Voluntary carbon market on tenterhooks but compliance prices edge higher

Compliance carbon market values maintained upward momentum in August while voluntary markets remained stymied by a lack of liquidity, analysis of global carbon prices by S&P Global Commodity Insights found.

Platts Carbon Price Explorer(opens in a new tab) offers monthly insight on a variety of carbon values across compliance and voluntary markets. Platts is part of S&P Global Commodity Insights.

Allowances under the EU's Emissions Trading System hit three-month highs in August, supported by resilient demand, a stronger gas complex and buying interest from power generation and industrial sectors.

In the first half of the month, EU Allowances continued to track natural gas prices, buoyed by escalating geopolitical tension in Ukraine and the Middle East. As EUA auction supply rose into September and gas prices eased, however, so EUA prices gave up all of August's gains.

The strongest month-on-month increase across all the Explorer's carbon price assessments was seen in the US Regional Greenhouse Gas Initiative. Prices were trading at all-time highs of $27.47 per allowance mid-month ahead of the third-quarter auction, as demand remained high relative to emission caps.

The rises in allowance prices this year were partly caused by the complete depletion of the carbon market's reserves in the Q1 auction.

Analysts at Commodity Insights expected tight balances for the next two years, with RGGI prices projected to average $22.9/allowance in 2024. RGGI prices averaged $13.7/allowance and $14/allowance in 2022 and 2023, respectively.

VCM headwinds

The carbon offset market faced more headwinds in August, with demand across most segments stagnating. The Platts Renewable Energy 2024 price averaged $1.327 per metric ton of CO2 equivalent in August, the lowest since Commodity Insights started assessing the metric in August 2021.

That came as carbon credits from renewable energy projects failed to receive the high-integrity Core Carbon Principles tag from the Integrity Council for Voluntary Carbon Markets due to additionality concerns.

Despite lower prices, the renewable energy segment topped the list of issuances of credits for August in the voluntary carbon market, data compiled by Commodity Insights showed.

Total credits issued in August in the VCM were 16.9 million metric tons, down from 21.4 MMt issued in July and down 1.6% year on year, signifying the persisting sluggishness in demand.

The market is still awaiting more guidance on which credits meet the high-integrity CCP labels and, so far, there has not been a significant impact from ICVCM's announcement.

"A positive development is that the market is coalescing around the Core Carbon Principles, and supply is slowly developing as these principles are operationalized," said Hania Dawood, the Practice Manager for Climate Finance and Economics at the World Bank, on the sidelines of the Innovate 4 Climate conference in Berlin.

However, in its latest report, the World Bank said the timeline for market adoption will be a significant challenge for such integrity initiatives. The governance body, tasked with setting threshold standards for high-quality carbon credits, has delayed some announcements this summer.

Market sources are hopeful the new set of CCP credits will likely emerge from a broader set of methodologies, including project categories such as REDD+, Improved Forest Management, Afforestation, Reforestation, and Revegetation.

"Overall, any CCP-related impact is likely to be slow to materialize and may only be felt towards the end of the year, once the ICVCM releases a decision across all submitted methodologies," analysts at Commodity Insights said in a recent note.