Currently, 68 compliance markets span the globe, representing about 23% of total greenhouse gas (GHG) emissions. Strong demand now outweighs supply, and prices in some markets have reached new highs. About US$84 billion was collected in global carbon pricing revenue in 2021, compared to US$53 billion the year before. Rapid growth is expected especially in the volunteer market, where companies purchase credits from carbon reduction initiatives that are not necessarily linked to regulatory regimes. In fact, volunteer market offset activity hit US$1 trillion for the first time in 2021, according to the World Bank.
Market Parameters and Rules Are Starting to Gel
Offsets are still evolving as a distinct asset class. The markets are starting to take better shape as regulators and other groups help codify some rules around them.
Pending guidance from the Institutional Investors Group on Climate Change, for example, articulates company engagement and capital allocation best practices. The recent COP26 global climate change conference adjourned with a first-ever multinational agreement for trading standards. They included clearer rules to facilitate arbitrage across developed and emerging-market jurisdictions, which is considered vital to improved legitimacy and global uptake.
In the US, proposed SEC disclosure rules around climate change impacts would mandate offsets reporting in annual statements—a big step toward greater transparency and accountability. The move has sparked such a swarm of interest and debate that the SEC issued a rare extension of the window period for comments.
Investors More Aware of Offsets Role in ESG
Investor interest in offsets is steadily growing too, as the emphasis on corporate commitments to address climate change intensifies and more solutions are placed on the table. Shareholder activism around ESG is expected to soar in the coming years, with considerable pressure on the “E” factor. In this vein, more investors are keenly aware of how offsets can directly impact a company’s cash flow, reputation and legal standing, among other variables (Display). So, when the Carbon Disclosure Project (CDP) reports that just 100 companies are responsible for 71% of world GHG emissions, shareholders are highly motivated to advocate for effective counter measures. We now expect these exchanges on carbon offsets to increasingly feature in proxy votes.