Long-term offset outlook

Long-term offset outlook

It’s possible the carbon offset market could grow several orders of magnitude in value from where it is today, depending on how things develop. 

Using our baseline assumptions, we forecast demand could reach 5.4GtCO2e in 2050 and potentially fracture to levels as low as 1.3GtCO2e depending on the types of offsets companies are interested in buying. At the same time, we expect supply to reach between 8-9.8GtCO2e in 2050, depending on whether emphasis is put on removals or all types of offsets. This supply can similarly fracture to accommodate certain types of buyers, getting as low as 3.2GtCO2e in 2050 in a market delineated by quality.

Pricing could subsequently end up all over the map, depending on how supply and demand evolve. Should things remain the same as today, with companies purchasing all types of offsets to meet net-zero targets, the market will be heavily oversupplied and prices will peak at just $35/ton in 2050. Conversely, if companies can only use removals to achieve their net-zero goals, prices will peak at $254/ton in 2037 before plummeting back to $88/ton in 2050.

Both scenarios represent extremes that could cause the market to bifurcate. A market fracturing between removal and avoidance offsets would diverge significantly in the next decade, with prices ranging from $14-51/ton in 2040, before eventually re-converging in 2050. A market fracturing based on offset quality, regardless of the sector, would see its biggest divergence in 2038 at $13-38/ton and remain fairly split all the way to mid-century.

Depending on the scenario, the carbon offset market could be valued between $15-47 billion in 2030 and $186-476 billion in 2050 – up from roughly $2 billion today. The market will need significant investment, which is a big opportunity for project developers, banks and traders to capitalize on. Corporations will also need to grapple with these price rises or risk severely compromising their ability to achieve net-zero targets.

Depending on the scenario, the carbon offset market could be valued between $15-47 billion in 2030 and $186-476 billion in 2050 – up from roughly$2 billion today.

 

Demand outlook

We expect demand for carbon offsets to reach 1.2GtCO2e in 2030, rising to 5.4GtCO2e in 2050 (Figure 20). While demand closely resembles our previous forecast, it’s higher in earlier years (20% greater in 2030), primarily due to behavioral demand for carbon offsets being added. 

Behavioral offset demand refers to companies buying offsets to gain a competitive advantage with customers or claim carbon neutrality in a given year. The nature of many net-zero targets being set for 2040 or later means that most carbon offsets purchased today are for behavioral purposes. Such demand is common with consumer-facing sectors like airlines and retail companies, who give their customers options to decarbonize their purchases for an added fee. It’s also common with companies offering nominally green alternatives of products they sell, by bundling offsets to create products like ‘green gas’ or ‘carbon-neutral LNG’.

We estimate behavioral carbon offset demand will total 181.1MtCO2e in 2023 (Figure 20). We classify all of the corporations with net-zero targets in our Corporate Net-Zero Assessment Tool by whether they are business-to-business (B2B) or business-to-consumer (B2C) companies, with the latter category making up most behavioral demand.

The nature of behavioral demand often being partially driven by customer preference means it’s also far more price-elastic. As carbon offsets become more expensive, fewer companies or their customers will be willing to pay extreme premiums to make activities carbon neutral. It’s also likely customers will come to expect that companies begin offering cleaner products at no additional premium as they achieve net-zero goals. As a result, behavioral demand for offsets gradually decreases from 2023, reaching just 25MtCO2e in 2040 (1%) and 0MtCO2e in 2050 (Figure 20).

Fundamental demand will play a much larger role in the offset market in the coming years as
behavioral demand wanes, reaching 1.1GtCO2e in 2030 (92% of total demand) and 5.4GtCO2e
in 2050 (100% of total demand) (Figure 20). Fundamental demand mostly applies to residual emissions, or those remaining once a country, company or individual has exhausted all options to reduce its own gross emissions. These entities will purchase carbon offsets to neutralize any residual emissions on the road to net zero. This type of demand will grow as net-zero targets become more imminent and companies face pressure from investors to decarbonize.

 

 

Supply outlook

While the range of outcomes for long-term offset demand is greater, the outlook for carbon offset supply may have more question marks. Each sector has its own forecast that’s impacted by different macroeconomic, technology and policy-related factors. In addition, guidance by initiatives like SBTI will influence what types of offsets will be permitted in the coming years.

We model potential carbon offset supply for seven different sectors, making up 98% of issuance in the offset market since 2015. The largest of these is avoided deforestation (REDD+), which makes up 44% of the market since 2015 (Figure 21). Energy generation is second and makes up 35% of total supply over this period. Emissions projects make up 11% of supply since 2015 – we model this sector but assume all future supply will come from direct air capture (DAC) and bioenergy carbon capture and sequestration (BECCS). Energy demand, specifically from clean cookstoves, makes up 5% of supply, followed by reforestation (2%) and agriculture (1%).

 

Under our baseline assumptions, should all types of offsets be allowed, supply reaches 4.5GtCO2e in 2030 and 8GtCO2e in 2050 (Figure 22). However, should avoidance offsets be outlawed and more emphasis is put on removal, we forecast supply reaching just 1.6GtCO2e in 2030, but 9.8GtCO2e in 2050 as more investment goes into technology-based removal like DAC (Figure 23). These represent specific projections we view as more likely, outlined in the pricing section below, rather than an average as seen for demand.

 

Clean energy

Supply is dependent on how big a role solar and wind will play in carbon
abatement, specifically as it related to sub-Saharan Africa (our proxy for LDCs), and the cost-competitiveness of renewables. Under our baseline projection, supply reaches 77MtCO2e in 2030, before peaking at 320MtCO2e in 2045 and being curtailed entirely beginning in 2046. In a removals-only market there is no clean energy offset supply.

Price outlook

It’s not a question of whether carbon offset prices will rise – it’s a matter of how much. BNEF’s voluntary market ($18/ton) and removal ($127/ton) scenarios both have higher average prices in this year’s outlook compared to last year, but prices end up lower in 2050 in both (Figure 24). The higher average prices speak to a larger and more diverse supply curve, coupled with higher behavioral demand in early years. In the voluntary market scenario, prices remain consistently low, reaching just $13/ton in 2030 and $35/ton in 2050. This baseline scenario would fail to attract capital to crucial sectors like technology-based removal, and incentivize companies to purchase offsets over reducing their gross emissions. However, prices could increase due to factors like the Russia-Ukraine War, the Brazil presidential elections and demand from compliance markets.

The inevitable offset price rise still comes in this year’s removal scenario, but three years later (2032 vs 2029) and at lower prices ($105/ton vs $224/ton) (Figure 25). Prices ultimately peak at$254/ton in 2037 and drop to $88/ton in 2050 as supply starts accelerating faster, once again set by DAC in later years. Such high prices risk boxing most companies out of the market, but those that remain will have more time to brace for these extremes and can hedge against it.

BNEF’s voluntary market ($18/ton) and removal ($127/ton) scenarios both have higher average prices in this year’s outlook compared to last year, but prices end up lower.

 

 

A third bifurcation scenario could see the offset market split in two, with a smaller market trading high-quality offsets reaching $37/ton in 2040 and $32/ton in 2050 (Figure 25). Separately, a more liquid market for low-quality offsets trading at $16/ton in 2040 and $22/ton in 2050 would also exist for companies placing less emphasis on sustainability. A bifurcation scenario is a realistic outcome that hinges on stakeholders being able to define quality in the offset market but fails to address many of the concerns around the cheap price of offsets.