An Inflection Point for the Energy Transition
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Despite a sluggish economy and ongoing budget pressures, the demand for voluntary carbon-emissions credits is growing rapidly. And the focus of credit trading is shifting from reducing emissions to removing them altogether.
These are two of the key insights from BCG’s latest report on the voluntary carbon markets, written in partnership with Shell. Our global analysis also found that the influence of external organizations on buyers’ decisions is growing; that a reputable monitoring, reporting, and verification framework has become a priority when making purchase decisions; and that companies continue to monitor developments on Article 6 of the Paris Agreement to adapt their strategy as needed.
As more companies join the race to net zero, we hope this research will prove useful for those interested in making carbon credits part of their climate and sustainability strategies.
Companies that wish to offset their greenhouse gas emissions can purchase two different types of credits in the voluntary market: avoidance credits for external projects that avoid or reduce emissions production, such as building a wind farm, and removal credits for projects that lower existing emissions. Removal projects deploy either nature-based solutions such as afforestation (introducing trees to a previously unforested area) or technology-based solutions such as renewable energy generation.
In 2021, the voluntary carbon market grew at a record pace, reaching $2 billion—four times its value in 2020—and the pace of purchases is still accelerating in 2022. By 2030, the market is expected to reach between $10 billion and $40 billion.
To better understand the impact of current economic headwinds on companies’ carbon-offset purchase strategies, we conducted a worldwide survey of over 200 environmental and sustainability executives across sectors and interviewed over 20 executives in depth. Five key findings emerged:
According to our analysis, avoidance credits currently represent about 80% of supply, but removal credits are expected to reach 35% by 2030. Our survey respondents expect an even more aggressive shift. Are removals now the best market play?
In the context of the shrinking carbon budget, relying exclusively on removal credits seems premature given that we are still underperforming on reducing emissions globally. We’re cutting down forests much faster than any afforestation or reforestation efforts can replace them, for example—so it’s critical to fund the avoidance that stops deforestation. Ultimately, a combination of verifiable avoidance and removal projects will be necessary. The focus, therefore, should be on the quality of both types of credits as the market continues to mature.
The rapid rise in voluntary purchases of emissions credits, even in uncertain times, reflects companies’ commitment to reaching net zero and the growing importance of the carbon market. But decarbonization must start with reducing emissions: offsets are an additional tool, not a replacement. And we must ensure that credits deliver on their promises.