbon emissions, the power segment now maintains the largest market share in the market for carbon credits. Demand for carbon credits in this market has been further boosted by the transition to greener energy sources and power companies' capacity to participate in carbon offset projects. As the power sector continues to prioritise emission reduction efforts and invest in sustainable practices, its dominance in the carbon credit market is expected to persist in the coming years.

Growth Opportunities Across Regions

Ambitious Climate Goals Uphold Europe’s Leadership

Europe captured the largest market share in the carbon credit market for several compelling reasons. One of the key factors is the European Union Emissions Trading System (EU ETS), one of the world's largest and most comprehensive cap-and-trade systems. The EU ETS sets emission reduction targets for various industries and allocates carbon credits to companies based on their emissions.

Companies exceeding their allocated limits must purchase additional carbon credits, creating a high demand for carbon credits in the region. The well-established and regulated nature of the EU ETS has contributed to Europe's dominant position in the global carbon credit market.

Encouraging Policy Framework

European countries have been at the forefront of climate action and strongly committed to combat climate change. The region has implemented ambitious climate policies like the Paris Agreement and set long-term emission reduction targets. These policies have incentivised European businesses and industries to engage in carbon offsetting and invest in sustainable practices actively. The culture of environmental responsibility and sustainability in Europe has driven significant demand for carbon credits, boosting the region's market share.

Mature, Regulated Carbon Trading System

Europe has a robust market infrastructure and a mature carbon credit trading system. The presence of reputable carbon credit exchanges and intermediaries facilitates the buying and selling carbon credits, making it easier for companies to participate in the market. Europe's well-established financial and regulatory systems provide a stable and transparent environment for carbon credit trading. This conducive market environment has attracted investors and businesses worldwide, contributing to Europe's global carbon credit market leadership.

Europe's dominant position in the carbon credit market has been intact owing to to its well-established and regulated carbon trading system, a strong commitment to climate action, and mature market infrastructure. The EU ETS and ambitious climate policies have driven significant demand for carbon credits in the region. At the same time, the presence of reputable exchanges and a stable market environment have attracted global participation. As Europe continues to prioritise sustainability and take decisive climate action, its carbon credit market share will likely remain substantial in the coming years.

Asian Markets Take a Significant Stride

Asia Pacific was the fastest-growing region in the carbon credit market due to several key factors. One of the main causes is the area's quick industrialisation and economic development, which have greatly increased greenhouse gas emissions. To offset their emissions and adhere to international climate agreements, governments and companies in the Asia Pacific region are becoming more mindful of the environmental effect of their operations. This demand has fueled the region's carbon credit market expansion.

Active Investments in Carbon Offset Projects

Asia Pacific is home to several populous and environmentally conscious countries such as China, India, and Japan. These countries have taken significant strides in implementing climate policies and sustainable practices to address environmental challenges. As part of their commitments to combat climate change, they actively invest in carbon offset projects and purchase carbon credits to achieve their emission reduction goals. The region's large and growing market for carbon credits is driving its rapid growth in the global carbon credit market.

Furthermore, the increasing interest from investors and financial institutions in sustainable environmental, social, and governance (ESG) investing has boosted the demand for carbon credits in Asia. Investors recognise climate solutions' potential as lucrative investment opportunities, leading to greater participation in carbon offset projects. The strong financial and technological infrastructure in the Asia Pacific has facilitated carbon credit trading and investment, further contributing to the region's rapid growth in the carbon credit market.

Fastest Growth Potential

In a nutshell, Asia Pacific's rapid economic growth, the presence of environmentally conscious countries, and increasing interest from investors in sustainable investing have collectively driven the region's status as the fastest-growing carbon credit market. As the region continues to prioritise sustainability, driving investments in emission reduction efforts. The demand for carbon credits is thus expected to remain robust, sustaining its growth momentum in the global market in the long term.

Carbon Credit Market: Competitive Landscape

Some of the leading players at the forefront in the carbon credit market space include EKI Energy Services Ltd., 3Degrees, CarbonBetter, South Pole Group, Finite Carbon, Native Energy, Climeco LLC, Tasman Environmental Markets, Carbon Care Asia Limited, Moss Earth, ClimatePartner GmBH, Terrapass, Climate Impact Partners, and Carbon Credit Capital.

Recent Notable Developments

In November 2022, 3Degrees joined forces with Merge Electric Fleet Solutions to offer practical insights and extensive experience to current and prospective fleet clients. Within environmentally conscious states focused on clean fuels such as California, Oregon, and Washington, 3Degrees will leverage Merge's charging infrastructure while ensuring that all-electric vehicle charging is balanced with Renewable Energy Certificates (RECS).

Similarly, in August 2022, through a partnership, Johnson Controls and 3Degrees are working together to expedite efforts toward achieving a net-zero environment. This collaboration aims to swiftly advance net-zero objectives by providing services focused on carbon reduction.

Global Carbon Credit Market is Segmented as Below:

By Type

• Voluntary Market
• Compliance Market

By Project Type

• Avoidance/Reduction Projects
• Removal/Sequestration Projects

By End-use Industry

• Power
• Energy
• Aviation
• Transportation
• Buildings
• Industrial
• Miscellaneous

By Geographic Coverage

• North America 
  • U.S.
  • Canada 
• Europe 
  • Germany
  • U.K.
  • France
  • Italy
  • Turkey
  • Russia
  • Rest of Europe 
• Asia Pacific 
  • China
  • Japan
  • South Korea
  • India
  • Southeast Asia
  • Rest of Asia Pacific 
• Latin America 
  • Brazil 
  • Mexico 
  • Rest of Latin America 
• Middle East & Africa  
  • GCC 
  • South Africa
  • Rest of the Middle East & Africa