By Lars Kroijer, CEO and Co-Founder, AlliedOffsets.
As we step into 2025, I wanted to take a moment to share why I’m genuinely optimistic about AlliedOffsets and the markets we operate in, both in the near and medium term.
The Voluntary Carbon Market (VCM) has undergone significant changes over the years, and understanding these shifts not only explains the challenges we've faced but also highlights the immense opportunities that lie ahead.
In rough terms, I divide the VCM into 3 periods:
Phase 1: The ‘Original’ VCM (CDM Era)
The ‘original’ VCM which was the CDM period. Perhaps unfairly I think of this as the UN phase which involved a bunch of projects that were often not additional or were massively over-credited. Eventually the lack of credible projects led to effectively this market being completely ‘discredited’, perhaps unfairly to some genuinely good projects.
Phase 2: The Rise of Independent Registries
The emergence of registries like Verra marked the next phase, with better methodologies and oversight designed to address the shortcomings of the previous CDM era. These independent registries brought much-needed structure to the market but were often under-resourced relative to the scale.
During this time, this ‘independent registry’ way forward was broadly accepted and up until about 2-3 years ago people thought the VCM had incredible potential (still only representing about 0.2-0.3% of global emissions so massive room to grow). McKinsey & others wrote reports saying that this $2-3 billion market would become a $100 billion market in 10 years, and VCs invested large amounts into startups at eye watering valuations.
However, cracks began to show. High-profile media scrutiny, led by outlets exposed questionable project approvals and over-crediting practices. Furthermore, the EU provided fuel for detractors by making carbon neutral claims illegal. Fearing being caught up in the media onslaught and being the next brand accused of greenwashing, many sensibly decided to stay out of the market until there was greater clarity on the use of carbon credits. As a result, the VCM suffered greatly in the past 2-3 years, declining 50%+ by some measures. Comparing this to expected growth of the VCM, this was a massive disappointment to many, not least those investors who had paid huge valuations to take part in the expected growth.
Phase 3: The Path Forward
Now, in my mind we are now towards the end of phase 2 and hopefully the start of phase 3, which I hope will bring about the full potential of the VCM. While the challenges of the past few years have been painful, they’ve also prompted a critical shift: an industry-wide commitment to provable, high-quality credits.
You could argue that the provability that a ton is a ton should always have been the case, but perhaps the need to prove projects were sometimes lost in the general scramble to address catastrophic climate change. After all, can you think of another part of the economy where you can’t prove what you are selling is in fact what you say it is, at least to a reasonably high standard?
Developers today are designing projects to withstand scrutiny, with an implicit invitation for the toughest critics to validate their claims. The market is clearly still reeling from the scandals of the past few years, and the move to higher quality may take a while to filter through. But in my view the trend is clear, if perhaps in the early stages.
How this will plan out remains to be seen, but here are some of my personal guesses:
1. Legacy Credits
A lot of the historical overhang of unsold/unretired credits will either never be sold, have to prove their worth to a new and higher standard, or be heavily discounted. The overhang of billions of credits from sometimes questionable projects has no doubt put downward pressure on the market in the past several years and continues to do so. Some good projects will unfairly be caught up in this.
2. Methodologies development
Some methodologies may disappear if they cannot meet the heightened standards for quality and provability. However, some project types/methodologies/geographies will find the sweet spot where provability and cost efficiency will be really attractive to buyers of credits. Our forecast model will support people in the market to find those projects, and fund them - and those people will do very well.
3. Projects Capacity Constraints
If the market starts to recover, we may start to see real capacity constraints in certain project types. While far from the case now, there are only so many cookstoves or places to plant new trees. The low hanging fruits of project creations will be used up and more expensive projects will start to make sense. Our forecast model suggests there is a plateau of supply where it is hard to add capacity and that prices can accelerate aggressively if the market gets to that point. Subject to a series of assumptions, this perhaps happens at a price per ton of $20-25.
4. Decarbonisation vs. Offsetting
Should the credibility of the VCM recover, I’d expect there to be increasing debate about the cost of decarbonisation and the cost-efficiency of carbon credits may challenge the "decarbonize at any cost" mantra. Say the VCM can provide genuine/provable tons of carbon at $15/ton, then arguably it doesn’t make sense for industries around the world to pay $200/ton to restructure how they do business to emit a ton of carbon less. It would be far better for the world to buy 10+ tons of VCM credits instead. Of course, when the credibility of the VCM credits are questioned, then it is much easier to argue that industries should always decarbonise at any cost.
5. Article 6 & Convergence with Compliance Markets
With improved standards, and quality checks, we might see increased acceptance of VCM credits within compliance schemes. But it is certainly an easier sell if the carbon in some indirect way is demonstrably genuine and a cheaper and necessary alternative to somehow decarbonising at home.
6. The Role of CDR and Breakthrough Innovations
The CDR market will have to be more of a tangible, scalable, and cost-efficient alternative. Thus far, the CDR market has sold itself on offering genuine credits and whilst expensive, at least there is future potential for scale. As the VCM gets more credible, the CDR market will hopefully continue the search for breakthrough solutions, but I believe the focus will be on the breakthrough solutions, not the expensive ‘genuine’ credits. A well regarded VCM will be able to provide credits much cheaper, at least for a while. That said, the CDR market remains our best chance for a game changing breakthrough.
7. Economic and Social Impact of the Voluntary Carbon Market
As credibility of the VCM improves, the amount of money that will flow into countries from projects being created in the VCM will be genuinely meaningful to local economies and the credits created will make significant to a country’s NDCs. This will be hugely positive as both the capital flows and positive environmental contribution will make the VCM a huge win for some local economies (a privately funded boosting of local employment and potential tax receipts). At AlliedOffsets, we are in a great position to predict this impact thanks to our new forecast model.
The challenges of the past have laid the groundwork for a market that is stronger, more transparent, and better equipped to scale. At AlliedOffsets, we’re at the forefront of this transition, providing the data and insights needed to navigate and shape the future of the VCM.
Should some (or all) of the above happen, the prospects for the VCM is huge. The market can grow 50x at much higher prices per ton of carbon and still not fulfil its full potential in addressing climate change. But of course, the opposite is also true: if we can’t prove the quality of the credits the VCM is selling, we should go do something else with our lives.
I am particularly excited about the prospects of using our data to help the VCM recover and become an integral part of addressing climate change. Many industry stakeholders will need to understand not only the lay of the land, but also the growth prospects and challenges of various segments of the markets. Something we are in a great position to help them with. My hope is that our data combined with our new forecast model will help provide real insight to companies in terms of how significant the carbon credits and investments will be by sector & geographies in the years ahead.
I think our independence is one of the reasons why we (in my biased mind) are the most innovative and agile business in the space. It has always been my ambition that we do more for climate change per employee than any other organisation in the world. I don’t think we are miles away from that, and I think our independence is a strong contributor to this.
Finally, I think we have an amazing team of passionate, smart, and above all genuinely wonderful people. This team makes it an amazing thrill to be on this journey to help make the world a slightly better place.
I love this work and am excited to build further on it in the year ahead with a particular focus of being tangibly helpful to our clients.
Thank you!
Lars