Window closing for cheap offsets

An overwhelming amount of carbon offset demand from corporations today is for low-quality credits. These offsets are preferred because of their cheap price and low additionality, which can be attributed to the markets they come from, their sector and their older vintages. All three of these factors are being addressed by governments, registries and third-party initiatives, meaning the era of the cheap offset may soon be on its way out.
Despite 98% of all retired offsets in 2021 being created in Asia Pacific, Latin America and Africa, some 84% of these were bought by companies in North America and Europe. This may be short-lived, as Indonesia, India and Papua New Guinea, who together made up 26% of offset supply in 2021 (74 million tons of CO2 equivalent), have all halted the export of carbon credits to use them for their own climate targets.

While energy generation made up 43% of offsets retired on Verra, the largest registry, in 2021, its share of the market will plummet in the coming years. In January 2020, Verra agreed to exclude registering new energy generation projects in developed countries, as these projects are already economically competitive with dirtier alternatives, meaning they have low additionality.1 These offsets would only be permitted in least developed countries (LDCs), with large hydro excluded everywhere. This has yet to manifest in changes to buyer preference – less than 1% of energy generation offsets retired in 2021 on Verra were from LDCs – but serves as a harbinger for energy’s eventual downfall in the offset market.
Some 60% (46 million) of offsets retired on Verra in 2021 were produced in 2015 or earlier, while just 0.2% (0.2 million) were produced in 2021. Groups like the Integrity Council on Voluntary Carbon Markets (ICVCM) are evaluating how to treat offset vintage moving forward, with the consideration of limiting high quality offset supply to newer vintages in its Core Carbon Principles guidance.