In this article, you are going to learn how carbon offsetting works and everything relating to the cost of carbon offset projects.
So, how does carbon offsetting work?
Carbon offset is simply a process that allows you to make up for the carbon dioxide and other greenhouse gas emissions you produce by reducing emissions somewhere else.
Not only are there many variations in the types of carbon offsets, but there is also a significant range when it comes to their price. You can find carbon credits sold as low as $1 per tonne or as high as $100+ per tonne. Many factors determine the price of credits issued by offset projects. These include the nature of the project, the offset standard it falls under, where the implementation of the project takes place, the project vintage, and more. Given this wide range, how should companies view the price of carbon credits they are considering?
It goes without saying that organisations seeking to offset their GHG emissions will want to purchase credits from high-quality carbon offset projects. Nevertheless, it may be unclear how much organisations should be paying for carbon offsetting. How much is too much? How much is too little? If every carbon credit, regardless of project type, represents one tonne of GHG emissions, should companies/organisations simply pay the least amount possible to offset their carbon footprint? So, how exactly can they know the carbon offset projects cost? This article will answer these questions and more and give you all the information you need to understand and navigate the many prices of carbon offsets available today.
How is the pricing of carbon offsets determined?
First and foremost, we should provide an overview of the primary factors that affect the pricing of carbon credits in today's offset market. There are three critical determinants when it comes to carbon pricing. These are market dynamics, offset project cost, and value delivered. Let us take a closer look at each:
The effect of market dynamics on offset price
Like many markets, the carbon offset market is subject to the laws of supply and demand. As a result, these associated market dynamics are often at the heart of the pricing of many carbon credits. But while supply and demand could drive the cost of developing offset projects down, it can also lead to long-term problems for implementing offset projects. For instance, if the cost of carbon credits is driven down below the costs associated with operating the project, chances are the projects would be forced to shut down. At worst, the scuttling of a project can unwind carbon reductions previously secured.These scenarios can also de-incentivise future investments in other carbon offset projects.
Because of this, it may not necessarily be the best course of action to search for the lowest possible price of carbon credit you can find. It is in everyone's best interest for high-quality carbon offset projects to continue to operate. This may necessarily entail paying higher prices for the carbon credits they issue. However, it is projected that market dynamics will lead to a significant increase in carbon pricing in the coming decades. But we will cover this later in this article.
The effect of project cost on price
The total cost of developing and implementing the offset project also, unsurprisingly, has a significant influence on the price of the carbon credits issued. When offset projects use a cost-based model to price their carbon credits, it helps these projects remain viable long-term. As we mentioned, there is an issue with the sustainability of offset projects when their associated credits are priced solely based on market dynamics. While supply and demand could drive down the price of credits (which is better for credit purchasers), market dynamics could threaten the long-term operating potential of offset projects.
The effect of value delivered on price
Finally, another pricing model for carbon offsets is based upon the value delivered by the project. Offset projects under the Gold Standard are known for pricing their carbon credits based upon such a model. The idea behind this value-delivery model is to account for all the environmental, social, and economic impacts of a particular offset project. The previously mentioned pricing models essentially only account for the emissions reductions or development costs. This value-delivery model popularised by the Gold Standard, however, can account for all the supplementary benefits of an offset project (such as local job creation, for example).
There is a significant social cost of GHG emissions that other pricing models may neglect. The United States Environmental Protection Agency (EPA), for instance, uses this social cost (SC-CO2) when making estimates regarding the impacts of climate change. Unlike other pricing models, a value-delivered model can account for these social costs in the price of its carbon credits. The Gold Standard uses economists to perform thorough studies on the full socio-economic effects of the carbon offsets verified under their standard. In doing so, the price of carbon credits issued under the Gold Standard can account for the total social cost of GHG emissions.
Future cost of carbon offsets
As we mentioned previously, the cost of carbon credits is projected to rise significantly in the coming years. More than ever, especially following the recent publication of the IPCC reports and the conclusion of the COP26 conference, organisations are implementing their net-zero targets. By 2030, carbon credits are projected to cost between $20 - $50 per metric ton of CO2. However, recent pricing movements on the EU Emissions Trading System have prices up near $110.
Currently, there is a massive surplus of older carbon credits on the voluntary market. So much so that this excess supply has kept the price of carbon credits much lower than is viable long term. However, a report by Trove Research and UCL claims that the cost of offsetting will need to increase ten-fold to incentivize necessary investments in future climate action. Research by Bank of America projects that the carbon offset market will need to grow 50x or more to meet 2050 net-zero climate goals. All of this means that the price of carbon credits is likely to increase significantly in the coming years. And while this surplus of previously issued carbon credits continues to grow, the demand for carbon offsetting is growing as well.
How to think about pricing when choosing carbon offset projects
Organisations should not necessarily rely on the price alone when deciding which carbon credits to purchase. Instead, it is much wiser to consider the many characteristics of a high-quality offset project. Basing these decisions on price alone could be misleading. It is true that credits that cost less than $1-2 per tonne could be of lower quality. Although, it is not necessarily true that expensive credits inherently mean high quality. There are some types of offsetting projects that can cost-effectively reduce GHG emissions. For example, industrial gas destruction projects are some of the cheapest but most cost-effective projects in the offset market. If an organisation chooses its carbon offsets on price alone, offset projects like these could slip through the cracks.
How pricing at consequence works
However, if you use a platform like Consequence to offset your emissions, your costs will automatically be calculated according to your carbon footprint analysis and the average cost of our portfolio of UN and Gold Standard projects.